FORM 10-KSB

SECURITIES AND EXCHANGE COMMISSIONWashington, D. C. 20549

(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIESEXCHANGE ACT OF 1934

for the fiscal year ended March 31, 2005

( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIESEXCHANGE ACT OF 1934

for the transition period from to 

Commission File Number: 0-12716

Clinical Data, Inc.(Name of small business issuer in its charter)
 

**DELAWARE****04-2573920**             (State or other jurisdictionof incorporation) (I.R.S. Employer Identification No.)
**One Gateway    Center, Suite 411, Newton, Massachusetts****02458**
(Address of Principal Executive    Offices)      (Zip Code)
(Registrant's telephone number,    including area code)**(617) 527-9933**
 

Securities registered pursuant to Section 12(b) of the Exchange Act: None

Securities registered pursuant to Section 12(g) of the Exchange Act:Common Stock, $.01 par value

Check whether the issuer (1) has filed all reports required to be filedby Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) has beensubject to such filing requirement for the past 90 days. Yes X No __
Check if there is no disclosure of delinquent filers in response toItem 405 of Regulation S-B is not contained herein, and no disclosure will be contained,to the best of registrant's knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-KSB or any amendment to this Form10-KSB. [X]

Issuer's revenues for the most recent fiscal year: $56,399,986

The aggregate market value of the voting Common Stock held bynon-affiliates of the registrant was approximately $44,982,000 based on the average priceof the Common Stock as reported by NASDAQ on June 23 2005.

As of June 23, 2005, there were 4,405,020 of the Registrant's CommonStock outstanding.

Transitional Small Business Disclosure Format: Yes ___ No X 

** **
 

Clinical Data, Inc**.**

ANNUAL REPORT ON FORM 10-KSBFor the Year Ended March 31, 2005

Table of Contents

Page**PART I
Item 1
Description of Business
