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SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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FORM 10-K

(Mark One)

|ý | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ------------------------------------------------------------------------------------

For the fiscal year ended December 31, 2002

or

|o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

For the transition period from  to

Commission File No.: 000-49871

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HEALTHETECH, INC.(Exact name of Registrant as specified in its charter)

|Delaware                                                       |  | 77-0478611                          
|-------------------------------------------------------------- |  | ------------------------------------
|(State or other jurisdiction of
incorporation or organization) |  | (IRS Employer
Identification Number)

523 Park Point Drive, 3rd Floor, Golden, Colorado 80401(Address of principal executive offices, including zip code)

(303) 526-5085(Registrant's telephone number, including area code)

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Securities
registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $.001 par value per share

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Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes ý No o

Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best
of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. o

Indicate
by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the
Act). Yes o No ý

The
aggregate market value of the Common Stock held by non-affiliates of the Registrant as of February 14, 2003 was approximately $30,013,630 based upon the closing
sale price of the Registrant's Common Stock on such date, as reported on the Nasdaq National Market. Shares of Common Stock held by each executive officer and director and each person owning more than
5% of the outstanding Common Stock of the Registrant have been excluded in that such persons may be deemed to be affiliates of the Registrant. This determination of affiliate status is not necessarily
a conclusive determination for other purposes.

As
of February 14, 2003, the Registrant had 19,565,506 shares of Common Stock, $.001 par value per share, outstanding.

Documents Incorporated By Reference

Portions of the definitive proxy statement for the Registrant's 2002 Annual Meeting of Stockholders to be held on May 7, 2003, are incorporated by
reference in Part III of this Form 10-K.

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TABLE OF CONTENTS



|                            |  |                                                                                       |  | Page
|--------------------------- |  | ------------------------------------------------------------------------------------- |  | ----
|                            |  | Part I                                                                                |  |     
|Item 1.                     |  | Business                                                                              |  | 3   
|Item 2.                     |  | Facilities                                                                            |  | 31  
|Item 3.                     |  | Legal Proceedings                                                                     |  | 31  
|Item 4.                     |  | Submission of Matters to a Vote of Security Holders                                   |  | 31  
|                            |  | Part II                                                                               |  |     
|Item 5.                     |  | Market for Registrant's Common Equity and Related Stockholder Matters                 |  | 32  
|Item 6.                     |  | Selected Financial Data                                                               |  | 34  
|Item 7.                     |  | Management's Discussion and Analysis of Financial Condition and Results of Operations |  | 35  
|Item 7A.                    |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 44  
|Item 8.                     |  | Financial Statements and Supplementary Data                                           |  | 44  
|Item 9.                     |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure  |  | 44  
|                            |  | Part III                                                                              |  |     
|Item 10.                    |  | Directors and Executive Officers of the Registrant                                    |  | 45  
|Item 11.                    |  | Executive Compensation                                                                |  | 45  
|Item 12.                    |  | Security Ownership of Certain Beneficial Owners and Management                        |  | 45  
|Item 13.                    |  | Certain Relationships and Related Transactions                                        |  | 45  
|Item 14.                    |  | Controls and Procedures                                                               |  | 45  
|                            |  | Part IV                                                                               |  |     
|Item 15.                    |  | Exhibits, Consolidated Financial Statement Schedules and Reports on Form 8-K          |  | 46  
|Signatures & Certifications |  | S-1                                                                                  
|Power of Attorney           |  | S-1                                                                                  

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FORWARD-LOOKING STATEMENTS

This Form 10-K contains statements that constitute "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These forward-looking statements involve
risks and uncertainties and are not historical facts but rather are based on current expectations, estimates and projections about our industry, our beliefs and assumptions. We use words such as
"anticipate," "expect," "intend," "plan," "believe," "seek," "estimate" and variations of these words and similar expressions to identify forward-looking statements. These statements are not
guarantees of future performance and are subject to certain risks, uncertainties and other factors, some of which are beyond our control, are difficult to predict and could cause actual results to
differ materially from those expressed or forecasted in the forward-looking statements. These risks and uncertainties include those described in "Risk Factors" and elsewhere in this
Form 10-K. You should not place undue reliance on these forward-looking statements, which reflect our view only as of the date of this Form 10-K. Readers are
urged to carefully review and consider various disclosures made by us in this report and our other reports filed with the Securities and Exchange Commission that attempt to advise interested parties
of the risks and factors that may affect our business.

PART I

ITEM 1.    BUSINESS

Overview

We were incorporated in Delaware in February 1998 and design, develop and market technologically advanced and proprietary handheld medical devices and
software for the measurement and monitoring of important health parameters. Our current health monitoring devices measure oxygen consumption (also known as oxygen uptake) to calculate resting
metabolic rate, or RMR. The accurate measurement of resting metabolic rate, which establishes how many calories a person burns per day at rest and
represents up to 75% of the total calories burned by a healthy individual per day, is important to the success of medical therapy and to achieving weight management and fitness goals. However, an
accurate, cost-effective and practical device for measuring and monitoring metabolism has not previously been available. The HealtheTech system, which consists of handheld health
monitoring devices, single-use disposable facemasks and mouthpieces and stand-alone software applications designed to be used with our devices, enables healthcare professionals and
wellness advisors to quickly, accurately and cost effectively measure and monitor the metabolism of a patient or client. We believe that by making metabolism measurements broadly accessible, the
HealtheTech system has the potential to become a standard of care in the medical therapy, weight management and fitness markets.

Our
initial health monitoring devices include MedGem for the medical market, which received 510(k) clearance for prescription use from the FDA and commenced initial sales in
January 2002, and BodyGem for the weight management, nutrition monitoring and fitness markets, which was commercially launched in November 2001. We are also developing FitGem for use in
athletic and fitness training, cardiac and pulmonary rehabilitation, occupational therapy and sports medicine. Our BalanceLog software was launched in November 2001 and allows users to create a
weight management system that incorporates RMR measurements from our devices. A key element of our strategy is to establish relationships with large, prominent companies for the distribution of the
HealtheTech system in each of our target markets. We operate as a single business segment.

Industry Background

The proper management of an individual's nutritional and weight management needs is enhanced by the accurate measurement of metabolism. This has historically been
most often performed by use of a large and expensive machine either in a research lab or in the hospital setting. Because of the cost, complexity and time required to measure an individual's
metabolism using this method, healthcare

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professionals and wellness advisors primarily rely on estimation methods which are based on such factors as height, weight, sex and age. However, these estimations can be significantly inaccurate
when applied to an individual due to variations in disease state, genetics, hormone levels, diet, body composition, activities and exercise. The shortcomings in current methods of measuring or
estimating metabolism can significantly compromise the effectiveness of medical care, weight management and fitness programs.

Inadequate nutrition in medical care.Adequate nutritional assessment is important to ensuring satisfactory medical treatment results. According to a 1998 study
published in the Journal of Parenteral and Enteral Nutrition, only one quarter of patients admitted in long-term acute care facilities receive calories within 10% of their daily caloric
needs. In addition, 39% of patients admitted in long-term care facilities are not provided their caloric requirements while admitted, according to a 1995 study published in the Journal of
the American Dietetic Association. Underfeeding can lead to delayed healing, increased incidence of infection, increased morbidity and mortality, and increased length of
stay and cost per patient. Overfeeding can also result in a variety of serious medical complications and significant unnecessary expense. We believe that significant healthcare costs can be avoided
with an accurate and cost-effective medical device to measure metabolism.

Obesity.According to a June 1997 report by the World Health Organization, obesity has become a worldwide epidemic. In December 2001, the United
States Surgeon General issued a "Call to Action" against excess weight and obesity, a leading cause of preventable death in the United States. Obesity is a recognized independent risk factor or
aggravating agent for more than 20 medical conditions, including cardiovascular disease, high blood pressure and diabetes. Weight management and nutritional assessment play an integral part in the
daily management of these medical conditions. We believe that successful weight management is impeded by the inability to accurately determine an individual's metabolism in a practical manner.

Fitness and performance training.The accurate measurement of oxygen consumption and metabolic rate has important applications in the area of fitness and
performance training. One of the best ways to assess and monitor aerobic fitness is to measure oxygen consumption during physical activity. In addition, regardless of sport, performance is affected by
the maintenance of an optimal body weight. Oxygen consumption and resting metabolic rate measurements are used in the training and evaluation of many elite athletes in endurance-based sports at highly
specialized facilities. However, most people have not previously had access to cost-effective and accurate oxygen consumption and resting metabolic rate measurements.

Our Solution

We have developed a proprietary, non-invasive platform technology that can quickly, accurately and cost effectively measure oxygen consumption to
determine resting metabolic rate. The HealtheTech system incorporates advanced sensor technologies and significant engineering expertise. These technologies enable healthcare professionals and
wellness advisors to provide nutrition monitoring and weight management services that were generally not accessible to many patients and clients due to the cost and inconvenience of existing methods.

Our
MedGem device, which displays both oxygen consumption and resting metabolic rate, is designed to be used by healthcare professionals for medically supervised weight management
programs and medical nutritional assessment and therapy and received 510(k) clearance from the Food and Drug Administration in January 2002. BodyGem, which displays resting metabolic rate, is
designed to be used by wellness advisors for non-medically supervised weight management, nutrition monitoring and health and fitness programs to develop appropriate dietary and exercise
regimens and was commercially
launched in November 2001. We also have developed BalanceLog, a stand-alone software application that incorporates an individual's RMR measurement and allows users to establish and maintain a

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personalized nutrition and weight monitoring program as well as easily track food intake and exercise activity to provide continuous feedback on their caloric balance. We are developing additional
health monitoring devices and software products for the medical therapy, weight management and fitness and performance training markets.

The
HealtheTech system offers our customers the following benefits:

Scientifically-based and clinically validated accuracy.Our health monitoring devices have been validated in both laboratory and clinical tests against the "gold
standard" Douglas Bag method to demonstrate accurate measurement of RMR and oxygen consumption.

Ease of use.The HealtheTech system is designed to be easy to use and requires minimal training. Our health monitoring devices are portable, handheld devices that
weigh less than five ounces. Upon activation, the health monitoring devices quickly self-calibrate as compared to the metabolic cart, which requires a longer set-up time and
regular manual calibration. The measurement process itself is non-invasive and can be accomplished in less than ten minutes.

Cost-effective.The HealtheTech system enables healthcare professionals, wellness advisors and fitness trainers to provide health and nutrition
monitoring services that in many instances were not previously cost-effective. We designed our health monitoring devices to require no on-going maintenance and no replacement
parts. In appropriate cases, we believe that qualified medical nutrition professionals and registered dietitians can seek Medicare and other third-party reimbursement for some of the cost associated
with providing metabolic rate measurement services using MedGem to provide medical nutrition therapy for the purposes of managing diabetes or kidney disease.

Enables personalized care, therapy and advice.The HealtheTech system enables healthcare professionals and wellness advisors to provide highly personalized care,
therapy and advice to their patients and
clients. Our health monitoring devices provide oxygen consumption and RMR measurements for each individual, as opposed to relying upon an estimate derived from a population-based formula. Our related
software products integrate an individual's RMR with personal profile information to create personalized nutrition monitoring and weight management solutions. This allows users to customize care,
therapy and advice to the particular and changing profiles of each patient and client.

Our Strategy

Our goal is to be a leading medical device company that produces proprietary, non-invasive health monitoring devices for the measurement of important
health parameters. We intend to focus on the following key strategies:



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Our Products

Health Monitoring Devices

Our health monitoring devices are based on advanced technologies that enable healthcare professionals and wellness advisors to determine resting metabolic rate,
or RMR, by accurately measuring oxygen consumption. This information is then used by healthcare professionals, wellness advisors and fitness professionals to help determine the caloric requirements of
each patient or client.

Our
portfolio of health monitoring devices includes:



We
plan to develop additional health monitoring devices based on our existing technology platform to measure other important health parameters.

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Disposables

The MedGem and BodyGem are designed to use our proprietary disposable hygienic facemasks or mouthpieces. The disposables fit directly into our health monitoring
devices and are intended to be discarded after a single use. The disposables eliminate the threat of cross-contamination by incorporating a medical-grade microbial filter material. The labeling of our
disposable products cleared by the FDA states that a new disposable must be used each time our MedGem is used. We also label and contractually require our distributors and service provider partners to
acknowledge that disposables are single use and to use a new disposable each time the BodyGem is used.

We
currently sell the disposables separately from the health monitoring devices. However, we are evaluating a system under which purchasers of our health monitoring devices would have
the option to pay for a certain number of uses or measurements. Under this system, we would pre-set each device with the number of uses that a customer purchases and send a corresponding
number of disposables. After all uses are expended, customers could purchase additional uses.

Software

We anticipate that each health monitoring device will have a corresponding software package available which is designed to be used as a companion application with
our devices. The current software packages are not required to operate the related devices. Sales of our software products, predominately BalanceLog, amounted to approximately 22% of revenues in 2002.
Our BalanceLog software package is typically purchased by consumers at retail, from our distribution partners or downloaded from our web site with payment. A growing number of BalanceLog sales will
come from retail distribution and we intend to sell our future consumer software applications through retail distribution as well. We have also developed MedGem analyzer software intended for medical
professionals, which received FDA 510(k) clearance in June 2002. Our software products include:



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Sales, Marketing and Distribution

Through strategic relationships with our current and future strategic and distribution partners, we intend to focus primarily on the following markets:



Our
sales and marketing efforts are intended to establish strategic partnership and distribution relationships, to generate awareness of the HealtheTech system and to penetrate and
expand the markets for monitoring nutrition and metabolism and managing weight. As of December 31, 2002, we had 12 individuals in our sales and marketing organization.

In
addition to direct sales efforts and work with existing and prospective partners and distributors, our sales force educates and trains healthcare professionals and wellness advisors
on the benefits of our products. To further generate awareness and penetrate our target markets, our sales and marketing organization provides a range of programs, support materials and events. These
include public relations efforts, product training, attendance at conferences, seminars and trade shows, press relations and educational and promotional literature.

In
December 2002, we launched a $3 million national consumer awareness campaign aimed at educating consumers about the critical role of measured metabolism in weight
management and

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nutrition. Production costs for this campaign were $0.5 million in 2002. We recognized $1.3 million of production and advertising expense for the year ended December 31, 2002.
The campaign is expected to run through March 2003, and primarily targets women aged 30 to 54 through the use of network and cable television and print media. We plan to launch a
$1 million radio and print advertising campaign in the first quarter of 2003 to further support sales of our BalanceLog product in the retail channel.

Our
health monitoring devices are currently sold to healthcare professionals, wellness advisors and fitness professionals who have received training in their use and are not intended to
be sold directly to consumers.

Strategic Partnerships and Customers

Our strategy is to establish relationships with at least one large, prominent company in each of our targeted market segments that already possesses the sales,
marketing and distribution capabilities needed to reach our target customers. We currently distribute and plan to continue to distribute our products with the support of distributors that have
significant experience in marketing and selling health monitoring devices to healthcare professionals, such as physicians and dietitians. We also sell and market our products directly to companies in
the retail, in-home measurement, commercial weight management, commercial fitness, retail pharmacy and diagnostic service center, corporate wellness program and day spa and resort markets.
We believe that this strategy will allow us to promote rapid and widespread adoption of the HealtheTech system and to validate and increase exposure of our brand, while maintaining a relatively small
internal team of account management and service professionals.

Our
current customers, which include distributors and strategic partners, include:



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For
the year ended December 31, 2002, HEALTHSOUTH, Microlife and Nature's Sunshine accounted for 56%, 13% and 9% of our gross revenues respectively. For the year ended
December 31, 2001, Nature's Sunshine and Procter & Gamble accounted for 29% and 15% of our gross revenue respectively. No customers represented greater than 10% of our gross revenue in
2000.

Revenue
from customers outside the United States accounted for 13% of total revenue in 2002 of which 39% reflected sales of product into Europe and 23% to Taiwan. In addition, 38% of
revenue from customers outside the United States represented license fees. We recognized no revenue from outside the United States in 2001 and 2000.

Reimbursement

In the United States, medical professionals rely on third-party payors, principally private insurers, Medicare and Medicaid, to reimburse some of the cost
associated with diagnostic and monitoring services in which medical devices are used. In January 2002, the Centers for Medicare and Medicaid Services approved the use of Medicare reimbursement
codes for registered dietitians who provide medical nutrition therapy, which includes nutritional diagnosis, therapy and counseling, for purposes of managing diabetes and kidney disease. Certain
private insurers have also approved similar reimbursement codes for registered dietitians. However, there is little uniformity as to which medical conditions are covered under these codes.

In
appropriate cases, we believe that both registered dietitians and other qualified medical professionals can seek third-party reimbursement for some of the cost associated with
providing metabolic rate measurement services using MedGem. However, because MedGem did not receive FDA clearance until January 2002 and we did not commence shipment until the end of
January 2002, MedGem has not been available long enough for us to evaluate the success that healthcare providers will have in securing reimbursement for its use. In addition, given their strict
eligibility requirements, third-party payors may at times refuse to reimburse such procedures. Moreover, the current cost reduction orientation of third-party payors makes it exceedingly difficult for
new medical devices and procedures to obtain approval
for reimbursement. Often, it is necessary to convince these payors that the new devices or procedures will establish an overall cost savings compared to currently reimbursed devices and procedures.

We
believe that MedGem offers significant opportunities for third-party payors to reduce the overall cost of treating patients, such as reductions in length of hospital stays and number
of ventilator days, and decreased incidence of infection and complications in medical and surgical patients. While we believe that MedGem possesses economic advantages that will be attractive to such
payors, they may not make reimbursement decisions until we can demonstrate with clinical data that our products can improve patient outcomes.

Reimbursement
systems in international markets vary significantly by country and, within some countries, by region. Reimbursement approvals must be obtained on a
country-by-country basis or a region-by-region basis. In addition, reimbursement systems in international markets may include both private and
government sponsored insurance. We have not obtained any international reimbursement approvals. We may not obtain any such approvals in a timely manner, if at all. If we fail to receive international
reimbursement approvals at all or in acceptable amounts, market acceptance of our products may be adversely affected.

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Technology and Intellectual Property

Our platform health monitoring device technology uses an innovative approach to monitoring variables in inhaled and exhaled gases. Our devices use advanced
ultrasonic sensors to measure gas flow in combination with sophisticated sensor technology to measure oxygen content in that flow. Sophisticated algorithms incorporated into the devices integrate
these measurements with data received from other sensors, such as temperature, humidity and barometric pressure, to calculate breath-by-breath oxygen consumption. This platform
of sensor technologies can be deployed in different configurations using different algorithms to monitor variables specific to various disease states and health conditions.

We
believe our intellectual property portfolio represents a substantial business advantage for us. We rely on a combination of patent, trademark, copyright, trade secret and other
intellectual property laws, license agreements, confidentiality agreements and other measures to protect our proprietary rights. We have 16 issued United States patents, eight issued foreign patents
and 131 pending United States and foreign patent applications related to our technology. We believe it may take up to five years from the date of filing, and possibly longer, for our patent
applications to result in issued patents, if ever.

We
rely heavily on licensed technology to enable us to develop, market and sell our products. Our current technology licenses include the following:

Sensors
for Medicine and Science, Inc. developed the oxygen sensor used in our MedGem and BodyGem and, pursuant to a development and supply agreement, has granted us an exclusive
license to use the patented technology in the field of our products for the life of the patents, subject to our payment of minimum royalties. We pay royalties to Sensors for Medicine and Science based
on sales of our disposable products.

ndd
Medizintechnik AG developed and licensed to us the patented technology used in the air flow application specified integrated circuits used in our MedGem and BodyGem. The license is
exclusive in the field of our products and is for the life of the patent, subject to our payment of minimum royalties. We pay royalties to ndd based on sales of our products.

We
have four issued United States registrations, 23 pending United States applications for registration, 17 issued foreign registrations and 10 pending foreign applications for
registration for trademarks including HealtheTech, the HealtheTech logo, MedGem, BodyGem, FitGem and BalanceLog.

We
require all of our employees, consultants and other parties to execute confidentiality agreements. These agreements prohibit disclosure of confidential information to third parties
except in specified circumstances. In addition, all of our employees and consultants are required to execute invention assignment agreements, which generally provide that all proprietary information
relating to our business is the exclusive property of the company.

Research and Development

Our research and development activities are conducted by our research and development staff, which consisted of 33 employees as of December 31, 2002, and
third-party contractors, including certain of our suppliers and licensors. Our research and development expenditures were $6.8 million in 2002, $6.1 million in 2001 and
$9.2 million in 2000. Our research and development efforts are focused on:



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Government Regulation

As a participant in the healthcare industry we are subject to extensive and frequently changing regulation under many laws administered by governmental entities
at the federal, state and local level. Foremost among these are the regulations of the Food and Drug Administration, or FDA. FDA regulations govern several activities that either we perform or have
had performed on our behalf such as: product design and development; product testing; product manufacturing; product labeling and packaging; product handling, storage and installation; premarket
clearance or approval; advertising and promotion; and product sales, distribution and servicing.

Unless
an exemption applies, each medical device we wish to commercially distribute in the United States, including certain medical software applications, must first receive 510(k)
clearance or premarket approval from the FDA. In January 2002, we received 510(k) clearance from the FDA to market our MedGem device, a class II medical device, for prescription use in
the United States. The product was cleared for the measurement of oxygen uptake in clinical and research applications. The FDA also allows our device to display resting metabolic rate, which the
device calculates from the measurement of oxygen consumption and an internal device formula. Additionally, as part of our FDA clearance of the MedGem, we are required to set forth in our labeling the
formula used to estimate resting metabolic rate and a discussion on how the calculation may affect the accuracy of the resting metabolic rate measurement. Products such as BodyGem and the
non-medical version of FitGem, as well as software applications associated with those products, are not regulated by the FDA because the intended use and data generated from their use is
not of a clinical nature and is not used for determining medical treatments.

After
a medical device is placed on the market, numerous FDA regulatory requirements apply. These include quality system regulation, establishment registration, medical device listing,
labeling regulations and medical device reporting regulations. Failure to comply with applicable regulatory requirements can result in enforcement action by the FDA, which may include sanctions such
as: fines, injunctions and civil penalties; mandatory recall or seizure of our products; administrative detention or banning of our products; operating restrictions, partial suspension or total
shutdown of production; refusing our
request for 510(k) clearance or pre-market approval of new or modified products; revocation of 510(k) clearance or pre-market approvals previously granted; and criminal
penalties.

International
sales of medical devices are subject to foreign government regulations, which vary substantially from country to country. The time required to obtain approval by a foreign
country may be longer or shorter than that required for FDA approval, and the requirements may differ significantly. For example, the European Union has adopted legislation, in the form of directives
to be implemented in each member state, concerning the regulation of medical devices within the European Union. Among these are the Medical Device Directive, which establishes standards for regulating
the design, manufacture, clinical trials, labeling and adverse event reporting for medical devices. The medical devices of manufacturers who demonstrate compliance with the requirements of the Medical
Device Directive may bear CE Marking, indicating compliance with the requirements of the Medical Device Directive. Medical devices properly bearing the CE Marking may be commercially distributed
throughout the European Union. In June 2002 we obtained the right to affix the CE Marking to our MedGem, MedGem Analyzer and BodyGem products.

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Manufacturing, Warehousing and Logistics

Our strategy is to outsource the manufacturing, warehousing and shipping of our health monitoring devices, disposables and software to benefit from the resources
of our contract manufacturers and fulfillment vendor. We rely on contractors for the manufacture, warehousing and shipping of our products and their component parts.

Our
primary component subcontractors are Mikrofontechnik Leipzig GmbH, Sensors For Medicine and Science, Inc., Seco Sensor Consult GmbH, Centre Suisse d'Essais des Composants
Electroniques (CSEE), and Austria Mikro Systems International AG. Mikrofontechnik Leipzig manufactures the air flow transducers used in our health monitoring devices. Sensors For Medicine and Science
produces our oxygen sensors, which it developed pursuant to a development and supply agreement. This agreement requires Sensors for Medicine and Science to supply us with the oxygen sensors for the
life of the patents that cover the sensor technology. We place our supply orders with Sensors for Medicine and Science on a quarterly basis. See our discussion of risks associated with reliance on our
third party manufacturers contained in the "Risk Factors" section of this Form 10-K.

Austria
Mikro Systems International together with CSEE manufactures and assembles our air flow application specific integrated circuit, or ASIC, on a purchase order basis, based on
technology developed by ndd Medizintechnik and licensed to us. Each of our manufacturing subcontractors purchases all necessary parts and materials to produce complete finished goods. Currently,
oxygen sensors are a key sole-sourced component part. We obtain our air flow transducers and our air flow ASICs from limited sources.

Competition

The markets for our products are competitive and subject to rapid technological change. Certain of our current and potential competitors have greater name
recognition, longer operating histories, larger customer bases and significantly greater financial, technical, marketing, sales, distribution and other resources than we do. These competitors may,
among other things, be able to undertake more extensive research and development, adopt more aggressive marketing and pricing strategies, obtain more favorable pricing from suppliers and manufacturers
and make more attractive offers to distribution partners than we can. In addition, some healthcare professionals and wellness advisors will continue to use existing methodologies, such as the
Harris-Benedict equation and other formulas used to estimate metabolic rate, to derive metabolic rate estimates.

Our
current and potential competitors include:



In
addition, we also compete to some extent with pharmaceutical companies, commercial weight management companies, producers of fitness products and equipment and other providers of
alternative solutions to weight management and fitness. We believe that our competitive strengths are our technological leadership, our product design, performance and price, our focus on the needs of
our

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customers including education and training, and our distribution strategy. To remain competitive, we believe that we must invest significant resources in developing new products and enhancing our
current products and maintaining customer satisfaction worldwide.

Employees

At December 31, 2002, we had 84 full-time employees, all of whom were based in the United States. Of the total, 33 were in research and
development and clinical affairs, 17 were engaged in sales, marketing and customer service, 6 were in regulatory and quality assurance, and 28 were engaged in various administrative, finance and
operations activities. None of our employees are subject to a collective bargaining agreement and we believe that our relations with our employees are good.

Scientific Advisory Group

We have established a scientific advisory group to provide us with access to advice and direction from a group of well respected and established professionals.
Our advisory group members have expertise in weight management and the treatment of obesity, clinical and hospital-based nutrition programs, and the nutrition, fitness and health club industries. None
of the members of our scientific advisory group is an officer, director or employee of the company. The following individuals are members of our scientific advisory group:

|Name                                                         |  | Position and Affiliation                                                                                                                                  
|------------------------------------------------------------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------
|James O. Hill, Ph.D.                                         |  | Director, Center for Human Nutrition, University of Colorado Health Sciences Center, Denver, Colorado                                                     
|Charles Billington, M.D.                                     |  | Professor of Medicine, VA Medical Center, Special Diagnosis and Treatment Unit 111P, Minneapolis, Minnesota                                               
|Steven Blair, DPE                                            |  | Director of Research, Cooper Institute for Aerobics Research, Dallas, Texas                                                                               
|George L. Blackburn, M.D., Ph.D.                             |  | Associate Director of Nutrition, Division of Nutrition, Harvard Medical School, Beth Israel Deaconess Medical Center, Boston, Massachusetts               
|Richard Branson, R.R.T.                                      |  | Associate Professor of Clinical Surgery, Department of Surgery, Division of Trauma and Critical Care, University Hospital Medical Center, Cincinnati, Ohio
|Gary Foster, Ph.D.                                           |  | Associate Professor and Clinical Director Weight and Eating Disorders Program, University of Pennsylvania School of Medicine, Philadelphia, Pennsylvania  
|John P. Grant, M.D.                                          |  | Professor of Surgery, Duke University Medical Center, Durham, North Carolina                                                                              
|Steven Heymsfield, M.D.                                      |  | Deputy Director, Obesity Research, St. Luke's-Roosevelt Hospital Center, Columbia University College of Physicians and Surgeons, New York, New York       
|Carol S. Ireton-Jones, Ph.D., R.D., L.D., C.N.S.D., F.A.C.N. |  | Nutrition Therapy Specialist, Carrollton, Texas                                                                                                           
|Danny O. Jacobs, M.D., M.P.H., C.N.S.P.                      |  | Chairman, Department of Surgery, Creighton University Medical Center, Omaha, Nebraska                                                                     

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|Janet King, Ph.D.             |  | Director, USDA Western Research Center, University of California, Davis, California                                                                                                                                                                  
|----------------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Samuel Klein, M.D.            |  | William H. Danforth Professor of Medicine and Nutritional Science Director, Center for Human Nutrition, Washington University, St. Louis, Missouri                                                                                                   
|Steven A. McClave, M.D.       |  | Medical Director, Gastroenterology/Clinical Nutrition Vencor Hospital, Louisville, Kentucky; Director, Clinical Nutrition, University of Louisville School of Medicine, Louisville, Kentucky                                                         
|David Nieman, Ph.D.           |  | Director, Human Performance Laboratory, Appalachian State University, Boone, North Carolina                                                                                                                                                          
|Sachiko St. Jeor, Ph.D., R.D. |  | Professor and Director of Nutrition Education and Research Program at the University of Nevada at Reno, University of Nevada School of Medicine, Reno, Nevada                                                                                        
|Tom Storer, Ph.D.             |  | Professor and Director, Exercise Science Laboratory, El Camino College, Torrance, California. Adjunct Professor of Medicine, Division of Endocrinology Charles Drew-University of California, Los Angeles
School of Medicine, Los Angeles, California

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RISK FACTORS

Risks Related to Our Business

Our brief operating history makes it difficult to evaluate our prospects.

We were incorporated in February 1998. Through November 2001, we were primarily engaged in the research and development of our initial products. We
commenced shipment of our health monitoring devices in 2001 and executed our first significant distribution agreement in August 2001. As a result of our limited operating history, we have a
limited amount of financial data that you can use to evaluate our business. Moreover, the revenue and profitability potential of our markets are unproven. You must consider our prospects in light of
the risks, expenses and challenges we might encounter because we are at an early stage of development in new and developing markets. We may not successfully address these risks, and our business
strategy may not prove successful.

We recorded only $17.0 million in revenue since our inception, we have a large accumulated deficit, we expect future losses and we may not achieve or maintain
profitability.

Since our inception through December 31, 2002, we recorded only $17.0 million in revenue, of which only $16.0 million was from products we
currently sell. As a result, we will need to significantly increase the revenue we receive from sales of our products, while controlling our expenses, in order to achieve profitability. We have
incurred substantial losses each year since our inception in funding the research and development of our products and technologies, the Food and Drug Administration, or FDA, marketing clearance
process for MedGem, the growth of our organizational resources and other activities. As of December 31, 2002, we had an accumulated deficit of $64.2 million.

We
expect that our expenses will continue to increase significantly as we, among other things:



We
may not generate a sufficient level of revenue to offset these expenditures, and we may be unable to adjust spending in a timely manner to respond to any failure to increase our
revenue. Even if we do achieve profitability, we may not be able to sustain or increase profitability.

We expect our future financial results to fluctuate significantly, and failure to increase our revenue or achieve profitability may disappoint securities analysts or investors
and result in a decline in our stock price.

We believe that period-to-period comparisons of our historical results of operations are not meaningful and are not a good predictor of
our future performance. We expect our future quarterly and annual operating results to fluctuate significantly as we attempt to expand our product offerings and increase sales into different markets.
Our revenue, gross margins and operating results are difficult to forecast and may vary significantly from period to period due to a number of factors, many of which are not in our control. These
factors include:



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We
forecast the volume and timing of orders for our products for operational and production planning and in some cases we become liable for procurement costs based on these forecasts.
These forecasts, however, are based on many factors and subjective judgments, and they may be inaccurate. In particular, because of our limited operating history, we do not have meaningful historical
information to predict demand for our products, and trends that may emerge, in the various markets into which we sell and plan to sell our products. Moreover, because most of our expenses, such as
employee compensation and lease payment obligations, are relatively fixed in the short term, we may be unable to adjust spending quickly enough to offset any unexpected shortfall in revenue growth or
any decrease in revenue levels in any particular period. As a result of the foregoing, our operating results may fall
below the expectations of securities analysts or investors in future quarters or years, causing our stock price to decline.

If our customers or distributors purchase products in excess of current demand, our revenue may unexpectedly decline in future periods, which may disappoint securities analysts
and investors and result in a decline in our stock price.

With the exception of software sold into the retail channel, we recognize revenue when ownership transfers to our customers or distributors. These customers or
distributors may make purchases well in advance of the actual resale, deployment or use of our products, particularly in the case of their initial purchases of our products, or may make purchases in
excess of current requirements to take advantage of volume or price discounts. Additionally, our customers or distributors may purchase disposables from us based on their projected utilization of our
MedGem and BodyGem devices. Some customers or distributors have exclusive rights in a particular market if they meet contractual minimum purchase requirements and may make purchases in excess of
actual demand in order to maintain that exclusivity. Our revenue could decline in future periods if our customers and distributors acquire a supply of our products that is in excess of their demand or
if our customers or distributors and their resale customers fail to develop a successful deployment strategy for our devices. Moreover, our revenue may not be indicative of the number of health
monitoring devices in use or the number of disposables used in a particular period. Consequently, our historical operating results may not provide any indication of the number of health monitoring
devices and disposables that may be purchased or used in future periods.

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Our strategic partners may experience financial difficulties or undergo organizational changes, which may harm our ability to distribute our products, and could result in a
substantial decline in our revenue and overall operating results.

We expect that a majority of our sales will be made to a limited number of customers, including our strategic partners and distributors. One or more of our
strategic partners may experience financial difficulties or undergo organizational changes that could affect their ability or need to purchase our products. Organizational restructurings and financial
concerns may cause our strategic partners to substantially reduce the volume of their purchases of our products, or to no longer continue as our distributors. As a result, our ability to effectively
distribute our products may be harmed, and we may experience a significant decline in our revenue and overall operating results.

We have very limited product offerings from which we expect to derive substantially all of our future revenue. If demand for our limited number of products fails to develop as
we expect or otherwise declines, we could fail to generate sufficient revenue to achieve profitability.

We derive substantially all of our revenue from the sale of MedGem, BodyGem, disposables and software. In January 2002, we obtained FDA clearance to market
MedGem and accordingly did not derive any of our revenue from the sale of MedGem prior to that time. We expect that revenue from the sale of MedGem, BodyGem, disposables and our BalanceLog software
will account for substantially all of our revenue for the foreseeable future. In particular, we expect disposable sales and sales of our software products to comprise a larger portion of revenue over
time. The limited development and sales of our product line makes our future prospects difficult to predict. If the anticipated demand for our products fails to develop, our ability to generate
revenue and achieve profitability would be significantly harmed. In particular, the failure to sell sufficient quantities of MedGem and BodyGem would not only directly affect revenue but would also
significantly harm our ability to generate recurring revenue from the sale of our disposables and may limit sales of software products.

The failure of our customers to adhere to single-use labeling restrictions for disposable facemasks and mouthpieces, or the use of disposables acquired from third
party sources would significantly limit our ability to generate recurring revenue.

Our disposable products used with MedGem were cleared by the FDA for single-use only and the labeling states that a new disposable mouthpiece or
facemask be used each time MedGem is used. We also label and contractually require our distributors and strategic partners to acknowledge that disposables are single-use and to use a new
disposable each time a BodyGem or MedGem device is used. We anticipate that a significant portion of our future revenue will be derived from the use of a new disposable each time our health monitoring
devices are used. If customers do not adhere to our single-use labeling instructions, or if customers use disposables acquired from third parties, our ability to generate recurring revenue
would be significantly harmed, our operating results may suffer and we may incur significant costs in developing future versions of our product that provide for alternative means to track and charge
for usage. We may not successfully develop these alternative means.

If we cannot convince healthcare professionals, wellness advisors and their patients and clients of the importance of measuring metabolism for nutrition monitoring, weight
management and fitness applications and of the benefits of our products, we will not be able to increase our revenue and our operating results would suffer.

Our products, which have only recently been launched, have achieved limited adoption in their target markets and our ability to sell to customers and distributors
in these markets is unproven. Consequently, there is limited information upon which to evaluate whether a significant number of potential customers will purchase our solutions to replace or supplement
their current methods for nutrition monitoring and weight management. As part of our strategy, we will be required to educate

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healthcare professionals and wellness advisors as to the importance of measuring metabolism for nutrition monitoring, weight management and other applications. However, these practitioners may view
existing tools, such as estimates of resting metabolic rate, as adequate for their needs. Patients and clients may also view present methods of nutrition monitoring and weight management, including
self-administered weight-loss regimens, commercial weight loss programs and pharmaceuticals, as adequate without the need for the additional benefits provided by our products.
Additionally, as part of our FDA clearance of MedGem, we are required to set forth in our labeling the formula used to estimate resting metabolic rate and a discussion on how the calculation may
affect the accuracy of the resting metabolic rate measurement. If we cannot convince practitioners, patients and clients that accurately measuring metabolism is important for nutrition monitoring,
weight management and other applications and that our solution is superior to current tools, we will be unable to increase or sustain revenue.

The commercial weight management and fitness markets are characterized by short-lived trends and we may not experience increased demand for our products, or any increase in
demand may be short-lived.

Due in part to the difficulty of weight management and fitness enhancement and the regular introduction of new weight management or fitness products and regimens,
many products sold in the weight management and fitness markets have short product lifecycles. The weight management and fitness markets are characterized by fads and short-lived trends driven by
factors such as short-term success, perceived efficacy and marketing campaigns. Weight management and fitness improvement can be difficult, and many people abandon weight loss and fitness
regimens due to factors unrelated to the effectiveness of the regimen. We have not conducted trials or other tests to demonstrate to our customers and end-users that our products are
effective in helping people lose weight or improve their fitness. Sales of BalanceLog, BodyGem and our disposables will suffer and our revenue and results of operations will be harmed if we and our
strategic partners are not able to convince end-users that the measurement of resting metabolic rate will effectively and efficiently help their weight management or fitness efforts, or if
people who use our products do not meet their weight goals.

Our consumer software products have uncertain market acceptance, short product life cycles and may be subject to returns from our distributors.

A substantial portion of our current sales orders relate to the sale of BalanceLog software. Consumer preferences for software products, particularly software
relating to weight management and fitness, are difficult to predict and few consumer software products achieve sustained market acceptance. There can be no assurance that BalanceLog software or other
software products that we introduce will achieve any significant degree of market acceptance, or that such acceptance will be sustained for any significant period.

We
typically sell BalanceLog software, and intend to sell our future consumer software applications, separately through retail distribution channels. In most circumstances, our
distributors and customers have certain return rights and in other circumstances we could be forced to accept substantial product returns to maintain our relationships with certain distributors and
customers. Because the sale of our
software products has a limited history, we do not have a historical basis for estimating the rate of such returns and therefore have deferred recognizing revenue until sold to an end user. Failure of
the current or new releases of BalanceLog software or other software offerings to achieve market acceptance or product returns in excess of our expectations would have a material adverse effect on our
operating results and financial condition.

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We currently rely on a limited number of distributors for the sale of MedGem and BodyGem into the medical markets and, to a lesser extent, other target markets. If these
distributors are not successful selling our products, or if we are unable to establish additional distributor arrangements as planned, we will not be able to achieve our sales goals and our business
will be harmed.

We expect to rely primarily upon distributors and their sales forces to sell MedGem into the medical market and to increasingly rely upon distributors and their
sales forces to sell BodyGem into the retail pharmacy, weight management, fitness and other target markets. We currently have a limited number of distributors, such as HEALTHSOUTH Corporation, Mead
Johnson & Company, Microlife Corporation and Nature's Sunshine Products, Inc. for the distribution of our products into global markets. Our reliance on distributors subjects us to many
risks, including risks related to their inventory levels and support for our products. If any of our distributors attempt to reduce their inventory levels or if they do not maintain sufficient levels
to meet customer demand, our sales could be negatively affected. As is generally the case with our current distribution agreements, we anticipate that our future distribution agreements will allow our
distributors to reduce or discontinue purchases of our products with short notice. Further, distributors may not recommend, or continue to recommend, our products. We will rely heavily upon our
distributors for the sales and marketing activities that we believe are critical to the successful sale of our products. However, our distributors may not market or sell our products effectively or
continue to develop and devote the resources necessary to provide us with effective sales, marketing and technical support. For example, while we have granted to a subsidiary of Microlife Corporation
an exclusive right to sell our products to retail pharmacies in Europe, and weight management and fitness/exercise markets in Taiwan, Microlife has limited experience selling into those markets. In
addition, we intend to attract additional distributors of MedGem and BodyGem in order to increase penetration in the medical and other markets. It may be difficult to increase our distributor base due
to current exclusivity arrangements and prospective requests for exclusivity from distributors and other customers. In addition to the exclusive rights we have granted Microlife, we have granted
HEALTHSOUTH Corporation an exclusive right to purchase our products for use in its facilities, an exclusive right to purchase BodyGem for use in and resale to certain non-hospital
facilities such as outpatient rehabilitation and physical therapy facilities, and a right of first refusal to provide metabolic rate measurement services to organizations such as in-house
corporate wellness programs and fitness facilities. We have entered into a distribution agreement with Mead Johnson & Company for the marketing, sale and distribution of MedGem and related
products on an exclusive basis to hospital-based dieticians and physicians and osteopaths specializing in oncology, hospital based nutrition support services, obstetrics, gynecology, pediatrics and
bariatric surgery as well as a non-exclusive right to distribute MedGem and related products to certain other categories of physician professionals in the United States. If we are unable
to maintain successful relationships with our distributors or obtain additional distributors, we will have to devote substantially more resources to the distribution, sales, marketing, implementation
and support of our products than we would otherwise and our efforts may not be as effective. The loss of any one or more of our distributors, a reduction in purchases of our
products by or through our distributors, the decline of our distributors' business or the inability to increase our third-party distributor base may limit our revenue growth and harm our operating
results.

Because a small number of customers are likely to account for a substantial portion of our revenue, the loss of any of these customers or the cancellation or deferment of a
customer's order could cause our revenue to decline substantially and may result in a decline in our share price.

We expect that the majority of our revenue will depend on sales of our products to a limited number of customers, which include our strategic partners and our
distributors. We intend to establish strategic relationships with large, prominent companies that possess significant sales, marketing and distribution capabilities in each of our targeted medical and
non-medical channels. We have only recently entered into contracts with customers that provide for the potential purchase of significant quantities of our products. As a result, we have
not had significant working experience with these new

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customers and it is difficult to predict their purchasing patterns. Many of our contracts with our customers do not contain minimum purchase requirements and any customer may reduce or discontinue
purchases of our products at any time. The loss of one or more of our customers, a reduction in purchases of our products by our customers or the decline of our customers' business may cause our
revenue to decline substantially or fall short of our expectations. In addition, because we expect our accounts receivable to be concentrated on a small group of customers, the failure of any of them
to pay on a timely basis would reduce our cash flow and negatively affect our operating results.

We
have granted, and may in the future grant, certain of our customers' exclusive rights to particular markets. For example, we have granted to a subsidiary of Microlife Corporation an
exclusive right to sell our products to retail pharmacies in Europe, and weight management and fitness/exercise markets in Taiwan. In addition to the exclusive rights we have granted Microlife, we
have granted HEALTHSOUTH Corporation an exclusive right to purchase our products for use in its facilities, an exclusive right to purchase BodyGem for use in and resale to certain
non-hospital facilities such as outpatient rehabilitation and physical therapy facilities, and a right of first refusal to provide metabolic rate measurement services to organizations such
as in-house corporate wellness programs and fitness facilities. We have entered into a distribution agreement with Mead Johnson & Company for the marketing, sale and distribution of
MedGem and related products on an exclusive basis to hospital-based dieticians and physicians and osteopaths specializing in oncology, hospital based nutrition support services, obstetrics,
gynecology, pediatrics and bariatric surgery as well as a non-exclusive right to distribute MedGem and related products to certain other categories of physician professionals in the United
States. Also, Nature's Sunshine Products, Inc. has an exclusive right to purchase our products for resale to their independent distributors who, in turn, may use our products to provide
metabolic rate measurement services to consumers for a fee. These exclusive agreements may limit our ability to add additional customers. If one of these current or future customers fails to
adequately promote and sell our products, our sales and penetration into their markets will be adversely affected. Moreover, if any customer that has an exclusive right in a particular market proves
to be ineffective, we may not be able to replace that customer for a significant period of time, if at all.

We rely primarily on Sanmina-SCI Corporation to manufacture and assemble MedGem and BodyGem. If it is unable to perform any of these services on a timely and
cost-effective basis, our revenue, profitability and stock price could be harmed and our reputation and brand may suffer.

We currently rely primarily on Sanmina-SCI Corporation, a third-party contract manufacturer and assembler, to procure component parts for MedGem and
BodyGem and to assemble, test and package MedGem and BodyGem at its facility in San Jose, California. Our reliance on a single third-party manufacturer exposes us to the following significant risks
outside our control:



We
entered into our agreement with Sanmina in April 2001. As a result, we have not had a long term working experience with Sanmina and therefore cannot predict whether Sanmina
will be able to continue to produce MedGem and BodyGem at acceptable cost and quantity levels, and in a timely manner. In particular, Sanmina may not be able to improve or maintain the efficiency and
quality of its services when it is required to manufacture larger quantities of our health monitoring devices or meet

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FDA or other regulatory requirements. If Sanmina is unable to meet our requirements, we may be unable to cost effectively provide our customers with sufficient quantities of MedGem and BodyGem
devices on a timely basis and our devices may contain defects. If there is any problem with Sanmina's services, our reputation and brand may suffer. We may also lose current and prospective customers
and experience a higher rate of product returns due to manufacturing issues, which would harm our revenue and profitability.

Our
agreement with Sanmina terminates in April 2004 and may be terminated by Sanmina with cause on 60 days notice. If Sanmina were to stop manufacturing our devices, we may
be unable to replace the lost manufacturing capacity on a timely or cost-effective basis, and we could suffer significant disruption in operations, delays in product shipments, a decrease
in revenue and an increase in costs. If Sanmina were to seek to change the terms under which it manufactures and assembles for us, our manufacturing and assembly costs could increase and our
profitability could suffer.

We purchase one of our key components, an oxygen sensor, from a sole source. If this source fails to satisfy our supply requirements on a timely basis, we may lose sales and
experience increased component costs and our customer relationships may be harmed.

We currently purchase the oxygen sensor component of our health monitoring devices from a sole source, Sensors for Medicine and Science, Inc. If we are
unable to obtain a sufficient supply of oxygen sensors from this source, or if we experience any interruption in the supply of this component, we could experience difficulties in obtaining alternative
sources or in altering product designs to use alternate components. For example, we had to modify the original design of MedGem and BodyGem as a result of our inability to obtain adequate supplies of
capacitors that the design required. Any resulting delays or reductions in product shipments could affect our ability to meet scheduled product deliveries to customers, damage customer relationships
and limit our ability to enter into new customer relationships. We may also be subject to increases in component costs, which would adversely affect our gross margins.

Our health monitoring devices and our software products may contain unknown errors or defects, which could result in rejection of our products and damage to our reputation, as
well as lost revenue, diverted development resources and increased service costs and warranty claims.

Our MedGem and BodyGem devices and our software products incorporate complex technologies. In the future, we must develop our hardware and software products
quickly to keep pace with the rapidly changing requirements of our customers. Products as complex as ours can contain undetected errors or defects, especially when first introduced or when new models
or versions are released. For instance, in July 2001 we discovered a defect in BodyGem related to our oxygen sensor calibration algorithm and stopped shipment of BodyGem. We spent four months
working to correct the defect, and in November 2001 we shipped replacement devices to all of our customers and resumed shipments of the device. We estimate that the direct cost to correct this
defect was approximately $187,000. We also suffered damage to our reputation, lost revenue and had to divert development resources. If any of our products in the future contain errors or defects, it
could result in product recalls, the rejection of our products, damage to our reputation, lost revenue, diverted development resources and increased customer service and support costs and warranty
claims. Any of these results could harm our business.

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If we fail to maintain necessary FDA or other regulatory clearance for the marketing and sale of MedGem or if we fail to obtain or maintain necessary FDA or other regulatory
clearance or approvals for the marketing and sale of any other medical devices that we may develop in the future, or if clearances or approvals are delayed, we will be unable to commercially
distribute and market those medical devices in the United States or abroad.

MedGem is a medical device that is subject to extensive regulation in the United States and in foreign countries where we do business. In January 2002, we
obtained FDA clearance through the premarket notification provisions of Section 510(k) of the Federal Food, Drug and Cosmetic Act to market MedGem for the measurement of oxygen consumption in
clinical and research applications. The FDA also allows our device to display resting metabolic rate, which the device calculates from the measurement of oxygen consumption and an internal device
algorithm. We have obtained International Standards Organization (ISO) certification and CE Marking approval and are in the process of fulfilling various other international requirements in order to
commercially distribute our products in new international markets. We may no longer be able to sell MedGem if safety or effectiveness problems develop or if we lose our ISO certification or CE
Marking. Furthermore, unless an exemption applies, before we can sell a new medical device in the United States, we must obtain either 510(k) clearance or premarket approval from the FDA and CE
Marking approval before we can sell a new device in international markets. Complying with the FDA and other regulations is an expensive and time-consuming process, and any failure to
comply could result in substantial penalties. The FDA's 510(k) clearance process usually takes from six to twelve months after the date we submit the application and it is received and filed by the
FDA, but may take significantly longer. The alternative premarket approval process is much more costly, lengthy and uncertain. It generally takes from one to six years after we submit the application
and it is received and filed by the FDA or even longer. We may not be able to obtain additional clearances in a timely fashion, or at all. Delays in obtaining domestic and foreign regulatory
clearances or approvals, if required, could adversely affect our revenue and profitability. Noncompliance with applicable regulatory requirements can result in enforcement action, which may include
recalling products, ceasing product marketing and paying significant fines and penalties, which could limit product sales, delay product shipment and adversely affect our profitability.

Modifications to MedGem may require a new 510(k) clearance or premarket approval or require us to cease marketing or recall the modified device until these clearances or
approvals are obtained.

Although we have not modified any aspect of MedGem since receiving our FDA 510(k) clearance in January 2002, we may make modifications to MedGem in the
future. Any modification to an FDA cleared device that could significantly affect its safety or effectiveness, or that would constitute a major change in its intended use, requires a new FDA 510(k)
clearance. While the manufacturer makes this determination in the first instance, the FDA can review any such decision and may disagree with a
decision not to seek new clearance and require a new 510(k) clearance. In addition, the FDA may impose significant regulatory fines or penalties for marketing the modified product. If we need to seek
510(k) clearance for any modifications to a previously cleared product, we may be required to cease marketing until we obtain this clearance.

If we or our third-party manufacturers fail to comply with the FDA's Quality System regulation with respect to MedGem and any other medical devices that we may produce in the
future, our manufacturing operations could be delayed, and our MedGem product sales and our profitability could suffer.

The manufacturing processes used by third-party manufacturers of our MedGem and any other medical devices, including disposables, are required to comply with the
FDA's Quality System regulation, which covers the methods and documentation of the testing, production, control, quality assurance, labeling, packaging, complaint-handling, storage and shipping of
MedGem. The FDA's

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Quality System regulation will also cover any other medical devices that our contract manufacturer or we may produce in the future. The FDA enforces its Quality System regulation through periodic
inspections, some of which may be unannounced. If we or our third-party manufacturers fail the FDA's Quality System inspection, our operations could be disrupted and our manufacturing delayed. If we,
or one of our third-party manufacturers, fail to comply with the FDA's Quality System regulations, we or our third-party manufacturer could face various enforcement actions, which could include a
shutdown of the manufacturing line at our third-party manufacturer and a recall of our products, which would cause our product sales and profitability to suffer. Furthermore, our key component
suppliers must also remain in compliance with applicable regulatory requirements. If our third-party manufacturer or component suppliers do not conform to applicable regulations, we may be required to
find alternative manufacturers or component suppliers, which could be a long and costly process and which could significantly harm our ability to deliver products to our customers on a timely basis.

Our MedGem device and any other medical devices that we may produce in the future are subject to product recalls even after receiving regulatory clearance or approval. Product
recalls would harm our reputation and result in increased costs, either of which could harm our operating results.

The FDA and similar governmental authorities in other countries have the authority to require the recall of our medical products in the event of material
deficiencies or defects in design or manufacture. A government mandated or voluntary recall by us could occur as a result of component failures, manufacturing errors or design or labeling defects. Any
recall of a product would divert managerial and financial resources, harm our reputation with customers and harm our operating results.

If we fail to protect our intellectual property rights, our competitors may take advantage of our ideas and compete directly against us.

We rely on a combination of patent, trademark, copyright, trade secret and other intellectual property laws, license agreements, confidentiality agreements and
other measures to protect our proprietary technology and intellectual property. Our success will depend in part on our ability to maintain existing intellectual property and to obtain and maintain
further intellectual property protection for our products, in the United States and in other countries. We have 16 issued United States patents, eight issued foreign patents and 131 pending United
States and foreign patent applications. We also have exclusive licenses to patents and other intellectual property rights of the companies that supply us with the oxygen sensor and the airflow
application-specific integrated circuits used in MedGem and BodyGem. Subject to our payment of minimum royalties, the licenses provide us with rights to use the patented technology in the field of our
products for the life of the patents. We intend to rely on our portfolio of issued patents and pending patent applications in the United States and in other countries and our patent licenses to
protect a portion of our intellectual property and our competitive position. However, our patents and any licensed patents may not protect or address critical aspects of the technology incorporated in
our present and future products. Moreover, intellectual property laws and legal agreements afford only limited protection, may be expensive to pursue and may not adequately protect our rights or
permit us to gain or keep any competitive advantage. Our patents and the patents that we license may be challenged, invalidated or circumvented by third-parties, and these patents may not be
sufficiently broad to prevent third parties from producing competing products similar in design to our products. Our patent applications, including those already allowed and those patent applications
covered under licenses, may not be issued as patents in a form that will be advantageous to us.

In
addition, we may not be able to prevent the unauthorized disclosure or use of our technical knowledge or other trade secrets by our employees, consultants, partners or other persons.
Our confidentiality agreements may not provide meaningful protection against the unauthorized use or disclosure of our trade secrets or other confidential information and adequate remedies may not
exist if

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unauthorized use or disclosure were to occur. Furthermore, the laws of foreign countries may not protect our intellectual property rights to the same extent as the laws of the United States. Even if
our intellectual property rights are adequately protected, litigation may be necessary to enforce our intellectual property rights, which could result in substantial costs to us and result in a
substantial diversion of management attention. If our intellectual property is not adequately protected, our competitors could use our intellectual property to enhance their products. This could harm
our competitive position, decrease our market share or otherwise harm our business.

If we infringe the patents or proprietary rights of other parties, our ability to grow our business will be severely limited.

Extensive litigation and related administrative proceedings regarding disputes over patents and other intellectual property rights are common in the medical
device and software industries. In addition, major medical device companies have used litigation against emerging growth companies as a means of gaining a competitive advantage. Although we have not
been sued for infringement of another party's
patent in the past, we may be the subject of patent or other litigation in the future. From time to time, we may receive letters from third parties drawing our attention to their patent rights.
Third-parties may claim that we are using their patented inventions and may go to court to stop us from engaging in our normal operations and activities. These lawsuits are expensive to defend and
conduct and would also consume and divert a significant amount of time and attention of our management. A court may decide that we are infringing a third-party's patents and may order us to cease the
infringing activity. An adverse determination could put our patents at risk of being invalidated or interpreted narrowly or require us to seek licenses from third-parties. Licenses may not be
available on commercially reasonable terms or at all, in which event, our business would be significantly harmed. The court could also order us to pay damages for the infringement. These damages could
be substantial and could harm our business, financial condition and operating results. While we do not believe that we infringe any valid and enforceable rights that have been brought to our
attention, there may be other more pertinent rights of which we are presently unaware.

We license or sublicense key technology from third-parties. If necessary licenses or sublicenses of technology are terminated or become unavailable or too expensive, or if
licensors or sublicensors fail to prosecute and enforce patents licensed to us, our competitive position and our product offering will suffer.

We license or sublicense from third-party suppliers several key technologies incorporated or to be incorporated in our health monitoring devices, such as oxygen
sensor technology from Sensors for Medicine and Science and air flow application specific integrated circuits from ndd Medizintechnik AG. We do not own the patents that underlie these licenses or
sublicenses. We may be required to license or sublicense technology from other third-party suppliers to enable us to develop new products or to modify our existing products. Our rights to use these
technologies and employ the inventions claimed in the licensed patents are subject to our licensors' valid and enforceable ownership of the underlying technology as well as their abiding by the terms
of those licenses. Moreover, because oxygen sensor and other technologies that are important to our health monitoring devices are sublicensed to us, our rights to use these technologies and employ the
inventions claimed in the sublicensed patents are subject to our or our sublicensor abiding by the terms of their agreement with the original licensor. In addition, we do not control the prosecution
of the patents to which we hold licenses or sublicenses. In many cases we do not control the strategy for determining when any patents to which we hold licenses should be enforced. Instead, we rely
upon our licensors to determine the appropriate strategy for prosecuting and enforcing those patents. We may face competition in our attempts to renew or obtain new licenses, which may result in
increased costs, limited or nonexclusive rights or our inability to renew or obtain licenses. If we are unable to renew or obtain any license that we need, if any license is terminated, or if the
underlying patents to our licenses are declared invalid or are otherwise impaired, we could be

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required to obtain substitute technology of lower quality or at greater cost, which could seriously impair our ability to sell our products and harm our operating results.

If we lose our key personnel or are unable to attract and retain additional key personnel and scientific staff, we may be unable to pursue business opportunities or develop new
products.

Our future success depends in large part upon attracting and retaining key technical, sales, marketing and senior management personnel. The loss of the services
of any of our key employees, particularly if lost to competitors, may significantly delay or prevent the achievement of our product development and other business objectives and may adversely affect
our strategic direction. In particular, the services of James Mault, our chief executive officer, and James Dennis, our president and chief operating officer, would be difficult to replace. Our
employees may terminate their employment with us at any time. In addition, other than a life insurance policy we have obtained for Dr. Mault, we do not maintain key person life insurance for
any of our personnel. Our future success will also depend on our ability to identify, recruit, train and retain additional qualified and skilled personnel. Despite the downturn in the economy, there
are a limited number of qualified technical, sales, marketing and senior management personnel and there is significant competition for these personnel, especially in Silicon Valley where our research
and development facility is located. We may be unable to attract and retain personnel with the qualifications necessary for the further development of our business. We have in the past experienced
difficulty in recruiting and retaining personnel with appropriate qualifications, particularly in technical areas. If we fail to attract and retain personnel, particularly management and technical
personnel, we may not be able to execute on our business plan.

We expect to grow rapidly, and our failure to effectively manage this growth could harm our business.

We intend to expand our operations and pursue market opportunities domestically and internationally to grow our customer base. To accommodate anticipated growth
and expansion, we will be required to:



These
measures will place a significant burden on our management and internal resources and may increase our costs and decrease our margins. Moreover, if we cannot scale our business
appropriately or otherwise adapt to anticipated growth and new product introductions, our business will suffer.

Our business exposes us to risks of product liability claims, and we may incur substantial expenses that exceed our insurance coverage if we are sued for product liability.

Our business exposes us to potential product liability claims that are inherent in the testing, production, marketing and sale of health monitoring products. For
example, our products may generate a false measurement, or false reports based on those measurements, which may then be incorrectly used as a basis for medical care or weight management. We may be
held liable if any product we develop or any product that uses or incorporates any of our technologies causes injury or is otherwise found unsuitable. While we have product liability insurance, it may
not be sufficient in amount or scope

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to provide us with adequate coverage against all potential liabilities, and we may not be able to maintain or increase this insurance as necessary, either cost-effectively or at all. A
product liability claim in excess of our insurance coverage would have to be paid out of cash reserves and would harm our reputation in the industry. A product liability claim, regardless of its merit
or eventual outcome, could result in significant legal defense costs and damage to our reputation. These costs would have the effect of increasing our expenses and could harm our business.

We may have warranty claims that exceed our reserves.

BodyGem and MedGem carry warranties for a period of 12 to 15 months from the date of purchase against defects in materials and workmanship. Our customer
software, such as our BalanceLog product, generally carries a 90-day warranty from the date of purchase. Because we continue to develop new versions of our customer software, we cannot be
certain that our customer software will work as designed, or that it won't contain defects that could harm the computer systems of our customers. We have established reserves for the liability
associated with product warranties. However, any unforeseen warranty claims could adversely affect our operating results.

We face risks related to our international operations, including the need to maintain ISO certification and CE Marking approval and obtain necessary foreign regulatory
clearance or approvals.

We have committed resources to expanding our international sales channels. Our efforts to expand and develop international sales channels may not be successful.
Sales of our products outside the United States are subject to foreign regulatory requirements that vary widely from country to country. We have obtained ISO certification and CE Marking approval and
are in the process of fulfilling various other
international requirements in order to commercially distribute our products in new international markets. In order to maintain our ISO certification, we are required to undergo an audit conducted by a
European notified body every six months. ISO certification is required to maintain our CE Marking approval to distribute our medical devices outside the United States. If we fail to maintain a quality
assurance system we may fail our ISO audit and may lose our ISO certification and CE Marking. In addition, exports of medical devices from the United States are regulated by the FDA. Complying with
international regulatory requirements can be an expensive, time-consuming process and approval is not certain. The time required to obtain clearances or approvals, if required by other
countries, may be longer than that required for FDA clearance or approval, and requirements for such clearances or approvals may differ from FDA requirements. We may be unable to obtain regulatory
clearances or approvals in other countries. We may also incur significant costs in attempting to obtain and in maintaining foreign regulatory approvals, including ISO certification and CE Marking. If
we experience delays in receipt of necessary clearances or approvals to market our products outside the United States, or if we fail to receive or maintain those clearances or approvals, we may be
unable to market our products or enhancements in international markets in a timely manner, if at all. International sales are subject to a number of risks, including:



We
do not know if foreign markets for our products will develop.

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Failure to raise additional capital or to generate the significant capital necessary to expand our operations and invest in new products and technologies could reduce our
ability to compete and to take advantage of market opportunities and could result in lower revenue.

We expect to expend significant capital to develop and market our products and technologies and expand our operations. These initiatives may require us to raise
additional capital from public and private stock offerings, borrowings under lease lines, lines of credit or other sources. Although we believe that our current cash reserves should be sufficient to
fund our operations, working capital and capital expenditure needs for at least the next twelve months, we may consume available resources more rapidly than anticipated. Our limiting operating history
makes it difficult to predict whether these funds will be sufficient to finance our anticipated requirements. We may need to raise additional funds if our estimates of revenue or if our working
capital or capital expenditure requirements change or prove inaccurate, if we are required to respond to unforeseen technological or marketing hurdles or if we choose to take advantage of
unanticipated opportunities.

We
may not be able to raise additional funds when needed, or on acceptable terms, or at all. If adequate funds are not available on a timely basis, we may not be able to, among other
things:



Our
failure to do any of these things could result in lower revenue and could seriously harm our business. Moreover, if additional funds are raised through the issuance of equity
securities, the percentage ownership of our then current stockholders would be reduced and the value of their investments might decline. In addition, any new securities issued might have rights,
preferences or privileges senior to those of the securities held by stockholders. If we raise additional funds through the issuance of debt, we might become subject to restrictive covenants or we may
subject our assets to security interests.

Most of our research, development and product engineering operations directed to our health monitoring devices are currently conducted at a single location in California, and a
disaster at this facility could result in a prolonged interruption of our business.

We currently conduct most of our scientific, product engineering and research and development activities directed to our health monitoring devices at a single
location in Los Gatos, California, near known earthquake fault zones. We have taken precautions to safeguard our facilities, including insurance, health and safety protocols, and off-site
storage of computer data. However, a natural disaster, such as an earthquake, fire or flood, could cause substantial delays in our operations, cause us to incur additional expenses and damage or
destroy equipment and inventory. Our insurance may not be adequate to cover our losses in any particular case. In addition, our health monitoring devices are assembled at a facility of
Sanmina-SCI Corporation located in San Jose, California. Our disposables are also produced in a facility located in San Jose, California. These facilities are subject to the same risk of
loss due to earthquake, fire, flood or other natural disaster.

Acquisitions of new companies or technologies may result in disruptions to our business and strain management resources due to difficulties in assimilating personnel and
operations.

Our success depends on our ability to continually enhance and broaden our product offerings in response to changing technologies, customer demands and competitive
pressures. Accordingly, we may

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in the future acquire third-party businesses, products or technologies instead of developing them ourselves. We do not know whether we will be able to complete any acquisitions, whether any
acquisition would prove beneficial to us, or whether we will be able to successfully assimilate the operations, products and personnel of the acquired business and train, retain and motivate key
personnel from the acquired business. In addition, certain acquisitions may not prove to be successful to our business. Acquisitions, and integrating any business, product or technology we acquire,
could be expensive and time consuming, disrupt our ongoing business and distract our management and other key personnel. If we are unable to integrate any acquired entities, products or technologies
effectively, our business will suffer. The issuance of equity securities for any acquisition could be substantially dilutive to our stockholders. In addition, our profitability may suffer because of
acquisition-related costs of intangible assets, among other things (and goodwill is no longer amortized unless impaired).

If the security of our website is compromised, our reputation could suffer and customers may not be willing to use our Internet services, which could cause our revenue to
decline.

We retain confidential patient and client information that is logged using our software products through the Internet. Despite our efforts to protect the
integrity of our healthetech.com and balacelog.com sites, a party may be able to circumvent our security measures and could misappropriate personal information or cause interruptions in our operations
and damage our reputation. Any such action could decrease the willingness of our customers and end-users to use our online services. We may be required to spend significant amounts and
allocate other resources to protect against security breaches or to
alleviate problems caused by these breaches. In addition, we may be subject to laws regarding the confidentiality of patient and client information. Violations of these laws may result in fines or
other criminal or civil penalties, which could adversely affect our operating results and harm our business.

Risks Related to Our Industry

The expense of using our products may not be subject to reimbursement by Medicare, Medicaid or third-party payors, such as health insurance companies. Even if a procedure
including our products may be covered, any adverse changes in reimbursement procedures by Medicare, Medicaid or other third-party payors for procedures that include our products may limit our ability
to market and sell MedGem.

Healthcare providers generally receive reimbursement from third-party payors, principally private insurance companies, Medicare and Medicaid, for the cost of
services rendered to their patients. Over time, health care providers could expect to receive reimbursement for procedures using medical devices sufficient to cover the initial cost of the medical
devices, such as MedGem. However, the use of our products is not currently expressly approved for reimbursement by third-party payors for all medical uses and reimbursement for medical procedures is
subject to substantial restriction and scrutiny both in the United States and in international markets. Because MedGem did not receive FDA clearance until January 2002 and we did not commence
shipment until the end of January 2002, MedGem has not been available long enough for us to evaluate the success that healthcare providers will have in securing reimbursement for its use.
Moreover, Medicare and other third-party payors are increasingly scrutinizing whether to cover new procedures and the level of reimbursement for covered services. Third-party reimbursement and
coverage for services including MedGem measurements may not be available or adequate in either the United States or international markets. Future legislation, regulation or reimbursement policies of
third-party payors may adversely affect the demand for our products or our ability to sell our products on a profitable basis. The lack of third-party payor coverage or the inadequacy of reimbursement
could reduce our revenue and harm our operating results.

International
market acceptance of health monitoring devices may depend, in part, upon the availability of reimbursement within prevailing healthcare payment systems. Reimbursement and

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healthcare payment systems in international markets vary significantly by country, and include both government sponsored healthcare and private insurance. We may not obtain international
reimbursement approvals in a timely manner, if at all. Our failure to receive international reimbursement approvals may negatively impact market acceptance of our products in the international markets
in which those approvals are sought.

If we fail to develop and introduce new products and services rapidly and successfully, we will not be able to compete effectively and our ability to generate revenue will
suffer.

The markets for medical devices and software are subject to rapid technological innovation. Our future success depends on our ability to develop and introduce new
or enhanced products that satisfy the needs of our end-user customers, and obtain regulatory clearance or approval on those products, if needed. The development of new products and
services can be very difficult and requires high levels of innovation and research and development expenditures. The development process is also lengthy and costly. If we fail to anticipate our end
users' needs and technological trends accurately or are otherwise unable to complete the development of products and services quickly, we will be unable to introduce new products and services into the
market on a timely basis, if at all. For example, our current MedGem and BodyGem devices took several years to develop. In addition, our software products will require periodic updates to remain
competitive in the market. If we are unsuccessful at developing and introducing new products, software and services that are appealing to end users, we would not be able to compete effectively, our
ability to generate revenue would suffer and our business and operating results would be seriously harmed.

We face competition from competitors with greater resources, and competition from personal health technology companies and fitness, nutrition and weight management software
companies could increase, which may make it more difficult for us to achieve any significant market penetration.

The markets for our products are competitive and subject to rapid technological change. Certain of our current and potential competitors have greater name
recognition, longer operating histories, larger customer bases and significantly greater financial, technical, marketing, sales, distribution and other resources than we do. These competitors may,
among other things, be able to undertake more extensive research and development, adopt more aggressive marketing and pricing strategies, obtain more favorable pricing from suppliers and manufacturers
and make more attractive offers to distribution partners than we can. In addition, some healthcare professionals and wellness advisors will continue to use existing methodologies, such as the
Harris-Benedict equation and other formulas used to estimate metabolic rate, to derive metabolic rate estimates.

Our
current and potential competitors include:



In
addition we may also compete with pharmaceutical companies, commercial weight management companies, producers of fitness products and equipment, and other providers of alternative
solutions to

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weight management and fitness. New or different products or methods of weight management, fitness and nutrition monitoring are continually being introduced. If any of our competitors were to become
the industry standard or were to enter into or expand relationships with significantly larger companies through mergers, acquisitions or otherwise, our business and operating results could be
significantly harmed. We may not be able to successfully compete against the numerous companies in our target markets.

ITEM 2.    FACILITIES.

Our corporate headquarters facility consists of approximately 25,600 square feet and is located in Golden, Colorado. We lease our corporate headquarters facility
pursuant to a lease agreement that expires in December 2007. We lease a facility in Los Gatos, California for research and development activities under a lease that expires in May 2005.
We also lease a facility in Seattle, Washington, which at one time contained software developers, primarily from our acquisition of Softcare, Inc. We have relocated many of these employees from
Seattle to our headquarters in Golden, Colorado. As such, we have unoccupied office space in Seattle, Washington under a lease that expires in June 2005, for which we are currently pursuing a
sublease arrangement. We believe that these facilities are adequate for our current operations and that additional space can be obtained on commercially reasonable terms if needed.

ITEM 3.    LEGAL PROCEEDINGS.

We are not currently party to any material legal proceedings.

ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

No matters were submitted to a vote of the security holders, through solicitation of proxies or otherwise, during the fourth quarter of 2002.

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PART II

ITEM 5.    MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

(a)  Price Range of Common Stock

Our common stock has been listed on the Nasdaq National Market under the market symbol "HETC" since July 12, 2002. The following table sets forth the range
of high and low sales prices per share of our common stock for the periods indicated.

High

LowYear Ended December 31, 2002Third Quarter

8.80

4.20Fourth Quarter

7.34

4.50




During the fourth quarter ended December 31, 2002, we issued:



The
above issuances of securities were made by us in reliance on exemptions from registration contained in Section 4(2) of the Securities Act of 1933, as amended, and the rules
and regulations thereunder, as offerings not involving a public offering.

(b)  Holders

On February 14, 2003, the last reported sale price of our common stock on the Nasdaq National Market was $2.38 per share. As of February 14, 2003,
there were approximately 237 stockholders of record of our common stock. We believe that we have a greater number of beneficial stockholders because a substantial number of shares of our common stock
are held of record in street name by broker-dealers for their customers.

(c)  Dividend Policy

We have not declared nor paid and do not anticipate declaring or paying any dividends on our common stock in the near future. Any future determination as to the
declaration and payment of dividends will be at the discretion of our board of directors and will depend on then existing conditions, including our financial condition, results of operations,
contractual restrictions, capital requirements, business prospects, and such other factors as the board deems relevant.

(d)  Securities Authorized for Issuance Under Equity Compensation Plans

The information required by this Item regarding securities authorized for issuance under equity compensation plans is incorporated by reference to our definitive
Proxy Statement to be filed in connection with the Annual Meeting of Stockholders to be held on May 7, 2003.

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(e)  Use of Proceeds

We commenced trading of our common stock, $0.001 par value, on July 12, 2002 on the Nasdaq National Stock Market. The aggregate gross proceeds were
approximately $25.7 million after deducting $2.1 million in underwriting discounts and commissions and an estimated $2.2 million in other expenses incurred in connection with the
offering.

Upon
closing of the initial public offering, we paid $1.75 million out of the proceeds of the offering to Dr. Mault, our Chief Executive Officer, as partial consideration
for the sale and assignment of patent rights by Dr. Mault to us.

We
spent $3.5 million of the proceeds from the offering to implement and support a marketing awareness campaign launched in late 2002 and early 2003. We plan to spend up to an
additional $2.5 million on radio and print advertising for our BalanceLog software and to further support its retail distribution.

No
other proceeds of the offering were paid, directly or indirectly, to any other of our officers or directors or any of their associates, or to any persons owning 10% or more of our
outstanding common stock or to any of our affiliates. We invested the remaining proceeds in short-term, investment-grade, interest bearing instruments, pending their use to fund our
operations, working capital and capital expenditures.

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ITEM 6.    SELECTED FINANCIAL DATA

SELECTED CONSOLIDATED FINANCIAL DATA  (in thousands, except share and per share data)

Selected financial data related our financial condition and results of operations for the five years ended December 31, 2002 are summarized as follows.
Such information should be read in conjunction with the accompanying consolidated financial statements and related notes thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."

|                                                                |                                          | Inception
(February 1998)
to December 31,
1998 |           | Fiscal Years Ending December 31, |      
|--------------------------------------------------------------- | ---------------------------------------- | ---------------------------------------------- | --------- | -------------------------------- | -----
|
|Consolidated Statements of Operations Data:                     |                                          |                                                |           |                                  |      
|Revenue                                                         |                                          | $                                              |          |                                  | $    
|Cost of revenue                                                 |                                          |                                                |          |                                  |      
|Operating expenses                                              |                                          |                                                | 390       |                                  |      
|Loss from operations                                            |                                          |                                                | (390      | )                                |      
|Interest income and interest expense, net                       |                                          |                                                | 3         |                                  |      
|Loss from continuing operations                                 |                                          |                                                | (387      | )                                |      
|Loss from discontinued operations                               |                                          |                                                |          |                                  |      
|Net loss                                                        |                                          | $                                              | (387      | )                                | $    
|                                                                |                                          |                                                |           |                                  |      
|Loss per common share:                                          |                                          |                                                |           |                                  |      
|                                                                | Basic and diluted loss per common share: |                                                |           |                                  |      
|                                                                |                                          | Continuing operations                          |           | $                                | (0.10
|                                                                |                                          | Discontinued operations                        |           |                                  |     
|                                                                |                                          |                                                | Net loss  |                                  | $    
|                                                                |                                          |                                                |           |                                  |      
|Basic and diluted weighted average number of shares outstanding |                                          |                                                | 4,039,995 |                                  |      

|                                          |  | December 31,
|----------------------------------------- |  | ------------
|
|Selected Consolidated Balance Sheet Data: |  |             
|Cash and cash equivalents                 |  | $           
|Investments                               |  |             
|Working capital                           |  |             
|Total assets                              |  |             
|Long-term note payable to related party   |  |             
|Total liabilities                         |  |             
|Total stockholders' equity                |  |             

See
Note 1 of the notes to our consolidated financial statements for an explanation of the determination of the basic and diluted weighted average number of shares outstanding
used to compute net loss per share.

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ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion contains forward-looking statements regarding us, our business, prospects and results of operations that are
subject to risks and uncertainties posed by many factors and events that could cause our actual business, prospects and results of operations to differ materially from those that may be anticipated by
such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed herein and under the captions "Risk Factors" and "Business"
as well as those discussed elsewhere in this Annual Report on Form 10-K. You should not place undue reliance on these forward-looking statements, which speak as of the date of this
report. We do not intend to update or revise these forward-looking statements to reflect future events or developments. You should read this discussion together with the financial statements and other
financial information included in this Annual Report on Form 10-K and our other reports filed with the Securities and Exchange Commission.

Overview

We were incorporated in Delaware in February 1998. We design, develop and market technologically advanced and proprietary handheld medical devices and
software for the measurement of important health parameters.

Since
our inception, our principal activities have involved developing our products, forming distributor and strategic partner relationships, and more recently, marketing our initial
products. We received FDA 510(k) clearance in January 2002 to market MedGem for the measurement of oxygen uptake in clinical and research applications. BodyGem, which we promote for
non-medical weight management applications, was commercially launched in November 2001. Our BalanceLog software application, which can be used as a stand-alone weight and nutrition
management program or in conjunction with measurements from our devices, was also commercially launched in November 2001.

We
derive revenue from the sale of our health monitoring devices, single-use disposables, software products and license fees. We anticipate that our revenue will be generated
primarily through strategic partnerships and distribution agreements. Our sales strategy is to establish relationships with at least one large, prominent company in each channel that already possesses
the sales, marketing and distribution capabilities needed to reach our end users. In the medical and clinical markets, we
currently have agreements with HEALTHSOUTH Corporation and Mead Johnson & Company (a subsidiary of Bristol-Myers Squibb Company) for use or distribution of MedGem into such markets. In
connection with our entering into a distribution agreement with Mead Johnson & Company, we mutually agreed with SensorMedics Corporation, a subsidiary of VIASYS Healthcare, to terminate their
distribution rights in certain markets effective September 30, 2002. Thereafter, our international distribution agreement with SensorMedics dated August 2001, as well as our joint
development agreement dated July 6, 2000, were both terminated by mutual agreement, effective as of October 31, 2002

In
the non-medical markets, we currently have agreements with Nature's Sunshine Products, Inc. for distribution of BodyGem through their independent distributors who
provide measurement services to consumers; Bally Total Fitness for purchase of BodyGem devices to provide measurement services in their fitness clubs; US Wellness, Inc. for distribution of
BodyGem measurement services into the retail pharmacy and diagnostic markets; SAM'S West, Inc. (a subsidiary of Wal-Mart Stores, Inc.), and Wal-Mart
Stores, Inc. for the retail distribution of our BalanceLog software; and a subsidiary of Microlife Corporation for distribution of BodyGem to retail pharmacies in Europe to provide
in-store metabolic rate measurement services and the weight management and fitness/exercise markets in Taiwan. In addition, we have entered into agreements with several regional
distributors for the sale of MedGem and BodyGem into certain medical and non-medical markets.

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We
recognize revenue from the sale of our products, other than retail software, when ownership transfers to our customer or distributor. Other than software, we offer products with
warranty periods of 12 to 15 months from the date of purchase. With certain limited exceptions, we provide limited warranties on our software products for 90 days from the date of
purchase. In the future, we expect that revenue from the sale of disposables will increase as a percentage of total revenue as the installed base of our monitoring devices increases. We also
anticipate revenue from our software product sales to increase as a percentage of total revenue as our BalanceLog software product is commercially distributed in the retail channel. As the retail
channel is a new channel for us and we have no historical basis for estimating returns, we recognize revenue when the software is sold through to the end user.

We
pay royalties to third-parties to license various sensor technologies that are used in our health monitoring devices. These royalty expenses are included in our cost of revenue. In
general, we pay the greater of minimum royalty amounts or a percentage of product revenue to these third-parties in order to maintain exclusivity in specified fields of use through the terms of the
agreements covering the licensed technologies.

We
currently outsource the manufacturing, testing and packaging of our health monitoring devices, disposable products and software. We pay our contract manufacturers a negotiated price,
inclusive of labor, material, overhead and profit, for the products that they manufacture. Generally, we pay for products as they are completed and move into finished goods inventory. In some
circumstances, if we reschedule purchase orders placed with our manufacturers, we may be liable for restocking fees or may be required to purchase surplus inventory at the manufacturer. Cost of
revenue consists primarily of
purchases of products from our contract manufacturing partners, royalties, tooling depreciation and costs of our manufacturing liaison group. We anticipate that we will recognize higher margins on our
disposables and software products as compared to our health monitoring devices. We anticipate that our gross margins will improve over time as product volume increases and higher-margin disposables
and software become a greater percentage of our total revenue.

Research
and development expenses have principally consisted of compensation and other personnel costs, contractor fees, fees paid to outside service providers, project material, and
clinical expenses. Research and development costs are expensed as incurred.

Selling,
general and administrative expenses consist of compensation and other personnel fees, professional fees, travel, tradeshows, public and investor relations, advertising and
marketing, insurance, outsourced customer support and, to a lesser extent, account management and customer training. Our sales and marketing strategy is to establish strategic distribution
relationships, generate awareness of our products and penetrate and expand in the medical nutrition therapy, weight management and fitness markets. We initiated an awareness campaign emphasizing the
importance of metabolism in weight management and began running advertisements in magazines and cable and broadcast television in late 2002. This awareness campaign will conclude in early 2003. We
anticipate that in the near future we will increase our selling, general and administrative expenditures as we grow our product sales, expand our marketing and customer support efforts and incur costs
associated with operating as a public company.

We
recorded deferred stock-based charges of $4.0 million with respect to stock options that we granted through December 31, 2002. We amortized $1.2 million of the
deferred stock-based charges through December 31, 2002, reduced deferred stock-based charges by $0.3 million for unvested options that have been forfeited and will ratably amortize the
remaining $2.5 million of deferred stock-based charges over the remaining vesting period of the options, which is generally four years from the date of grant. We expect to record expense for
deferred compensation as follows: $0.9 million during 2003, $0.9 million during 2004 and $0.7 million during 2005. The amount of deferred compensation expense to be recorded in
future periods may again decrease if unvested options for which deferred compensation has been recorded subsequently lapse or are cancelled.

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We
issued a warrant to a consultant to purchase 171,849 shares of common stock at $7.50 per share in December 2001 that vested in June 2002. The fair value of the warrant
approximated $290,000. We issued a warrant to a strategic partner in July 2002 at $7.50 per share to purchase 1,942,200 shares of common stock in exchange for promotional services that will be
performed over a three-year period. The warrant has varying exercise periods and the fair value approximated $2.3 million. The expense for this warrant is being recognized over the
three-year promotional period. In September 2002, we issued a warrant to a consultant to purchase 76,000 shares of common stock at exercise prices ranging from $7.50 to $10.00 per
share. The consultant was later appointed to serve as our president and chief operating officer. The fair value of the warrant approximated $59,000 and is included in selling, general and
administrative stock-based charges for the year ended December 31, 2002. In December 2002, we
issued a consultant a performance-based warrant for the right to acquire up to 625,000 shares of common stock, with exercise prices ranging from $15.00 to $50.00 per share, which will be exercisable
based upon the acquisition of, or introduction into certain distribution channels for our health monitoring products. We have recognized $16,425 as of December 31, 2002 for the vesting of
225,000 warrants. We will account for the fair value of the remaining warrants when and if they vest. We also issued four additional warrants in December 2002 to certain consultants for the
rights to purchase up to an aggregate of 400,000 shares of common stock with exercises prices ranging from $10.00 to $20.00 per share for services rendered. The fair value of these warrants
approximated $123,000 at December 31, 2002 and is included in selling, general and administrative stock-based charges for the year ended December 31, 2002.

Results of Operations

Years Ended December 31, 2001 and 2002

Revenue.Total revenue increased $10.8 million to $13.5 million in 2002 from $2.7 million in 2001. Product sales increased $8.3 million
and software and other revenue increased $2.5 million. We sold approximately 4,600 health monitoring devices and over 580,000 single-use disposables in 2002 compared to
approximately 900 devices and over 74,000 disposables in 2001. We received FDA 510(k) clearance in January 2002 and began shipping MedGem devices to our key medical partners shortly thereafter.
Approximately 60% of our devices sold in 2002 were MedGems. In 2001, we sold BodyGem devices primarily into the consumer measurement and commercial sports and fitness markets. Sales of
single-use disposables increased eight-fold in 2002 compared to 2001. The increase was due to initial stocking shipments to new distributors and partners, purchases to maintain
exclusivity requirements, as well as the higher number of health monitoring devices in use. Sales of our BalanceLog software application increased $2.2 million or 264% from 2001. Our BalanceLog
software was first launched in the fourth quarter of 2001. Software revenue is generated through sales from our website, sales through retail distribution and sales through resale agreements we have
with several key accounts. The remaining software and other revenue increase primarily reflects the recognition of license fees from a distributor, and shipping revenue.

We
shipped approximately 21,000 BalanceLog kits, containing BalanceLog software and a coupon for a discounted RMR measurement, to a mass-market retailer in late
December 2002. As we have no historical basis for estimating returns from this channel, we recognize revenue when the software is sold through to the end user. As of December 31, 2002,
no revenue from this transaction was recognized.

Revenue
from customers outside the United States accounted for 13% of total revenue in 2002. We recognized no revenue from outside the United States in 2001.

Cost of Revenue.Total cost of revenue increased $1.6 million to $6.8 million in 2002 from $5.2 million in 2001. As a percentage of revenue,
cost of revenue improved to 51% in 2002 compared to 191% in 2001. The improvement resulted from higher shipment volume, lower contracted manufacturing costs on single-use disposables, and
an absence in 2002 of significant inventory write-offs. Product cost of

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revenue increased $1.1 million to $5.9 million in 2002 from $4.8 million in 2001. As a percentage of product revenue, cost of product revenue improved to 61% in 2002 compared to
364% in 2001. Higher manufacturing volumes and a significant unit cost reduction in our single-use disposables contributed to the improvement. This was partially offset by increased
warranty expense on our health monitoring devices resulting from increased sales of the devices in 2002, increases in minimum royalty obligations, and increased tooling depreciation. In addition, in
2001, we incurred $2.2 million in write-offs for unsaleable BodyGem units and excess inventory purchased from our contract manufacturer. Software and other cost of revenue increased
$0.6 million from $0.3 million in 2001 to $0.9 million in 2002 due to higher volumes of software shipped. As a percentage of software and other revenue, software and other costs
were comparable at 24% in 2001 and 2002.

Research and Development.Research and development expenses increased $0.7 million or 12% to $6.8 million in 2002 from $6.1 million in 2001,
primarily due to contract software developers hired to expand our BalanceLog software application capabilities. In addition, we incurred expense in assisting a national medical association in
establishing practice guidelines and protocols for the use of indirect calorimetry in determining resting metabolic rate. We expect research and development expenses to grow in absolute dollars, and
we expect periodic expenditures for third-party research and development as we grow and continue to develop and bring to market new sensor-based and software products.

Selling, General and Administrative.Selling, general and administrative expenses increased $4.1 million or 38% to $15.0 million in 2002 from
$10.9 million in 2001. The increase is partially due to a marketing awareness campaign we launched in December 2002 to run through March 2003. In October 2002, we made a
prepayment to our marketing agency of approximately $3.5 million for planning, producing and securing print and television spots for this campaign. Of this prepayment, we expensed
$1.1 million for the production and media placements that occurred in December 2002. We also incurred approximately $0.4 million for marketing consultation, packaging design and
merchandising costs to launch our BalanceLog software product into the mass-market retail channel, which is new for us in 2002. In addition to the awareness campaign, we plan to launch a
$1 million radio and print advertising
campaign in early March 2003 to further support sales of our BalanceLog software in the retail channel. As we completed our initial public offering in July 2002, we have experienced a
partial year of increased expense operating as a publicly traded company and expect to see further growth in expenses for legal, audit, investor relations and director's and officer's insurance, which
are typical of a publicly traded company. We expect our selling, general and administrative expenses to increase as we continue to expand our sales and marketing teams.

In
December 2002, we wrote-off a $0.3 million prepayment made to a vendor upon execution of a Web-hosting services agreement. Due to a restructuring
undertaken by the vendor, the vendor is no longer able to provide the services originally contemplated. We have demanded refund of the prepayment in full and will continue to pursue collection of this
amount. We are under a lease agreement for an office facility in Seattle, Washington that we vacated in October 2001. The lease runs through June 2005. We recorded rent expense of
approximately $0.4 million in December 2001. As the market conditions have further softened in Seattle since then, we have lowered our estimates on the price per square foot we would be
able to obtain from the sublet market and accordingly have increased our rent expense by $0.2 million for the year ended December 31, 2002.

Fourth-Quarter Adjustments.In 2002, we established an annual company-wide bonus plan based on a combination of the company and individual performance
factors. Through the third quarter of 2002, we were on track to meet or exceed our performance goals and we accrued bonus expenses of $1.4 million accordingly. Ultimately, we failed to achieve
100% of the annual performance goal, but as many employees met personal performance goals, we paid $0.1 million in cash bonuses in 2003. Consequently, we reversed a total of approximately
$1.3 million of the accrued bonus, beneficially impacting cost of revenue, research and development and selling, general and administrative expenses.

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Certain
officers were granted stock options at below fair market value in early 2002 that vested in four years but the vesting would accelerate to one year if our revenue goals,
discussed above, were achieved. Through the third quarter of 2002, we were meeting or exceeding performance goals and thus were amortizing these stock-based charges over the estimated
one-year vesting period. As our fourth quarter and annual revenue goals were not achieved, the stock options did not vest. We reversed a total of approximately $1.3 million,
beneficially impacting selling, general and administrative stock-based charges. These stock-based charges will be recognized over their original vesting term of four years.

Stock-based Charges.Stock-based charges increased $1.7 million to $2.0 million in 2002 from $0.3 million in 2001. The majority of the
increase, 72%, related to issuance of employee stock options below fair
value and the remaining 28% related to issuance of warrants to outside partners and consultants and stock option modifications.

Interest Income and Interest Expense, Net.Net interest income decreased $0.1 million to $0.4 million in 2002 from $0.5 million in 2001. The
slight decrease was due to timing of funds received from our Series C preferred stock offering throughout 2001 compared to timing of funds received from our initial public offering in
July 2002. In addition, interest on money market funds declined due to lower interest rates.

Loss from Discontinued Operations.Loss from discontinued operations in 2001 reflects the activity of Baby-C, our former wholly-owned subsidiary, and
amortization of goodwill and copyrights. We acquired Baby-C, an educational and sampling products company for the child-care market, in April 2001, believing it would
provide a distribution channel for our software products. As Baby-C was unable to penetrate this channel as expected, we made the decision to discontinue its operations in the fourth
quarter of 2001. Consequently, all goodwill and copyrights, amounting to $10.9 million, attributable to Baby-C were written-off in December 2001 and we dissolved
the entity in May 2002.

Years Ended December 31, 2000 and 2001

Revenue.Total revenue increased $2.2 million to $2.7 million in 2001 from $0.5 million in 2000. Product sales increased $1.3 million
in 2001 due to the commercial launch of BodyGem and related disposables in November 2001. The majority of our product sales occurred in the fourth quarter of 2001. Software and other revenue
increased $0.9 million from $0.5 million in 2000 to $1.4 million in 2001. This increase is partly attributable to a $0.5 million development fee received from
Procter & Gamble in 2001. This development fee resulted from a corporate strategic alliance agreement we entered into with Procter & Gamble in early 2001. Under the agreement we would
have designed and supplied a low-cost version of our BodyGem system for distribution by Procter & Gamble in consumer markets. After changing our strategic focus away from developing
a low-cost consumer version of BodyGem to developing a device for sale to healthcare professionals and wellness advisors, the agreement was terminated. The remaining $0.4 million
increase in software and other revenue includes $0.2 million of software bundled with HealtheTech-branded personal digital assistants and $0.2 million from stand-alone software sales. We
discontinued the sale of HealtheTech-branded personal digital assistants in early 2002.

Cost of Revenue.Total cost of revenue increased $5.1 million to $5.2 million in 2001 from $56,000 in 2000. Product cost of revenues increased
$4.8 million due to $1.1 million for the manufacture of BodyGem, disposable products and software, $1.0 million for the write-off of unsaleable BodyGem units,
$1.1 million for the write-off of excess inventory that was acquired or produced in anticipation of higher manufacturing levels pursuant to our agreement with Procter &
Gamble, $0.4 million for minimum royalty payments due to certain component vendors, and $1.2 million for warranty and obsolescence reserves, customer service and other product costs. The
$1.0 million write-off of unsaleable BodyGem units was required due to subsequent design improvements, such as changes in the serial port and direct current power supply connector,
that would have made these units

39

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incompatible with newer units and difficult to sell and support. The cost to rework the units would have exceeded the cost to produce new units, and recovery of components would have been cost
prohibitive. These units are considered impaired and were written down to zero. We do not intend to sell these units or use their components in our current products. Some of the units have been used
for demonstration purposes, while others have been or will be discarded.

The
$1.1 million write-off of excess inventory related to long-lead time raw material components. This component inventory was purchased to support the
Procter & Gamble relationship, which as discussed above has been terminated. While these components are part of our current product specification, the quantities purchased were in excess of our
anticipated needs. We determined that we could use two years' supply of these components. Quantities in excess of anticipated needs over the next two years would likely become technologically
obsolete. Accordingly, we recorded $1.5 million of the raw material components in current raw material inventory and $0.4 million as a long-term asset at December 31,
2001.

Software
and other cost of revenue increased to $0.3 million in 2001 from $56,000 in 2000 primarily due to the volume increase in software sales and bundled software and
HealtheTech-branded personal digital assistants. Sales of bundled software and HealtheTech-branded personal digital assistants were $14,000 in 2000 and $204,000 in 2001. We discontinued selling
software bundled with HealtheTech-branded personal digital assistants in March 2002.

Research and Development.Research and development costs decreased $3.1 million to $6.1 million in 2001 from $9.2 million in 2000. Most of the
decline related to third-party hardware design and component co-development costs for an oxygen sensor and flow transducer, which declined from $3.9 million in 2000 to
$1.5 million in 2001. In addition, we incurred $0.9 million of web development costs in 2000, as compared to none in 2001. Furthermore, research and development headcount declined from
40 full-time employees at the end of 2000 to 25 full-time employees at the end of 2001.

Selling, General and Administrative.Selling, general and administrative expenses increased $5.8 million to $11.0 million in 2001 from
$5.2 million in 2000. The increase was comprised in part of one-time expenses of $1.5 million related to a asset impairment for Softcare, Inc., a company we purchased
in March 2000 that provided nutrition and other health tracking software (the purchased software was discontinued in December 2001) and the closure of our Seattle office, where we
conducted software development. In addition, our occupancy and related expenses, including leasehold improvements for the Colorado facility, increased $1.7 million over 2000. All of our key
functions are primarily located in this facility, other than hardware development, which is located in Los Gatos, California. The remaining increase was attributable to increased headcount and
compensation costs, professional fees, increased marketing, public relations and advertising programs, and other marketing costs to support our product, marketing and sales initiatives.

Interest Income and Interest Expense, Net.Net interest income increased $0.2 million to $0.5 million in 2001 from $0.3 million in 2000. The
increase was due to higher average cash and cash equivalent balances resulting from the increased net proceeds from the sale of our Series C preferred stock, partially offset by lower interest
rates.

Liquidity and Capital Resources

Cash, cash equivalents and investments totaled $22.1 million at December 31, 2002, with cash and cash equivalents totaling $16.9 million.
Cash used in operating activities was $16.2 million in 2002 and results from funding our net loss, prepaying $3.5 million for the marketing awareness campaign and a $1.9 million
increase in receivables due to late year shipments to a few significant customers. Cash of $1.9 million was received in early January 2003 from these significant customers. Cash used in
investing activities was $8.0 million in 2002 due to the purchase of marketable securities, purchases of capital

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equipment, production tooling and a payment of $1.75 million to our Chief Executive Officer in connection with a patent assignment. Cash flows from financing activities were
$28.2 million in 2002 primarily due to net proceeds from our July 2002 initial public offering of $25.7 million and net proceeds from Series C preferred stock offering
earlier in 2002 of $2.9 million partially offset by a repurchase of $0.9 million of Series B preferred stock. The remaining cash flows from financing activities result from the
exercise of stock options and common stock warrants, offset by payments made on a note payable.

Net
cash used by operations was $11.5 million in 2000 and $17.7 million in 2001. Net cash used by operating activities was $11.5 million in 2000, and primarily
related to funding our net loss, building inventory levels, securing a cash-collateralized letter of credit related to our Colorado facility lease and increased receivables. These uses
were offset by increases in accounts payable and accrued liabilities.
Net cash used by operating activities was $17.7 million in 2001. The increase in accounts receivable from 2000 to 2001 resulted primarily from increased sales in the latter part of 2001.
Receivables at December 31, 2001 were 47% of annual sales for 2001. Approximately 60% of the receivables at December 31, 2001 related to a single customer sale for which payment was
subsequently received in February 2002. The increase in inventory from 2000 to 2001 resulted from a contract requirement to purchase certain raw materials and
work-in-progress exceeding our then current production requirements from our contract manufacturer. These uses of cash were partially offset by increases in accounts payable
and accrued liabilities from 2000 to 2001. The increases in accounts payable and accrued liabilities resulted from our liability to our contract manufacturer and other expenditures associated with our
growth.

Cash
used by investing activities was $2.6 million in 2000, and primarily related to the purchase of capital equipment, intangible assets and the acquisition of
Softcare, Inc. Cash used in investing activities was $3.6 million in 2001, and related to the purchase of capital equipment, intangible assets and investing cash in a government
securities mutual fund.

Cash
provided by financing activities was $19.8 million in 2000 and $29.7 million in 2001. Net cash from financing activities primarily reflects proceeds from sales of
equity securities and exercise of stock options.

We
have no long-term debt. Stockholders' equity at December 31, 2002 was $31.9 million. We expect to continue to invest primarily in sales and marketing
programs and research and development. We expect that additions to property and equipment will continue with growing staff.

The
following table sets forth information concerning our material contractual obligations as of December 31, 2002:

|                                   |  | Payments Due by Period
|---------------------------------- |  | ----------------------
|
|Related Party Notes Payable        |  | $                     
|Operating Lease Obligations        |  |                       
|                                   |  |                       
|Total Contractual Cash Obligations |  | $                     
|                                   |  |                       

We
have contractual rights to third party intellectual property underlying certain of our sensor technologies under which there are obligations to pay transaction-based royalties. To
maintain exclusive rights to these intellectual property rights, we may be obligated to make additional minimum payments.

We
have commitments to pay a total of $1.3 million secured by standby letters of credit as follows: $53,000 in less than one year; $29,000 between one and three years and
$1.2 million in five years. Cash securing the standby letters of credit becomes available when net worth and cash flow requirements are met.

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We
expect to spend significant additional capital primarily for product development, sales, marketing, training and support activities, increased marketing and public relations programs,
and supporting our growing number of strategic and distribution alliances. We also plan to create an international presence that will require additional working capital resources.

We
believe that our current cash and cash equivalent balances and any cash flows from operations, will be sufficient to meet our operating and capital needs for at least the next twelve
months. However, it is possible that we may be required to raise additional financing in some future period through public or private financings, strategic relationships or other arrangements. We may
not be able to raise additional funds when needed, or on acceptable terms, or at all. Also, if additional funds are raised through the issuance of equity securities, the percentage ownership of our
then current stockholders would be reduced and the value of their investments might decline. In addition, any new securities issued might have rights, preferences or privileges senior to those of the
securities held by stockholders. If we raise additional funds through the issuance of debt, we might become subject to restrictive covenants or we may subject our assets to security interests.

Critical Accounting Policies and Estimates

We have disclosed in Note 1 to our consolidated financial statements those accounting policies that we consider to be significant in determining our
results of operations and our financial position.

The
preparation of consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses. We
evaluate our estimates, including those related to bad debts, inventories and warranty obligations, on an ongoing basis. We base our estimates on historical experience and on various assumptions that
we believe to be reasonable under the circumstances. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the periods presented. The actual results may differ from these estimates under different assumptions or conditions.

The
significant accounting policies which we believe are the most critical to aid in fully understanding and evaluating our reported financial results include the following:

Revenue recognition

We derive our revenue primarily from the sale of our health monitoring devices, the recurring sale of our single-use disposables and our companion
software. Our software revenue is recognized in accordance with Statement of Position 97-2, as amended by Statement of Position 98-9. We license our software products on a
perpetual basis. We recognize revenue from the sale of our health monitoring devices and single-use disposables upon ownership transfer to the customer and when it is determined that a
continuing service obligation no longer exists. We recognize revenue from the sale of our software, when persuasive evidence of an arrangement exists, the product is delivered (except in the
mass-market retail channel), the price is fixed or determinable and collectibility is probable. For the mass-market retail channel, as the retailer has a contractual or implied
right of return and as we have no historical basis for estimating returns, we do not recognize revenue upon shipment of product to the retailer, but when the software is sold through to the end user.
Sell-through reporting is provided to us on a daily basis from our mass-market retailers. For sales of our software over the Internet, we use a credit card authorization as
evidence of an arrangement. Sales through our distributors are evidenced by a master agreement governing the relationship together with binding purchase orders on a
transaction-by-transaction basis. Delivery generally occurs when the product is delivered to a common carrier. Service revenue, including training, is recognized as services
are performed. We offer customers the right to return software products that do not function properly within a limited time after delivery, typically 90 days. We provide limited warranties on
our health monitoring devices for periods of 12 to

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15 months from the date of purchase and on our software products for 90 days from date of purchase, with certain limited exceptions.

Receivables
are recorded net of allowance for doubtful accounts. We regularly review the adequacy of our accounts receivable allowance after considering the accounts receivable aging,
the ages of each invoice, each customer's expected ability to pay and our collection history with each customer. We review any invoice greater than 90 days past due to determine if an allowance
is appropriate based on the risk category using the factors discussed above. The allowance for doubtful accounts represents our best estimate, but changes in circumstances relating to accounts
receivable may result in additional allowances or recoveries in the near future.

Valuation allowances

Management makes estimates of potential future product returns and product warranties related to current period product revenue, based on historical returns,
current economic trends and changes in customer demand and acceptance of our products when evaluating the adequacy of the sales returns and other allowances. Significant management judgments and
estimates must be made and used in connection with establishing the sales returns and other allowances in any accounting period. Significant differences may result in the amount and timing of our
revenue for any period if management made different judgments or used different estimates.

Related party transactions

We periodically enter into transactions with individuals or entities that are considered to be related parties. Our policy is to enter into these transactions on
terms consistent with those that have been, or would be, granted to unrelated parties.

Accruals and estimates

We accrue bonuses and recognize expense for options issued at less than fair value on a quarterly basis based on expected attainment of our established Company
goals. If the goals are not attained, we adjust expense recognized to date. For instance, we did not achieve 100% of our annual performance goals for 2002, and we reversed $1.3 million of the
bonus accrual in the fourth quarter of 2002. As our quarterly results have been volatile, there have historically been significant changes in estimates that have significantly impacted expenses within
interim periods. As long as revenue is volatile from period to period and established goals would then vary from period to period, we can continue to report significant fluctuations in expenses.

We
have generated significant operating losses from inception to date, the income tax impact of which has not been reflected in our financial statements. Deferred tax assets are
recognized when it is more likely than not that the asset will be realized. We will need to generate taxable income to recognize available net operating losses in the future.

We
acquired two entities in 2000 and 2001, Softcare and Baby-C respectively. We have transferred certain development-related activities of Softcare to our Colorado location
and terminated other remaining activities. Shortly after the acquisition of Baby-C, we decided to terminate its operations. We recognized significant expenses related to the decisions to
curtail or terminate these activities. While we do not currently have significant intangible assets, we could have similar experience from future acquisitions, if any.

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Item 7A.    Quantitative and Qualitative Disclosures About Market Risk

Our interest income is sensitive to changes in the general level of interest rates in the United States, particularly since the majority of our investments are
short-term in nature. Due to the nature of our short-term investments, we have concluded that we do not have material market risk exposure.

Our
investment policy requires us to invest funds in excess of current operating requirements. At December 31, 2002, our cash and cash equivalents consisted primarily of money
market and mutual funds with average maturities of less than 90 days. The recorded carrying amounts of cash and cash equivalents approximate fair value due to their short maturities. At
December 31, 2002, we also invested funds in a short-duration government mutual fund with an average maturity of greater than 90 days, which is classified as a short-term
investment. The recorded carrying amount of this investment approximates fair value.

Recent Accounting Pronouncements

In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or Disposal Activities." SFAS No. 146 addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the
liability is incurred instead of the date of an entity's commitment to an exit plan. This Statement also establishes that fair value is the objective for initial measurement of the liability.
Severance pay under Statement No. 146, in many cases, would be recognized over time rather than upfront for employees who render future services beyond a minimum retention period. The minimum
retention period would be based on the legal notification period, or if there is no such requirement, 60 days. The provisions of SFAS No. 146 are effective for us for disposal activities
initiated after December 31, 2002. We do not believe adoption of this statement will have a material impact on our financial position, results of operations or cash flows.

In
December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based CompensationTransition and Disclosurean amendment of FASB Statement
No. 123." SFAS No. 148 amends FASB No. 123, "Accounting for Stock-Based Compensation" to provide alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of Statement 123 to require prominent disclosures in both annual
and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The provisions of SFAS No. 148 are
effective for us in fiscal 2003. Management does not believe the adoption of this statement will have a material impact on our financial position, results of operations or cash flows as we do not plan
to change to the fair value based method of accounting for stock-based employee compensation.

ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

See pages F-1 through F-20 of this Form 10-K.

ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL DISCLOSURE.

None.

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PART III

ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information regarding our directors and executive officers required by this Part III of Form 10-K is incorporated herein by reference to
our definitive Proxy Statement to be filed in connection with the Annual Meeting of Stockholders to be held on May 7, 2003.

ITEM 11.    EXECUTIVE COMPENSATION

Information regarding executive compensation required by this Part III of Form 10-K is incorporated herein by reference to our
definitive Proxy Statement to be filed in connection with the Annual Meeting of Stockholders to be held on May 7, 2003.

ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information regarding security ownership of certain beneficial owners and management required by this Part III of Form 10-K is
incorporated herein by reference to our definitive Proxy Statement to be filed in connection with the Annual Meeting of Stockholders to be held on May 7, 2003.

ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information regarding certain relationships and related transactions required by this Part III of Form 10-K is incorporated herein by
reference to our definitive Proxy Statement to be filed in connection with the Annual Meeting of Stockholders to be held on May 7, 2003.

ITEM 14.    CONTROLS AND PROCEDURES

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we have evaluated
the effectiveness of the design and operation of our disclosure controls and procedures within 90 days of filing of this annual report on Form 10-K, and, based on their
evaluation, our principal executive officer and principal financial officer have concluded that these controls and procedures are effective. There were no significant changes in our internal controls
or other factors that could significantly affect these controls subsequent to the date of their evaluation.

Disclosure
controls and procedures are our controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange
Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports
that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow
timely decisions regarding required disclosure.

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PART IV

ITEM 15.    EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)  Documents filed as part of this report:



|Exhibit
No. |  |                                                                                                                                                         
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1         |  | Amended and Restated Certificate of Incorporation of registrant.*                                                                                       
|3.2         |  | Amended and Restated Bylaws of registrant.*                                                                                                             
|4.1         |  | Form of registrant's common stock certificate.*                                                                                                         
|4.2         |  | Sixth Amended and Restated Investor Rights Agreement, as amended, dated June 21, 2001, between the registrant and the parties named therein.*           
|4.3         |  | Amendment No. 1 to the Sixth Amended and Restated Investor Rights Agreement, dated June 11, 2002, between the registrant and the parties named therein.*
|4.4         |  | Warrant to Purchase Shares of Common Stock issued by the registrant to HEALTHSOUTH Corporation.***                                                      
|4.5         |  | Amendment No. 2 to the Sixth Amended and Restated Investor Rights Agreement, dated June 12, 2002, between the registrant and the parties named therein.*
|4.6         |  | Amendment No. 3 to the Sixth Amended and Restated Investor Rights Agreement, dated June 28, 2002, between the registrant and the parties named therein.*
|4.7         |  | Warrant to Purchase Shares of Common Stock issued by the registrant to American Sales & Merchandising, LLC.*                                            
|4.8         |  | Warrant to Purchase Shares of Common Stock issued by the registrant to James W. Dennis.***                                                              
|            |  |                                                                                                                                                         

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|4.9    |  | Warrant to Purchase Shares of Common Stock issued by the registrant to Pamela Peeke.                                                                    
|------ |  | --------------------------------------------------------------------------------------------------------------------------------------------------------
|4.10   |  | Warrant to Purchase Shares of Common Stock issued by the registrant to Augie Nieto.                                                                     
|4.11   |  | Warrant to Purchase Shares of Common Stock issued by the registrant to James O. Hill.                                                                   
|4.12   |  | Warrant to Purchase Shares of Common Stock issued by the registrant to Vernon Brunner.                                                                  
|4.13   |  | Warrant to Purchase Shares of Common Stock issued by the registrant to Michael Liberty, as amended.                                                     
|10.1   |  | Form of Indemnification Agreement entered into by registrant with each of its directors and executive officers.*                                        
|10.2   |  | 1998 Stock Plan.*                                                                                                                                       
|10.3   |  | 2002 Stock Plan and related agreements.*                                                                                                                
|10.4   |  | 2002 Employee Stock Purchase Plan and related agreements.*                                                                                              
|10.5   |  | 2002 Director Option Plan and related agreements.*                                                                                                      
|10.6   |  | Standard Office Lease, dated October 2, 2000, between the registrant and New Genesee Land Company, LLC, as amended on January 24, 2001.*                
|10.7   |  | Office Lease, dated April 24, 2000, between the registrant and Gatito Enterprises Joint Venture.*                                                       
|10.8   |  | Lease Agreement, dated April 17, 2000, between the registrant and Dale Riveland, Christina M. Riveland, Kenneth Johnstone and Pearl L. Johnstone.*      
|10.9   |  | Assignment Agreement, dated May 22, 2002, between the registrant and James R. Mault, M.D.*                                                              
|10.10 |  | License Agreement, dated August 17, 1999, between the registrant and Sensors for Medicine and Science, Inc.*                                            
|10.11  |  | Amendment No.1 to License Agreement, dated October 30, 1999, between the registrant and Sensors for Medicine and Science, Inc.*                         
|10.12  |  | Amendment and Supplement to License Agreement, dated March 31, 2000, between the registrant and Sensors for Medicine and Science, Inc.*                 
|10.13 |  | Agreement, dated November 7, 2001, between the registrant and Sensors for Medicine and Science, Inc.*                                                   
|10.14 |  | License Agreement, dated August 21, 1999, between the registrant and ndd Medizintechnik AG.*                                                            
|10.15 |  | License Agreement, dated August 21, 1999, between the registrant and ndd Medizintechnik AG.*                                                            
|10.16 |  | Agreement for Electronic Manufacturing Services, dated April 3, 2001, between the registrant and Sanmina Corporation.*                                  
|10.17 |  | International Distribution Agreement, dated August 1, 2001, between the registrant and SensorMedics Corporation, a subsidiary of VIASYS Healthcare Inc.*
|10.18 |  | Exclusive Distribution Agreement, dated December 5, 2001, between the registrant and Nature's Sunshine Products, Inc.*                                  
|       |  |                                                                                                                                                         

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|10.19 |  | United States Sales and Distribution Agreement, dated December 21, 2001, between the registrant and US Wellness, Inc.*
|------ |  | ----------------------------------------------------------------------------------------------------------------------
|10.20  |  | Purchase Agreement, dated March 6, 2002, between the registrant and Piranha Plastics, LLC.*                           
|10.21  |  | Purchase Agreement, dated March 6, 2002, between the registrant and Sienna Corporation.*                              
|10.22 |  | International Distribution Agreement, dated March 19, 2002, between the registrant and Microlife Corporation.*        
|10.23 |  | Supply and Services Agreement, dated March 25, 2002, between the registrant and Bally Total Fitness Corporation.*     
|10.24  |  | Employment Offer Letter, executed on April 23, 2000, between the registrant and James R. Mault.*                      
|10.25  |  | Employment Offer Letter, executed on May 27, 1999, between the registrant and Noel L. Johnson.*                       
|10.26  |  | Employment Offer Letter, executed on February 11, 2002, between the registrant and Stephen E. Webb.*                  
|10.27  |  | Employment Offer Letter, executed on October 2, 2000, between the registrant and Kamal Hamid.*                        
|10.28  |  | Employment Offer Letter, executed on July 26, 2000, between the registrant and Jay T. Kearney.*                       
|10.30  |  | Change of Control Agreement, executed on November 10, 2000, between the registrant and James R. Mault.*               
|10.31  |  | Change of Control Agreement, executed on November 3, 2000, between the registrant and Noel L. Johnson.*               
|10.32  |  | Change of Control Agreement, executed on April 1, 2002, between the registrant and Stephen E. Webb.*                  
|10.33  |  | Change of Control Agreement, executed on April 11, 2002, between the registrant and Kamal Hamid.*                     
|10.35  |  | Employment Offer Letter, executed on April 11, 2002, between the registrant and Scott K. Meyer.*                      
|10.36  |  | Change of Control Agreement, executed on April 11, 2002, between the registrant and Scott K. Meyer.*                  
|10.37 |  | Strategic Agreement, dated May 23, 2002, between the registrant and HEALTHSOUTH Corporation.*                         
|10.38 |  | Promotion Agreement, dated May 23, 2002, between the registrant and HEALTHSOUTH Corporation.*                         
|10.39  |  | Employment Offer Letter, executed on July 1, 2002, between the registered and DeWayne R. Youngberg.**                 
|10.40  |  | Change of Control Agreement, executed on July 8, 2002, between the registrant and DeWayne R. Youngberg.**             
|       |  |                                                                                                                       

48

---

|10.41 |  | Vendor Agreement, dated June 24, 2002, between the registrant and SAM's West, Inc., as amended on August 6, 2002.***                                                                                       
|------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.42 |  | Strategic Partnership Agreement, dated August 8, 2002, between the registrant and Mead Johnson & Company, as amended on September 24, 2002.***                                                             
|10.43   |  | Employment Agreement, dated September 13, 2002, between the registrant and James R. Mault.***                                                                                                              
|10.44   |  | Consulting Agreement, dated September 27, 2002, between the registrant and James W. Dennis.***                                                                                                             
|10.45   |  | Amendments to International Distribution Agreement, dated September 26, 2002 and October 29, 2002, respectively, between the registrant and SensorMedics Corporation, a subsidiary of VIASYS Healthcare.***
|10.46   |  | Separation Agreement, dated November 5, 2002, between the registrant and Scott K. Meyer.                                                                                                                   
|10.47   |  | Employment Offer Letter, dated November 15, 2002, between the registrant and James W. Dennis.                                                                                                              
|10.48 |  | Amendment to Strategic Partnership Agreement, dated December 31, 2002, between the registrant and Mead Johnson and Company.                                                                                
|10.49 |  | Amendment to Strategic Agreement, dated in December 2002, between the registrant and HEALTHSOUTH Corporation.                                                                                              
|10.50 |  | Amended and Restated International Distribution Agreement, dated June 24, 2002, between the registrant and Malacca International Corporation, a subsidiary of Microlife Corporation.                       
|23.1    |  | Consent of Independent Auditors                                                                                                                                                                            
|99.1    |  | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                             

---

(b)  Reports on Form 8-K:

The Company filed a report on Form 8-K on December 19, 2002, during the fourth quarter ended December 31, 2002, regarding the
approval of the adoption of a Share Purchase Rights Plan, dated December 11, 2002.

49

---

HEALTHETECH, INC.        INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



|                                                |  | Page
|----------------------------------------------- |  | ----
|CONSOLIDATED FINANCIAL STATEMENTS              
|Independent Auditors' Report                    |  | F-1 
|Consolidated Balance Sheets                     |  | F-2 
|Consolidated Statements of Operations           |  | F-3 
|Consolidated Statements of Stockholders' Equity |  | F-4 
|Consolidated Statements of Cash Flows           |  | F-5 
|Notes to Consolidated Financial Statements      |  | F-6 

---



Independent Auditors' Report

The
Board of Directors and Stockholders
HealtheTech, Inc.:

We
have audited the accompanying consolidated balance sheets of HealtheTech, Inc. and subsidiaries as of December 31, 2001 and 2002, and the related consolidated statements
of operations, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2002. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We
conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of HealtheTech, Inc. and subsidiaries as
of December 31, 2001 and 2002, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2002, in conformity
with accounting principles generally accepted in the United States of America.

/s/
KPMG LLP

Denver,
Colorado
February 14, 2003

F-1

---



HEALTHETECH, INC.        Consolidated Balance Sheets

|                                                                                                           |                                                                                                                                                                                                    | December 31,
2001                                                                                                                                                                                    |                                            | December 31,
2002 |           
|---------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ----------------- | ----------
|Assets                                                                                                     |                                                                                                                                                                                                   
|Current assets:                                                                                            |                                                                                                                                                                                                    |                                                                                                                                                                                                      |                                            |                   |           
|                                                                                                           | Cash and cash equivalents                                                                                                                                                                          |                                                                                                                                                                                                      | $                                          | 12,898,164        |           
|                                                                                                           | Receivables, net of allowance of $37,000 and $29,000 in 2001 and 2002, respectively                                                                                                                |                                                                                                                                                                                                      |                                            | 1,267,044         |           
|                                                                                                           | Investments                                                                                                                                                                                        |                                                                                                                                                                                                      |                                            | 1,550,992         |           
|                                                                                                           | Inventory                                                                                                                                                                                          |                                                                                                                                                                                                      |                                            | 2,846,433         |           
|                                                                                                           | Prepaid expenses                                                                                                                                                                                   |                                                                                                                                                                                                      |                                            | 688,040           |           
|                                                                                                           | Other current assets                                                                                                                                                                               |                                                                                                                                                                                                      |                                            | 21,046            |           
|                                                                                                           | Assets held for sale from discontinued operation                                                                                                                                                   |                                                                                                                                                                                                      |                                            | 54,780            |           
|                                                                                                           |                                                                                                                                                                                                    |                                                                                                                                                                                                      |                                            |                   |           
|                                                                                                           |                                                                                                                                                                                                    |                                                                                                                                                                                                      | Total current assets                       |                   |           
|Property and equipment, net                                                                                |                                                                                                                                                                                                    |                                                                                                                                                                                                      | 2,635,238                                  |                   | 2,997,244 
|Deposits                                                                                                   |                                                                                                                                                                                                    |                                                                                                                                                                                                      | 326,667                                    |                   | 266,363   
|Restricted cash                                                                                            |                                                                                                                                                                                                    |                                                                                                                                                                                                      | 1,413,872                                  |                   | 1,372,497 
|Intangible assets, net of accumulated amortization of $295,000 and $741,000 in 2001 and 2002, respectively |                                                                                                                                                                                                    |                                                                                                                                                                                                      | 1,448,178                                  |                   | 3,406,326 
|Other assets                                                                                               |                                                                                                                                                                                                    |                                                                                                                                                                                                      | 425,294                                    |                   |          
|                                                                                                           |                                                                                                                                                                                                    |                                                                                                                                                                                                      |                                            |                   |           
|                                                                                                           |                                                                                                                                                                                                    |                                                                                                                                                                                                      | Total assets                               |                   | $         
|                                                                                                           |                                                                                                                                                                                                    |                                                                                                                                                                                                      |                                            |                   |           
|Liabilities and Stockholders' Equity                                                                       |                                                                                                                                                                                                   
|Current liabilities:                                                                                       |                                                                                                                                                                                                    |                                                                                                                                                                                                      |                                            |                   |           
|                                                                                                           | Accounts payable                                                                                                                                                                                   |                                                                                                                                                                                                      | $                                          | 2,090,257         |           
|                                                                                                           | Accrued liabilities                                                                                                                                                                                |                                                                                                                                                                                                      |                                            | 4,617,432         |           
|                                                                                                           | Current portion of deferred revenue                                                                                                                                                                |                                                                                                                                                                                                      |                                            |                  |           
|                                                                                                           | Current portion of note payable to related party                                                                                                                                                   |                                                                                                                                                                                                      |                                            | 60,000            |           
|                                                                                                           |                                                                                                                                                                                                    |                                                                                                                                                                                                      |                                            |                   |           
|                                                                                                           |                                                                                                                                                                                                    |                                                                                                                                                                                                      | Total current liabilities                  |                   |           
|Note payable to related party, less current portion                                                        |                                                                                                                                                                                                    |                                                                                                                                                                                                      | 10,000                                     |                   |          
|Deferred revenue, less current portion                                                                     |                                                                                                                                                                                                    |                                                                                                                                                                                                      |                                           |                   | 669,767   
|Other liabilities                                                                                          |                                                                                                                                                                                                    |                                                                                                                                                                                                      | 463,241                                    |                   | 332,306   
|                                                                                                           |                                                                                                                                                                                                    |                                                                                                                                                                                                      |                                            |                   |           
|                                                                                                           |                                                                                                                                                                                                    |                                                                                                                                                                                                      | Total liabilities                          |                   |           
|Stockholders' equity:                                                                                      |                                                                                                                                                                                                    |                                                                                                                                                                                                      |                                            |                   |           
|                                                                                                           | Common stock, $0.001 par value, 22,666,666 and 100,000,000 shares authorized in 2001 and 2002, respectively; 7,299,272 and 19,562,680 shares issued and outstanding in 2001 and 2002, respectively |                                                                                                                                                                                                      |                                            | 7,299             |           
|                                                                                                           | Preferred stock:                                                                                                                                                                                   |                                                                                                                                                                                                      |                                            |                   |           
|                                                                                                           |                                                                                                                                                                                                    | Series A, $0.001 par value, 900,000 and 0 shares authorized, 807,993 and 0 shares issued and outstanding in 2001 and 2002, respectively, aggregate liquidation preference of $1,515,000 in 2001      |                                            |                   | 1,504,799 
|                                                                                                           |                                                                                                                                                                                                    | Series B, $0.001 par value, 600,000 and 0 shares authorized; 533,327 and 0 shares issued and outstanding in 2001 and 2002, respectively, aggregate liquidation preference of $4,000,000 in 2001      |                                            |                   | 3,994,286 
|                                                                                                           |                                                                                                                                                                                                    | Series C, $0.001 par value, 6,700,000 and 0 shares authorized; 6,279,973 and 0 shares issued and outstanding in 2001 and 2002, respectively, aggregate liquidation preference of $47,100,000 in 2001 |                                            |                   | 46,661,877
|                                                                                                           | Deferred stock-based charges                                                                                                                                                                       |                                                                                                                                                                                                      |                                            | (1,488,082        | )         
|                                                                                                           | Additional paid-in capital                                                                                                                                                                         |                                                                                                                                                                                                      |                                            | 15,043,041        |           
|                                                                                                           | Accumulated deficit                                                                                                                                                                                |                                                                                                                                                                                                      |                                            | (47,388,402       | )         
|                                                                                                           |                                                                                                                                                                                                    |                                                                                                                                                                                                      |                                            |                   |           
|                                                                                                           |                                                                                                                                                                                                    |                                                                                                                                                                                                      | Total stockholders' equity                 |                   |           
|                                                                                                           |                                                                                                                                                                                                    |                                                                                                                                                                                                      |                                            |                   |           
|Commitments and contingencies                                                                              |                                                                                                                                                                                                    |                                                                                                                                                                                                      |                                            |                   |           
|                                                                                                           |                                                                                                                                                                                                    |                                                                                                                                                                                                      | Total liabilities and stockholders' equity |                   | $         
|                                                                                                           |                                                                                                                                                                                                    |                                                                                                                                                                                                      |                                            |                   |           

See accompanying notes to consolidated financial statements.

F-2

---

HEALTHETECH, INC.        Consolidated Statements of Operations

|                                                                                                                |                                                                                                                                                            | Years ended December 31, |                                
|--------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------ | -------------------------------
|
|Revenue:                                                                                                        |                                                                                                                                                            |                          |                                
|                                                                                                                | Product sales                                                                                                                                              |                          | $                              
|                                                                                                                | Software and other                                                                                                                                         |                          |                                
|                                                                                                                |                                                                                                                                                            |                          |                                
|                                                                                                                |                                                                                                                                                            |                          | Total revenue                  
|Cost of revenue:                                                                                                |                                                                                                                                                            |                          |                                
|                                                                                                                | Product sales                                                                                                                                              |                          |                                
|                                                                                                                | Software and other                                                                                                                                         |                          |                                
|                                                                                                                | Stock-based charges                                                                                                                                        |                          |                                
|                                                                                                                |                                                                                                                                                            |                          |                                
|                                                                                                                |                                                                                                                                                            |                          | Total cost of revenue          
|                                                                                                                |                                                                                                                                                            |                          |                                
|                                                                                                                | Gross profit (loss)                                                                                                                                        |                          |                                
|Operating expenses:                                                                                             |                                                                                                                                                            |                          |                                
|                                                                                                                | Research and development, excluding $90,703 and $233,794 of stock-based charges for the years ended December 31, 2001 and 2002, respectively               |                          |                                
|                                                                                                                | Selling, general and administrative, excluding $199,721 and $1,803,891 of stock-based charges for the years ended December 31, 2001 and 2002, respectively |                          |                                
|                                                                                                                | Stock-based charges                                                                                                                                        |                          |                                
|                                                                                                                | Impairment of intangible assets                                                                                                                            |                          |                                
|                                                                                                                |                                                                                                                                                            |                          |                                
|                                                                                                                | Total operating expenses                                                                                                                                   |                          |                                
|                                                                                                                |                                                                                                                                                            |                          |                                
|                                                                                                                |                                                                                                                                                            |                          | Loss from operations           
|Interest income                                                                                                 |                                                                                                                                                            |                          | 250,240                        
|Interest expense                                                                                                |                                                                                                                                                            |                          |                               
|                                                                                                                |                                                                                                                                                            |                          |                                
|                                                                                                                |                                                                                                                                                            |                          | Loss from continuing operations
|Loss from discontinued operations including $46,123 of stock-based charges for the year ended December 31, 2001 |                                                                                                                                                            |                          |                               
|                                                                                                                |                                                                                                                                                            |                          |                                
|                                                                                                                |                                                                                                                                                            |                          | Net loss                       
|                                                                                                                |                                                                                                                                                            |                          |                                
|Loss per common share:                                                                                          |                                                                                                                                                            |                          |                                
|                                                                                                                | Basic and diluted loss per common share:                                                                                                                   |                          |                                
|                                                                                                                |                                                                                                                                                            | Continuing operations    |                                
|                                                                                                                |                                                                                                                                                            | Discontinued operations  |                                
|                                                                                                                |                                                                                                                                                            |                          |                                
|                                                                                                                |                                                                                                                                                            |                          | Net loss                       
|                                                                                                                |                                                                                                                                                            |                          |                                
|                                                                                                                | Basic and diluted weighted average number of shares outstanding                                                                                            |                          |                                
|                                                                                                                |                                                                                                                                                            |                          |                                

See
accompanying notes to consolidated financial statements.

F-3

---



HEALTHETECH, INC.

Consolidated Statements of Stockholders' Equity

|                                                                                     |  |            |  |   |        | Preferred stock |          |   |   |            |   |          |   |   |           
|------------------------------------------------------------------------------------ |  | ---------- |  | - | ------ | --------------- | -------- | - | - | ---------- | - | -------- | - | - | ----------
|
|
|
|Balances at January 1, 2000                                                          |  | 4,839,987  |  | $ | 4,840  |                 | 807,993  |   | $ | 1,504,799  |   | 139,998  |   | $ | 1,044,286 
|Common stock issued in SoftCare acquisition                                          |  | 818,280    |  |   | 818    |                 |         |   |   |           |   |         |   |   |          
|Common stock issued for services                                                     |  | 1,333      |  |   | 1      |                 |         |   |   |           |   |         |   |   |          
|Exercise of common stock options for cash                                            |  | 180,000    |  |   | 180    |                 |         |   |   |           |   |         |   |   |          
|Common stock option modification                                                     |  |           |  |   |       |                 |         |   |   |           |   |         |   |   |          
|Series B convertible preferred stock issued for cash                                 |  |           |  |   |       |                 |         |   |   |           |   | 393,329  |   |   | 2,950,000 
|Series C convertible preferred stock issued for cash, net of $37,841 issuance costs  |  |           |  |   |       |                 |         |   |   |           |   |         |   |   |          
|Net loss                                                                             |  |           |  |   |       |                 |         |   |   |           |   |         |   |   |          
|                                                                                     |  |            |  |   |        |                 |          |   |   |            |   |          |   |   |           
|Balances at December 31, 2000                                                        |  | 5,839,600  |  |   | 5,839  |                 | 807,993  |   |   | 1,504,799  |   | 533,327  |   |   | 3,994,286 
|Common stock issued in Baby-C acquisition                                            |  | 1,446,525  |  |   | 1,447  |                 |         |   |   |           |   |         |   |   |          
|Common stock options issued for services                                             |  |           |  |   |       |                 |         |   |   |           |   |         |   |   |          
|Exercise of common stock options for cash                                            |  | 13,147     |  |   | 13     |                 |         |   |   |           |   |         |   |   |          
|Fair value of common stock options issued in acquisition                             |  |           |  |   |       |                 |         |   |   |           |   |         |   |   |          
|Issuance of common stock options at less than fair value                             |  |           |  |   |       |                 |         |   |   |           |   |         |   |   |          
|Amortization of deferred stock-based charges                                         |  |           |  |   |       |                 |         |   |   |           |   |         |   |   |          
|Common stock option modification                                                     |  |           |  |   |       |                 |         |   |   |           |   |         |   |   |          
|Series C convertible preferred stock issued for cash, net of $400,282 issuance costs |  |           |  |   |       |                 |         |   |   |           |   |         |   |   |          
|Warrants issued for services                                                         |  |           |  |   |       |                 |         |   |   |           |   |         |   |   |          
|Net loss                                                                             |  |           |  |   |       |                 |         |   |   |           |   |         |   |   |          
|                                                                                     |  |            |  |   |        |                 |          |   |   |            |   |          |   |   |           
|Balances at December 31, 2001                                                        |  | 7,299,272  |  |   | 7,299  |                 | 807,993  |   |   | 1,504,799  |   | 533,327  |   |   | 3,994,286 
|Exercise of common stock options for cash                                            |  | 122,116    |  |   | 122    |                 |         |   |   |           |   |         |   |   |          
|Series C preferred stock issued for cash, net of $8,067 issuance costs               |  |           |  |   |       |                 |         |   |   |           |   |         |   |   |          
|Issuance of common options at less than fair value                                   |  |           |  |   |       |                 |         |   |   |           |   |         |   |   |          
|Amortization of deferred stock-based charges                                         |  |           |  |   |       |                 |         |   |   |           |   |         |   |   |          
|Issuance of warrants for services                                                    |  |           |  |   |       |                 |         |   |   |           |   |         |   |   |          
|Adjust deferred stock-based charges for terminations                                 |  |           |  |   |       |                 |         |   |   |           |   |         |   |   |          
|Exercise of warrant for cash                                                         |  | 266,666    |  |   | 267    |                 |         |   |   |           |   |         |   |   |          
|Repurchase of Series B preferred stock                                               |  |           |  |   |       |                 |         |   |   |           |   | (133,333 | ) |   | (870,664  
|Conversion of preferred stock                                                        |  | 7,874,626  |  |   | 7,875  |                 | (807,993 | ) |   | (1,504,799 | ) | (399,994 | ) |   | (3,123,622
|Modification of stock options                                                        |  |           |  |   |       |                 |         |   |   |           |   |         |   |   |          
|Common stock issued for cash, net of $4,320,041 issuance costs                       |  | 4,000,000  |  |   | 4,000  |                 |         |   |   |           |   |         |   |   |          
|Net loss                                                                             |  |           |  |   |       |                 |         |   |   |           |   |         |   |   |          
|                                                                                     |  |            |  |   |        |                 |          |   |   |            |   |          |   |   |           
|Balances at December 31, 2002                                                        |  | 19,562,680 |  | $ | 19,563 |                 |         |   | $ |           |   |         |   | $ |          
|                                                                                     |  |            |  |   |        |                 |          |   |   |            |   |          |   |   |           

See accompanying notes to consolidated financial statements.

F-4

---



HEALTHETECH, INC.        Consolidated Statements of Cash Flows

|                                                          |                                                                                      | Years ended December 31,                   |                                          
|--------------------------------------------------------- | ------------------------------------------------------------------------------------ | ------------------------------------------ | -----------------------------------------
|
|Cash flows from operating activities:                     |                                                                                      |                                            |                                          
|                                                          | Net loss                                                                             |                                            | $                                        
|                                                          | Adjustments to reconcile net loss to net cash used by operating activities:          |                                            |                                          
|                                                          |                                                                                      | Depreciation and amortization expense      |                                          
|                                                          |                                                                                      | Loss on disposal of property and equipment |                                          
|                                                          |                                                                                      | Inventory write-offs                       |                                          
|                                                          |                                                                                      | Stock-based charges                        |                                          
|                                                          |                                                                                      | Prepaid asset write-off                    |                                          
|                                                          |                                                                                      | Allowance for doubtful accounts            |                                          
|                                                          |                                                                                      | Change in deposits and other               |                                          
|                                                          |                                                                                      | Impairment of intangible assets            |                                          
|                                                          | Changes in operating assets and liabilities, net of effects of business combination: |                                            |                                          
|                                                          |                                                                                      | Receivables                                |                                          
|                                                          |                                                                                      | Inventory                                  |                                          
|                                                          |                                                                                      | Prepaid expenses and other current assets  |                                          
|                                                          |                                                                                      | Accounts payable                           |                                          
|                                                          |                                                                                      | Accrued liabilities and other              |                                          
|                                                          |                                                                                      | Deferred revenue                           |                                          
|                                                          |                                                                                      |                                            |                                          
|                                                          |                                                                                      |                                            | Net cash used by operating activities    
|Cash flows from investing activities:                     |                                                                                      |                                            |                                          
|                                                          | Capital asset expenditures                                                           |                                            |                                          
|                                                          | Purchases of investments                                                             |                                            |                                          
|                                                          | Redemption of investments                                                            |                                            |                                          
|                                                          | Intangible assets expenditures                                                       |                                            |                                          
|                                                          | Proceeds from the sale of assets                                                     |                                            |                                          
|                                                          | Payments made in business acquisition, net of cash acquired                          |                                            |                                          
|                                                          |                                                                                      |                                            |                                          
|                                                          |                                                                                      |                                            | Net cash used by investing activities    
|Cash flows from financing activities:                     |                                                                                      |                                            |                                          
|                                                          | Proceeds from the issuance of common stock                                           |                                            |                                          
|                                                          | Common stock issuance costs                                                          |                                            |                                          
|                                                          | Repurchase of preferred stock                                                        |                                            |                                          
|                                                          | Exercise of common stock warrant for cash                                            |                                            |                                          
|                                                          | Payments on note payable                                                             |                                            |                                          
|                                                          | Proceeds from issuances of preferred stock                                           |                                            |                                          
|                                                          | Preferred stock issuance costs                                                       |                                            |                                          
|                                                          | Proceeds from exercises of common stock options                                      |                                            |                                          
|                                                          |                                                                                      |                                            |                                          
|                                                          |                                                                                      |                                            | Net cash provided by financing activities
|                                                          |                                                                                      |                                            | Net change in restricted cash            
|                                                          |                                                                                      |                                            |                                          
|                                                          |                                                                                      |                                            | Net increase in cash and cash equivalents
|Cash and cash equivalents at beginning of year            |                                                                                      |                                            | 134,942                                  
|                                                          |                                                                                      |                                            |                                          
|Cash and cash equivalents at end of year                  |                                                                                      | $                                          | 4,706,627                                
|                                                          |                                                                                      |                                            |                                          
|Disclosure of noncash investing and financing activities: |                                                                                      |                                            |                                          
|                                                          | Common stock issued in acquisitions                                                  |                                            | $                                        
|                                                          | Common stock options issued in acquisition                                           |                                            |                                          
|                                                          | Common stock issued for goods or services                                            |                                            |                                          
|                                                          | Conversion of preferred stock to common stock                                        |                                            |                                          

See accompanying notes to consolidated financial statements.

F-5

---



HEALTHETECH, INC.        Notes to Consolidated Financial Statements        December 31, 2001 and 2002

(1) Business and Basis of Financial Statement Presentation

HealtheTech, Inc. (the Company or HealtheTech) was incorporated in February 1998 under the laws of the State of Delaware. The Company operates in
one segment and develops and markets health solutions designed to give consumers simple, informative ways to improve and maintain health and wellness.

The
accompanying consolidated financial statements include the accounts of HealtheTech, Inc. and its wholly-owned subsidiaries since the date of formation or acquisition, as
described in note 3. All intercompany balances and transactions have been eliminated in consolidation.

The
preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ significantly from those estimates.

The
Company's consolidated financial statements are based on several significant estimates, including the reserve for warranty obligations and product returns, provision for excess and
obsolete inventory, and the selection of estimated useful lives of long-lived assets.

(2) Significant Accounting Policies



All highly liquid investments purchased with original maturities of three months or less are considered to be cash equivalents. Restricted cash represents amounts
the Company has pledged related to deposits on leases for office space and equipment.



We extend credit terms to our customers based upon credit analysis performed by management. An allowance is made for customer accounts for which collection has
become doubtful.



Investments of $1,550,992 and $5,242,746 at December 31, 2001 and 2002, respectively, consisted of mutual funds with investments in medium term U.S.
governmental securities. Investments are stated at fair value and are classified as available for sale.



Inventory is stated at the lower of cost or market and consists of purchased items or finished goods that were manufactured for the Company by contract
manufacturers, using the first-in, first-out method. The Company is contractually required to purchase from a manufacturer raw materials and
work-in-process that such manufacturer has purchased or processed based on the Company's initial forecasts, but which will not be utilized within 90 days due to
subsequently revised forecasts. The Company normally leaves such inventory at the manufacturer, but can request it to be shipped to another location, and bears risk of loss due to obsolescence and
other general inventory risk other than pilferage or mishandling by the manufacturer. Included in inventory and long term other assets at

F-6

---

December 31, 2001 and 2002 respectively, is $1,908,084 and $0 consisting of components in excess of 90-day requirements which the Company had accrued in response to notification
from a contract manufacturer of excess components due to revised forecasts. The component inventory has been utilized during 2002 and no components in excess of forecasts remain at December 31,
2002.



Intangible assets consist of purchased patents and legal fees to obtain patents and are recorded at cost. Amortization of intangible assets is calculated using
the straight-line method over the estimated useful lives, generally five to fifteen years. Amortization expense was $377,008, $1,537,061, and $445,827 and for the years ending
December 31, 2000, 2001 and 2002, respectively.



The Company accounts for long-lived assets in accordance with Statement of Financial Accounting Standards (SFAS) No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment annually and
whenever events or circumstances indicate the carrying amount of an asset may not be recoverable. The carrying value of a long-lived asset is considered impaired when the anticipated
undiscounted cash flows from such asset are separately identifiable and are less than the carrying value. Fair value is determined by reference to quoted market prices, if available, or the
utilization of certain valuation techniques such as cash flows discounted at a rate commensurate with the risk involved. Assets to be disposed of are reported at the lower of the carrying amount or
fair value, less cost to sell. During December 2001, the Company recognized impairment of $492,593 related to certain software products.



Accrued liabilities consisted of the following:

December 31,2001

2002Contract manufacturer

$
3,086,150

728,865Sales and marketing services




199,317Compensation


334,708

689,920Consulting and professional services


687,983

457,185Lease costs


116,983

262,596Product royalties and warranties


198,750

451,189Other


192,858

167,488Total

$
4,617,432

2,956,560




Deferred revenue consists of payments received to maintain exclusivity and are recognized ratably over the contract period.



The carrying amounts of certain of the Company's financial instruments, including, cash and cash equivalents, restricted cash, short-term investments,
accounts receivable, accounts payable and accrued expenses, approximate fair value.

F-7

---



Research and development costs are expensed as incurred and consist of salaries and other direct costs. SFAS No. 86,Accounting for
the Costs of Computer Software to be Sold, Leased or Otherwise Marketed, (SFAS No. 86) requires the capitalization of certain software development costs once
technological feasibility is established. The Company's software is deemed to be technologically feasible at the point a working model of the software product is developed. Through December 31,
2002, the period between achieving technological feasibility and general availability of such software has been short. Consequently, software development costs qualifying for capitalization have been
insignificant.



The Company generates revenue from the sale of its products, software and licensing arrangements. Revenue from the sale of products is recognized when evidence of
an arrangement exists, ownership transfers to the customer or distributor, the price is fixed and collectibility is probable. The software component of the Company's products is considered incidental
under Statement of Position (SOP) 97-2,Software Revenue Recognition.

Software
fees are comprised of sales of prepackaged software that can be sold independently or in conjunction with product sales. Software fees are recognized according to the criteria
of SOP 97-2, as amended. Revenue is recognized upon execution of a license agreement or signed written contract with fixed or determinable fees, shipment or electronic delivery of the
product, and when collection of the receivable is probable. Software sales are to retail consumers who install the software themselves and pay via credit card prior to shipment. We also sell software
to mass-market resellers who have a contractual or implied right of return and as we do not have a historical basis for estimating returns from this channel, the Company recognizes revenue
when the software is sold through to the end user. The Company provides support only to assist in installing the software. Service revenue, including training and consulting services, is recognized as
services are performed. Licensing fees are recognized ratably over the contract term.

Cost
of product revenue consists primarily of purchases of products from contract manufacturers, warranty reserves and royalty payments, in addition to costs of personnel directly
related to managing the supply chain and related overhead. Cost of software revenue primarily consists of purchases of product. Additionally, costs of shipping are included in software and other cost
of revenue.

The
Company provides 30 day right of return on software sales and limited warranty on its software products for 90 days from date of purchase. However as returns have been
insignificant, no reserve has been established. The Company does not provide price protection or right of return on health monitoring devices. The Company provides limited warranty on its devices for
periods of 12 to15 months, based on historical experience.



The Company accounts for its stock option plan in accordance with the provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock
Issued to Employees, and related interpretations, including FASB Interpretation No. 44,Accounting
for Certain Transactions involving Stock Compensation an Interpretation of APB Opinion No. 25. As such, compensation expense is recorded on the date of grant only if the
current fair value of the underlying stock exceeds the exercise price. Under SFAS No. 123,Accounting for Stock-Based Compensation(SFAS
No. 123), entities are permitted to recognize the fair value of all stock-based awards on the date of grant as expense over the vesting period. Alternatively, SFAS No. 123 also allows
entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma net income (loss) disclosures for employee stock option grants as if the fair-value-based
method defined in SFAS No. 123 had been applied. The Company has

F-8

---

elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosures required by SFAS No. 123.

The
Company accounts for non-employee stock based awards in accordance with SFAS 123 and related interpretations. Prior to the Company's initial public offering in
July 2002, the fair value of equity instruments was determined by the Company's Board of Directors. Subsequent to July 2002, the fair value of the Company's equity instruments is
determined by the price of the Company's stock.



The Company uses the asset and liability method of accounting for income taxes as prescribed by SFAS No. 109,Accounting for Income
Taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the
year in which those temporary differences are expected to be recovered or settled. The resulting deferred tax assets and liabilities are adjusted to reflect changes in tax laws or rates in the period
of enactment.



The Company accounts for advertising costs as a prepaid expense until such time as the media placement occurs. Advertising expense was $0 in 2000, $182,811 in
2001 and $1,277,013 in 2002. The Company has advertising prepayments of $0 and $2,323,128 included in prepaid expenses at December 31, 2001 and 2002, respectively.



Loss per share is presented in accordance with the provisions of SFAS No. 128,Earnings Per Share, (SFAS
No. 128). Under SFAS No. 128, basic loss per share (EPS) excludes dilution for potential common stock issuances and is computed by dividing net loss by the weighted average number of
common shares outstanding for the period. Diluted EPS reflects the potential dilution that would occur if securities or other contracts to issue common stock were exercised or converted into common
stock. Basic and diluted EPS are the same for all periods, as all potential common stock instruments, consisting of common stock options and warrants and convertible preferred stock, are
anti-dilutive due to the net losses for each year.

F-9

---

The
following is a reconciliation of the numerators and denominators of the basic and diluted EPS computations:

|                                  |                                                                                                    | Years ended December 31,                                                 |  
|--------------------------------- | -------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------ | -
|
|Numerator:                        |                                                                                                    |                                                                          |  
|                                  |                                                                                                    | Loss from continuing operations                                          |  
|                                  |                                                                                                    | Loss from discontinued operations                                        |  
|                                  |                                                                                                    |                                                                          |  
|                                  |                                                                                                    | Net loss                                                                 |  
|                                  |                                                                                                    |                                                                          |  
|Denominator:                      |                                                                                                    |                                                                          |  
|                                  | Historical common shares outstanding for basic and diluted loss per share at beginning of the year |                                                                          |  
|                                  | Weighted average number of common equivalent shares issued during the year                         |                                                                          |  
|                                  |                                                                                                    |                                                                          |  
|                                  |                                                                                                    | Denominator for basic and diluted loss per shareweighted average shares |  
|                                  |                                                                                                    |                                                                          |  
|Loss per sharebasic and diluted: |                                                                                                    |                                                                          |  
|                                  | Continuing operations                                                                              |                                                                          | $
|                                  | Discontinued operations                                                                            |                                                                          |  
|                                  |                                                                                                    |                                                                          |  
|                                  |                                                                                                    | Net loss                                                                 |  
|                                  |                                                                                                    |                                                                          |  

For
the years ending December 31, 2000, 2001, and 2002, 2,439,857, 8,935,403, and 6,946,349 respectively, potential common stock equivalents consisting of options and warrants
were excluded from the diluted loss per share calculation because their effect would be anti-dilutive.

(3) Acquisitions

On April 16, 2001, the Company issued 1,446,525 shares of common stock and 86,804 options to purchase common stock in exchange for all of the outstanding
common stock of Baby-C, a provider of instructional and promotional products to the juvenile products market. Concurrently with the closing of the acquisition, certain shareholders of
Baby-C and their affiliates made a $5.0 million investment in the Company's Series C preferred stock at $7.50 per share which was the same price paid by the other investors
in the same offering. The acquisition of Baby-C was a condition to this investment. The fair value of the common stock options was determined using the Black-Scholes option pricing model
with the following assumptions: no volatility or dividends, contractual life of 4 years, and risk free interest rate of 4.56%. This resulted in a fair value of $447,720 and together with the
common stock (valued at $7.50 a share on the purchase date based on the price of recent preferred stock offerings) and related costs of the acquisition total consideration granted was $11,341,441. The
acquisition was accounted for using the purchase method, with the excess consideration over net tangible assets acquired resulting in
goodwill, which was being amortized over an estimated useful life of 7 years. However, during the fourth quarter of 2001, the Company terminated the operations and accordingly, the results of
Baby-C's operations have been included in the financial statements since the date of acquisition, in loss from discontinued operations. Revenue from April 16 through
December 31, 2001 was approximately $62,000. See note 4.

F-10

---

The following summarizes the estimated fair value of the assets acquired and liabilities assumed at the date of acquisition.

Cash

$
90,812Accounts receivable


2,871Inventory


414,236Goodwill


10,869,369Total assets acquired


11,377,288Accounts payable and accrued liabilities


(35,847
)Net assets acquired

$
11,341,441


On
March 29, 2000, the Company issued 818,280 shares of common stock in exchange for all of the outstanding common stock of Softcare, Inc. (Softcare), a provider of
nutrition and other health tracking software. The acquisition was accounted for using the purchase method. The Company issued 654,625 shares upon consummation of the merger, and placed 163,655 in
escrow for resolution of general representations and warranties. These shares have been included as consideration in the calculation of the purchase price. The fair value of the common stock issued
was $1,227,422 as of the purchase date based on the price of recent preferred stock offerings. The results of Softcare's operations have been included in the financial statements since the date of
acquisition.

The
following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the date of acquisition.

Cash

$
55,642Property and equipment


87,754Purchased computer software


1,182,309Total assets acquired


1,325,705Accounts payable and accrued liabilities


(98,283
)Net assets acquired

$
1,227,422


The
acquired intangible assets represent software that was expected to be utilized and integrated into the Company's future products. The amount was being amortized over the estimated
useful life of three years using the straight-line method. However, in December 2001 the Company discontinued the products and introduced a product of its own. As no significant
features had been utilized in subsequent products, the remaining computer software balance of $492,593 was considered impaired and the related impairment is included in general and administrative
expenses in the year ended December 31, 2001.

(4) Discontinued Operations

As discussed in note 3, the Company discontinued the operations of Baby-C during 2001. The results of operations of Baby-C through
the end of the year and impairment of the net assets, including the associated goodwill, to net salvage value are shown as loss from discontinued operations in the statement of operations. No income
tax benefit was recognized as utilization of it was not deemed to be more likely than not. The associated net assets, consisting of inventory subsequently sold to a liquidator, have been classified as
"Assets held for sale from discontinued operation" in the balance

F-11

---

sheet. The following presents the activity of Baby-C from April 16, 2001 through December 31, 2001. There were no operations subsequent to December 31, 2001.

Revenue

$
62,110Cost of revenue


535,959Gross loss


(473,849
)Operating expenses


11,098,130Operating loss from discontinued operations


(11,571,979
)Other expense, net


502Loss from discontinued operations before income taxes


(11,572,481
)Income tax benefit


Loss from discontinued operations

$
(11,572,481
)


(5) Property and Equipment

Property and equipment are recorded at cost. Depreciation and amortization are calculated using the straight-line method over the estimated useful lives of the
assets, generally two to five years. Repairs and maintenance costs are expensed as incurred. Property and equipment consist of the following:

December 31,Estimated
useful life2001

2002Furniture and fixtures

$
329,765

418,084

60 monthsComputer equipment


1,078,243

1,399,609

36 monthsDevelopment tools


762,029

668,925

18 monthsLeasehold improvements


703,720

796,135

60 monthsPurchased software


566,639

922,576

36 monthsCapitalized website and software




769,156

24 monthsAssets not yet in use




134,075

3,440,396

5,108,560Less accumulated depreciation and amortization


(805,158
)
(2,111,316
)$
2,635,238

2,997,244


(6) Stockholders' Equity



In April 2002, the board of directors increased the number of authorized shares of common and preferred stock to 100,000,000 and 8,200,000, respectively,
and declared a 4 for 3 stock split for all classes of stock. The stockholders approved the resolution, and on June 17, 2002 the Company amended its certificate of incorporation. In
July 2002, the Company closed its initial public offering of 4,000,000 shares of its common stock at a price to the public of $7.50 per share, all of which shares were issued and sold by the
Company. Upon the closing of the initial public offering, all issued and outstanding shares of Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock,
less the repurchase of 133,333 shares of Series B Preferred Stock at a price of $6.53 per share, were converted into 7,874,626 shares of common stock.

F-12

---



In 1998, the Board of Directors approved the 1998 stock option plan (the Plan). Under the Plan, the Company granted options to employees, directors, consultants
and advisors. The Company had reserved 4,000,000 shares of common stock for issuance pursuant to the Plan. As of June 17, 2002, options and stock purchase rights to acquire a total of 2,880,310
shares of common stock were issued and outstanding and a total of 212,037 shares of our common stock had been issued upon the exercise of options and stock purchase rights granted under this Plan.
Effective with the Company's initial public offering in July 2002, the Board of Directors decided not to grant any additional awards under this Plan.

During
June 2001, the Company issued an option to purchase 6,666 shares with an exercise price of $2.63 to a consultant relating to services to be performed. The options vest over
4 years and have a life of 10 years. The Company measures the fair value of the option at each balance sheet date and recognizes the appropriate amount of cost based on the options
vested. Costs of $26,602 have been recognized in 2002 and are reflected in selling, general and administrative stock-based charges on the accompanying statement of operations.

During
October 2001, the Company modified 24,631 options, with weighted average exercise prices of $2.30, of terminating individuals in conjunction with the closure of an office.
The modification of previously granted stock options resulted in a new measurement date. The fair value of the Company's common stock exceeded the exercise price on the date of the modification, and
accordingly, compensation cost of $123,365, as measured using the intrinsic value method, has been included in selling, general and administrative stock-based charges in the accompanying 2001
financial statements.

In
April 2002, the Board of Directors approved the 2002 stock option plan (the 2002 Plan) providing for the grant of options to employees, directors and consultants. The Company
has reserved a total of 3,333,333 shares of common stock for issuance pursuant to the 2002 Plan. The 2002 Plan provides for any shares reserved but unissued under the 1998 stock option plan and any
shares returned to the 1998 stock option plan as the result of termination of options or repurchase of shares issued will be reserved for issuance under the 2002 Plan, together with annual increases
in the number of shares available for issuance on the first day of each fiscal year. Under the 2002 Plan, options are granted at exercise prices not less than the fair value of the Company's common
stock on the grant date. Options generally vest over four years and expire after 10 years.

In
April 2002, the Board of Directors approved the 2002 Director Option Plan. The Company has reserved a total of 200,000 shares of common stock for issuance, as well as providing
for annual increases in the number of shares available on the first day of each fiscal year.

In
June 2002, the Company accelerated vesting of an employee's options as part of a severance package. This modification was accounted for under APB 25, as the employee is
not providing future services and resulted in a charge to cost of revenue of approximately $149,000.

In
July 2002, the Company accelerated vesting of an employee's options as part of a severance package. This modification was accounted for under APB 25, as the employee is
not providing future services and resulted in a charge to selling, general and administrative stock-based charges of approximately $22,000.

In
September 2002, the Company accelerated the vesting of a director's options as compensation for his services as a member of the Board of Directors over the last two years. This
modification was accounted for under APB 25, as the director resigned his board position and is not providing future services, resulting in a charge to selling, general and administrative
stock-based charges of approximately $25,000.

F-13

---

In
December 2002, the Company accelerated vesting of an employee's options as part of a severance package. This modification was accounted for under APB 25, as the employee
is not providing future services and resulted in a charge to cost of revenue of approximately $21,000.

At
December 31, 2001 and 2002, 1,879,259 and 2,709,887 shares were available for grant under the Plan, respectively. The per share weighted average fair value of stock options
granted during 2000, 2001 and 2002 was $0.29, $5.07 and $6.13 respectively, on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions: no
dividends, no volatility in 2000 and 2001 and 55% volatility in 2002, expected life of four years and risk-free interest rate of 6.08%, 4.14% and 3.14%, respectively. In addition, at
December 31, 2002, there are 8,512 options with exercise prices of $4.58 per share, which were granted outside the Plan.

During
2001, the Company granted options with exercise prices less than the estimated fair value of common stock on the date of grant based on contemporaneous sales of convertible
preferred stock. The related compensation expense is being recognized over the vesting period of the options, which is the difference between $7.50 per share, and the exercise price. Unrecognized
compensation expense at December 31, 2001 and December 31, 2002 totaled $1,488,082 and $2,509,183, respectively. If the Company determined compensation cost based on the fair value of
the options at the grant date under SFAS No. 123, the Company's net loss would have been approximately $(13,832,648), $(31,461,727), and $(18,156,148), and basic and diluted net loss per
share would have been $(2.51), $(4.58), and $(1.39) for the years ended December 31, 2000, 2001, and 2002, respectively.

The
following table summarizes stock option activity and balances for the years ended December 31, 2000, 2001, and 2002:

Number of
options

Weighted-average
exercise priceBalance at December 31, 1999

693,332

$
0.75Granted

1,744,338


2.16Exercised

(180,000
)

0.19Forfeited

(113,332
)

1.15Balance at December 31, 2000

2,144,338


1.92Granted

448,046


2.86Exercised

(13,147
)

2.21Forfeited

(651,643
)

2.55Balance at December 31, 2001

1,927,594


1.93Granted

3,075,146


6.13Exercised

(122,119
)

2.37Forfeited

(372,441
)

6.04Balance at December 31, 2002

4,508,180

$
4.44


F-14

---

The
following table summarizes information about stock options outstanding at December 31, 2002:

Range of exercise prices

Number
outstanding

Weighted
average
remaining
contractual
life

Weighted
average
exercise
price

Number
exercisable as
of December 31,
2002

Weighted
average
exercise
price$0.94 - $1.88

936,770

2.83

$
1.37

918,074

$
1.362.06 - 2.63

1,027,887

7.05


2.45

524,199


2.302.63 - 5.80

967,399

8.37


4.93

20,000


2.636.05 - 6.98

267,000

8.38


6.16

198,000


6.057.50

1,309,124

8.31


7.50

20,000


7.504,508,180

6.90

$
4.44

1,680,273

$
2.30


The
table includes options for common stock whose exercise price was less than the fair market value, for financial reporting purposes, of the underlying common stock at the date of grant, equal to
the fair market value at the date of grant or greater than the fair market value at the date of grant:

Years ended December 31,2000

2001

2002Exercise Price:Less than fair market valueNumber of options


603,285


434,713


512,661Weighted average exercise price

$
2.51

$
2.86

$
2.73Weighted average fair value

$
0.48

$
5.07

$
5.16Equal to fair market valueNumber of options


341,054


13,333


2,562,485Weighted average exercise price

$
2.28

$
2.63

$
6.81Weighted average fair value

$
0.38

$
0.43

$
2.45Greater than fair market valueNumber of options


799,999





Weighted average exercise price

$
1.86





Weighted average fair value

$
0.13










In May 2001, the Company issued warrants to purchase 66,666 shares of common stock at an exercise price of $7.50 per share in connection with a corporate
alliance agreement. The warrants were fully vested upon grant and expired two months after grant date. Simultaneously, the Company issued fully vested warrants to purchase 66,666 shares of common
stock at an exercise price of $11.25 per share. These warrants expired on March 29, 2002. The fair value of the warrants was determined using the Black-Scholes option pricing model assuming no
dividends, 66% volatility, risk free interest rate of 4.70% and an expected life of 2 months and 10 months, respectively. The Company determined the fair value of the warrants to be
$115,288 and has been reflected as selling, general and administrative stock-based charges in the accompanying statement of operations.

In
December 2001, the Company issued warrants to purchase 171,849 shares of common stock at $7.50 per share to a consultant for services related to acquiring certain distribution
channels for its BodyGem product. The warrants vest upon the achievement of a milestone, which occurred in June 2002. The fair value of the warrants was $290,000, as determined using the
Black-Scholes option pricing model assuming no dividends, 55% volatility, risk free interest rate of 2.32% and an expected

F-15

---

life of 1 year. The fair value of this warrant has been included in selling, general and administrative stock-based charges on the accompanying statement of operations.

In
May 2002, the Company entered into a strategic agreement with a company under which exclusive rights were granted to sell its products and deliver metabolic measurements in
certain markets. Concurrently, in exchange for certain promotional services for which the partner is contractually obligated to provide over a three-year period, the Company granted a
fully vested warrant to purchase 1,942,200 shares of common stock. Twenty percent of the warrant will be exercisable in full or in part
in each of September 2002, December 2002, March 2003 and June 2003. Ten percent of the warrant will be exercisable in full or in part in each of September 2003 and
December 2003. The warrant will terminate on December 31, 2003. The Company will recognize expense over the period the advertising will be performed. The total expense of approximately
$2.3 million was determined using the Black-Scholes Option Pricing model with the following assumptions: volatility 50%, no dividend yield, risk free interest rate of 4%, and expected lives
ranging from three months to 18 months. The fair value of this warrant has been included in selling, general and administrative stock-based charges on the accompanying statement of operations.

In
September 2002, the Company issued a fully vested warrant to a consultant, who later was appointed to serve as president and chief operating officer of the Company, to purchase
an aggregate of 76,000 shares of common stock, of which 40,000 shares are exercisable at an exercise price of $7.50 per share expiring on September 26, 2004, and the remaining 36,000 shares are
exercisable at an exercise price of $10.00 per share expiring on September 26, 2005. The fair value of the warrant approximated $59,000, as determined using the Black-Scholes options pricing
model assuming no dividends, 55% volatility, risk free interest rates ranging from 2.12% to 2.45% and expected lives of two to three years. The fair value of this warrant has been included in selling,
general and administrative stock-based charges on the accompanying statement of operations.

In
December 2002, the Company issued four fully vested warrants to consultants to purchase an aggregate of 400,000 shares of common stock, of which 150,000 shares are exercisable
at an exercise price of $10.00 per share expiring December 11, 2003, 150,000 shares are exercisable at an exercise price of $15.00 per share expiring December 11, 2004 and 100,000 shares
are exercisable at an exercise price of $20.00 expiring December 11, 2005. The fair value of the warrants approximated $107,000, as determined using the Black-Scholes options pricing model
assuming no dividends, 55% volatility, risk free interest rates ranging from 1.47% to 2.27% and expected lives of one to three years. The fair value of this warrant has been included in selling,
general and administrative stock-based charges on the accompanying statement of operations.

In
December 2002, the Company issued a warrant to purchase 625,000 shares of common stock at prices ranging from $15.00 to $50.00 per share to a consultant for services based upon
the acquisition of, or introduction into certain distribution channels for its health monitoring products. The warrants become exercisable upon the occurrence of seven defined events. As of
December 31, 2002, the condition for one event was met granting the consultant the right to purchase up to 225,000 shares of common stock at an exercise price of $15.00 per share expiring
December 11, 2003. The fair value of the warrant approximated $16,000, as determined using the Black-Scholes options pricing model assuming no dividends, 55% volatility, a risk free interest
rate of 1.43% and an expected life of one year. As there is no significant disincentive for nonperformance on the part of the consultant for the remaining six conditions, a measurement date has not
occurred for the remaining warrants, and no additional amounts have been recorded in the accompanying financial statements. The fair value of this warrant has been included in selling, general and
administrative stock-based charges on the accompanying statement of operations.

F-16

---



In April 2002, the Board of Directors approved an Employee Stock Purchase Plan (ESPP). The Company has reserved a total of 933,333 shares of common stock
to be made available for sale. The ESPP provides for annual increases in the number of shares available on the first day of each fiscal year.

All
of our employees are eligible to participate if they are employed by the Company for at least 20 hours per week and more than five months in any calendar year. However, an
employee may not purchase stock if such employee:



The
ESPP permits participants to purchase common stock through payroll deductions of up to 15% of their eligible compensation. A participant may purchase a maximum of 2,500 shares during
a 6-month purchase period.

Amounts
deducted and accumulated by the participant are used to purchase shares of our common stock at the end of each six-month purchase period. The price is 85% of the
lower of the fair value of our common stock at the beginning of an offering period or at the end of a purchase period.

(7) Income Taxes

Income taxes differ from the amounts that would result from applying the federal statutory rate 35% as follows:

|                                                      |  | Years ended December 31, |           
|----------------------------------------------------- |  | ------------------------ | ----------
|
|Expected tax benefit                                  |  | $                        | (4,803,761
|State income taxes, net of federal benefit            |  |                          | (1,056,339
|Change in valuation allowance for deferred tax assets |  |                          | 6,159,374 
|Amortization of non-deductible goodwill               |  |                          | 100,496   
|Research and experimentation credit                   |  |                          | (335,762  
|Stock-based charges                                   |  |                          |          
|Other, net                                            |  |                          | (64,008   
|                                                      |  |                          |           
|                                                      |  | $                        |          
|                                                      |  |                          |           

Temporary
differences that give rise to significant components of deferred tax assets are as follows:

|                                     |                           | December 31, |            
|------------------------------------ | ------------------------- | ------------ | -----------
|
|Net operating loss carryforwards     |                           | $            | 12,837,203 
|Inventory impairments and write-offs |                           |              | 1,258,119  
|Other, net                           |                           |              | 571,807    
|                                     |                           |              |            
|                                     | Gross deferred tax assets |              |            
|Valuation allowance                  |                           |              | (14,667,129
|                                     |                           |              |            
|                                     | Net deferred tax assets   |              | $          
|                                     |                           |              |            

F-17

---

At
December 31, 2001 and 2002, the Company has a cumulative net operating loss carryforward for income tax purposes of approximately $29.8 million and $45.5 million,
respectively, which expires in various amounts through the year 2022, if not utilized. The utilization of the net operating loss carryforward may be limited due to the provisions of Section 382
of the Internal Revenue Code relating to changes in ownership.

Due
to the uncertainty regarding the utilization of net operating loss carryforwards and research and experimentation credit carryforwards, no tax benefit has been recorded by the
Company in any period, and a valuation allowance has been recorded for the entire amount of the deferred tax asset.

The
Company also has research and experimentation credit carryforwards for income tax purposes available totaling approximately $686,000, which if not utilized will expire in 2022. The
total credit carryforward is also subject to limitation under Section 382 of the Internal Revenue Code.

(8) Commitments and Contingencies



The Company leases office space under noncancelable operating leases. Rent expense is recognized on the straight-line basis over the lease term.
Future minimum lease payments as of December 31, 2002 are as follows:

2003

$
998,1202004


992,7972005


705,7592006


485,8222007


500,031Thereafter


168,256Total minimum payments

$
3,850,785


Rent
expense for the years ended December 31, 2000, 2001 and 2002 was $354,272, $1,323,206, and $960,345, respectively.

The
Company had entered into an agreement with a vendor to provide web-hosting services over a 24-month period at an approximate cost of $110,000 per month to
begin at an undesignated future date. The Company made a $335,530 prepayment to the vendor upon execution of the agreement. Due to a restructuring undertaken by the vendor, the vendor is no longer
able to provide the services originally contemplated. The Company has demanded refund of the prepayment in full and will continue to pursue collection of this amount. Due to the low probability of
recovering the prepayment, the
Company has expensed the $335,530 prepayment made to the vendor to selling, general, and administrative expenses as of December 31, 2002.

The
Company has entered into royalty agreements for two components where defined percentages of related component revenue is payable to the owner of the rights to the components. In
order to maintain exclusive rights for the Company's field of use it is required to make minimum payments up to $800,000 in the aggregate each year.

In
May 2002, the CEO and founder agreed to assign specific intellectual property to the Company in exchange for cash payment of $1,750,000. In addition, to the extent the Company
develops products incorporating certain technologies, it will pay royalties initially at 3% of revenue received from the sale of such products, and then at declining percentages based on
pre-determined thresholds, but not to exceed $6,000,000.

F-18

---



Revenue earned from significant customers is as follows:

Years ended December 31,2000

2001

2002Customer A





56
%Customer B



29
%
9
%Customer C



15
%
Customer D





6
%Customer E





13
%


At
December 31, 2001 and 2002, receivables from these customers represented 75% and 65%, respectively, of receivables.

(9) Employee Benefit Plan

In January 2001, the Company implemented a 401(k) Plan for the benefit of substantially all its employees. The Company may make discretionary matching
contributions. No company contributions have been made to date.

(10) Geographic information

The Company's operations and all assets are based in the United States. The Company sells products to both domestic and foreign customers. The Company's revenue
by geographic area for the years ended December 31, 2000, 2001 and 2002 is as follows:

Years ended December 31,2000

2001

2002United States

100
%
100
%
87
%Europe





5
%Taiwan





8
%


(11) Related party transactions

The Company receives professional services from a firm in which a director is a partner. Fees paid were $606,000, $602,000, $770,000, respectively, for the years
ended December 31, 2000, 2001, and 2002,
respectively. In addition, a former director and stockholder of the Company was an officer during 2002 in a company with which HealtheTech entered into a product sales agreement. HealtheTech
recognized approximately $1.1 million in revenue from this company for the year ended December 31, 2002. The director resigned his position effective October 1, 2002 and the
product sales agreement expired October 31, 2002.

As
discussed in Note 8 (a), the Company's CEO and founder assigned patent rights to the Company in exchange for cash payment of $1,750,000.

(12) Fourth Quarter Adjustments

In 2002, the Company established an annual company-wide bonus plan based on a combination of the company and individual performance factors. The
Company accrued $1.4 million based on meeting or exceeding performance goals through the third quarter 2002. As the Company did not achieve 100% of its annual goals, it reversed a total of
approximately $1.3 million of the accrued bonus in the fourth quarter of 2002.

F-19

---

Certain
officers were granted stock options at below fair market value in early 2002 that vested in four years but the vesting would accelerate to one year if Company revenue goals
discussed above were achieved. Through the third quarter of 2002, the Company was meeting or exceeding performance goals and thus the Company was amortizing these stock-based charges over the
estimated one-year vesting period. As annual revenue goals were not achieved, the stock options did not vest. The Company reversed a total of approximately $1.3 million of selling,
general and administrative stock-based charges. These stock-based charges will be recognized over their original vesting term of four years.

(13) Valuation Accounts

|                                                    |                   | Balance at
beginning
of period |   | Additions
charged
(credited)
to costs
and expenses |  | Write-offs
and other
adjustments |         | Balance at
end of period
|--------------------------------------------------- | ----------------- | ------------------------------ | - | -------------------------------------------------- |  | -------------------------------- | ------- | ------------------------
|Allowance for doubtful accounts for the year ended: |                   |                                |   |                                                    |  |                                  |         |                         
|                                                    | December 31, 2002 |                                | $ | 36,781                                             |  | $                                | 83,016  |                         
|                                                    | December 31, 2001 |                                |   |                                                   |  |                                  | 36,781  |                         
|                                                    | December 31, 2000 |                                |   |                                                   |  |                                  |        |                         
|Warranty reserve for the year ended:                |                   |                                |   |                                                    |  |                                  |         |                         
|                                                    | December 31, 2002 |                                |   | 25,000                                             |  |                                  | 300,957 |                         
|                                                    | December 31, 2001 |                                |   |                                                   |  |                                  | 25,000  |                         
|                                                    | December 31, 2000 |                                |   |                                                   |  |                                  |        |                         

(14) Selected Quarterly Financial Data (Unaudited)

|                                 |  | Three months ended |       
|-------------------------------- |  | ------------------ | ------
|
|
|Fiscal 2001                      |  |                    |       
|Revenue                          |  | $                  | 653   
|Gross profit                     |  |                    | 166   
|Loss from continuing operations  |  |                    | (4,044
|Net loss                         |  | $                  | (4,044
|Loss per sharebasic and diluted |  | $                  | (0.69 
|Fiscal 2002                      |  |                    |       
|Revenue                          |  | $                  | 2,355 
|Gross profit                     |  |                    | 471   
|Net loss                         |  | $                  | (3,862
|Loss per sharebasic and diluted |  | $                  | (0.53 

---



F-20

---





SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

|                        |  | HEALTHETECH, INC.
|----------------------- |  | -----------------
|Date: February 25, 2003 |  | By:              

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints James R. Mault, M.D., and
Stephen E. Webb, and each of them, as true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments to this report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all which said
attorneys-in-fact and agents or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on
the date indicated.

|                        |  |                                                                                                                         
|----------------------- |  | ------------------------------------------------------------------------------------------------------------------------
|Date: February 25, 2003 |  | /s/JAMES R. MAULT, M.D.James R. Mault, M.D. Chairman,
Chief Executive Officer and Director
(Principal Executive Officer)
|Date: February 25, 2003 |  | /s/STEPHEN E. WEBBStephen E. Webb Chief Financial Officer
(Principal Financial and Accounting Officer)                  
|Date: February 25, 2003 |  | /s/JAMES W. DENNISJames W. Dennis Director                                                                              
|                        |  |                                                                                                                         

S-1

---

|Date: February 25, 2003 |  | /s/KHALID AL-MANSOURKhalid Al-Mansour Director      
|----------------------- |  | ----------------------------------------------------
|Date: February 25, 2003 |  | /s/VERNON A. BRUNNERVernon A. Brunner Director      
|Date: February 25, 2003 |  | /s/ALLEN M. KRASSAllen M. Krass Director            
|Date: February 25, 2003 |  | /s/CHARLES P. ROTHSTEINCharles P. Rothstein Director
|Date: February 25, 2003 |  | /s/ARTHUR J. SAMBERGArthur J. Samberg Director      
|Date: February 25, 2003 |  | /s/ROBERT I. THEISRobert I. Theis Director          

S-2

---



CERTIFICATIONS

I, James R. Mault, M.D., certify that:

1.    I
have reviewed this annual report on Form 10-K of HealtheTech, Inc.;

2.    Based
on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made,
in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3.    Based
on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4.    The
registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and have:



5.    The
registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent functions):



6.    The
registrant's other certifying officer and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that
could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

|Date: February 25, 2003 |  |     |                                                                                                               
|----------------------- |  | --- | --------------------------------------------------------------------------------------------------------------
|                        |  | By: | /s/JAMES R. MAULT, M.D.James R. Mault, M.D. Chairman and Chief
Executive Officer
(Principal Executive Officer)

C-1

---

I,
Stephen E. Webb, certify that:

1.    I
have reviewed this annual report on Form 10-K of HealtheTech, Inc.;

2.    Based
on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made,
in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3.    Based
on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4.    The
registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and have:



5.    The
registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent functions):



6.    The
registrant's other certifying officer and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that
could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

|Date: February 25, 2003 |  |     |                                                                                        
|----------------------- |  | --- | ---------------------------------------------------------------------------------------
|                        |  | By: | /s/STEPHEN E. WEBBStephen E. Webb Chief Financial Officer
(Principal Financial Officer)

C-2

---

EXHIBIT INDEX

|Exhibit
No. |  |                                                                                                                                                         
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1         |  | Amended and Restated Certificate of Incorporation of registrant.*                                                                                       
|3.2         |  | Amended and Restated Bylaws of registrant.*                                                                                                             
|4.1         |  | Form of registrant's common stock certificate.*                                                                                                         
|4.2         |  | Sixth Amended and Restated Investor Rights Agreement, as amended, dated June 21, 2001, between the registrant and the parties named therein.*           
|4.3         |  | Amendment No. 1 to the Sixth Amended and Restated Investor Rights Agreement, dated June 11, 2002, between the registrant and the parties named therein.*
|4.4         |  | Warrant to Purchase Shares of Common Stock issued by the registrant to HEALTHSOUTH Corporation.***                                                      
|4.5         |  | Amendment No. 2 to the Sixth Amended and Restated Investor Rights Agreement, dated June 12, 2002, between the registrant and the parties named therein.*
|4.6         |  | Amendment No. 3 to the Sixth Amended and Restated Investor Rights Agreement, dated June 28, 2002, between the registrant and the parties named therein.*
|4.7         |  | Warrant to Purchase Shares of Common Stock issued by the registrant to American Sales & Merchandising, LLC.*                                            
|4.8         |  | Warrant to Purchase Shares of Common Stock issued by the registrant to James W. Dennis.***                                                              
|4.9         |  | Warrant to Purchase Shares of Common Stock issued by the registrant to Pamela Peeke.                                                                    
|4.10        |  | Warrant to Purchase Shares of Common Stock issued by the registrant to Augie Nieto.                                                                     
|4.11        |  | Warrant to Purchase Shares of Common Stock issued by the registrant to James O. Hill.                                                                   
|4.12        |  | Warrant to Purchase Shares of Common Stock issued by the registrant to Vernon Brunner.                                                                  
|4.13        |  | Warrant to Purchase Shares of Common Stock issued by the registrant to Michael Liberty, as amended.                                                     
|10.1        |  | Form of Indemnification Agreement entered into by registrant with each of its directors and executive officers.*                                        
|10.2        |  | 1998 Stock Plan.*                                                                                                                                       
|10.3        |  | 2002 Stock Plan and related agreements.*                                                                                                                
|10.4        |  | 2002 Employee Stock Purchase Plan and related agreements.*                                                                                              
|10.5        |  | 2002 Director Option Plan and related agreements.*                                                                                                      
|10.6        |  | Standard Office Lease, dated October 2, 2000, between the registrant and New Genesee Land Company, LLC, as amended on January 24, 2001.*                
|10.7        |  | Office Lease, dated April 24, 2000, between the registrant and Gatito Enterprises Joint Venture.*                                                       
|10.8        |  | Lease Agreement, dated April 17, 2000, between the registrant and Dale Riveland, Christina M. Riveland, Kenneth Johnstone and Pearl L. Johnstone.*      
|10.9        |  | Assignment Agreement, dated May 22, 2002, between the registrant and James R. Mault, M.D.*                                                              
|10.10      |  | License Agreement, dated August 17, 1999, between the registrant and Sensors for Medicine and Science, Inc.*                                            
|            |  |                                                                                                                                                         

---

|10.11  |  | Amendment No.1 to License Agreement, dated October 30, 1999, between the registrant and Sensors for Medicine and Science, Inc.*                         
|------ |  | --------------------------------------------------------------------------------------------------------------------------------------------------------
|10.12  |  | Amendment and Supplement to License Agreement, dated March 31, 2000, between the registrant and Sensors for Medicine and Science, Inc.*                 
|10.13 |  | Agreement, dated November 7, 2001, between the registrant and Sensors for Medicine and Science, Inc.*                                                   
|10.14 |  | License Agreement, dated August 21, 1999, between the registrant and ndd Medizintechnik AG.*                                                            
|10.15 |  | License Agreement, dated August 21, 1999, between the registrant and ndd Medizintechnik AG.*                                                            
|10.16 |  | Agreement for Electronic Manufacturing Services, dated April 3, 2001, between the registrant and Sanmina Corporation.*                                  
|10.17 |  | International Distribution Agreement, dated August 1, 2001, between the registrant and SensorMedics Corporation, a subsidiary of VIASYS Healthcare Inc.*
|10.18 |  | Exclusive Distribution Agreement, dated December 5, 2001, between the registrant and Nature's Sunshine Products, Inc.*                                  
|10.19 |  | United States Sales and Distribution Agreement, dated December 21, 2001, between the registrant and US Wellness, Inc.*                                  
|10.20  |  | Purchase Agreement, dated March 6, 2002, between the registrant and Piranha Plastics, LLC.*                                                             
|10.21  |  | Purchase Agreement, dated March 6, 2002, between the registrant and Sienna Corporation.*                                                                
|10.22 |  | International Distribution Agreement, dated March 19, 2002, between the registrant and Microlife Corporation.*                                          
|10.23 |  | Supply and Services Agreement, dated March 25, 2002, between the registrant and Bally Total Fitness Corporation.*                                       
|10.24  |  | Employment Offer Letter, executed on April 23, 2000, between the registrant and James R. Mault.*                                                        
|10.25  |  | Employment Offer Letter, executed on May 27, 1999, between the registrant and Noel L. Johnson.*                                                         
|10.26  |  | Employment Offer Letter, executed on February 11, 2002, between the registrant and Stephen E. Webb.*                                                    
|10.27  |  | Employment Offer Letter, executed on October 2, 2000, between the registrant and Kamal Hamid.*                                                          
|10.28  |  | Employment Offer Letter, executed on July 26, 2000, between the registrant and Jay T. Kearney.*                                                         
|10.30  |  | Change of Control Agreement, executed on November 10, 2000, between the registrant and James R. Mault.*                                                 
|10.31  |  | Change of Control Agreement, executed on November 3, 2000, between the registrant and Noel L. Johnson.*                                                 
|10.32  |  | Change of Control Agreement, executed on April 1, 2002, between the registrant and Stephen E. Webb.*                                                    
|10.33  |  | Change of Control Agreement, executed on April 11, 2002, between the registrant and Kamal Hamid.*                                                       
|       |  |                                                                                                                                                         

---

|10.35   |  | Employment Offer Letter, executed on April 11, 2002, between the registrant and Scott K. Meyer.*                                                                                                           
|------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.36   |  | Change of Control Agreement, executed on April 11, 2002, between the registrant and Scott K. Meyer.*                                                                                                       
|10.37  |  | Strategic Agreement, dated May 23, 2002, between the registrant and HEALTHSOUTH Corporation.*                                                                                                              
|10.38  |  | Promotion Agreement, dated May 23, 2002, between the registrant and HEALTHSOUTH Corporation.*                                                                                                              
|10.39   |  | Employment Offer Letter, executed on July 1, 2002, between the registered and DeWayne R. Youngberg.**                                                                                                      
|10.40   |  | Change of Control Agreement, executed on July 8, 2002, between the registrant and DeWayne R. Youngberg.**                                                                                                  
|10.41 |  | Vendor Agreement, dated June 24, 2002, between the registrant and SAM's West, Inc., as amended on August 6, 2002.***                                                                                       
|10.42 |  | Strategic Partnership Agreement, dated August 8, 2002, between the registrant and Mead Johnson & Company, as amended on September 24, 2002.***                                                             
|10.43   |  | Employment Agreement, dated September 13, 2002, between the registrant and James R. Mault.***                                                                                                              
|10.44   |  | Consulting Agreement, dated September 27, 2002, between the registrant and James W. Dennis.***                                                                                                             
|10.45   |  | Amendments to International Distribution Agreement, dated September 26, 2002 and October 29, 2002, respectively, between the registrant and SensorMedics Corporation, a subsidiary of VIASYS Healthcare.***
|10.46   |  | Separation Agreement, dated November 5, 2002, between the registrant and Scott K. Meyer.                                                                                                                   
|10.47   |  | Employment Offer Letter, dated November 15, 2002, between the registrant and James W. Dennis.                                                                                                              
|10.48 |  | Amendment to Strategic Partnership Agreement, dated December 31, 2002, between the registrant and Mead Johnson and Company.                                                                                
|10.49 |  | Amendment to Strategic Agreement, dated in December 2002, between the registrant and HEALTHSOUTH Corporation.                                                                                              
|10.50 |  | Amended and Restated International Distribution Agreement, dated June 24, 2002, between the registrant and Malacca International Corporation, a subsidiary of Microlife Corporation.                       
|23.1    |  | Consent of Independent Auditors.                                                                                                                                                                           
|99.1    |  | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                             

---

---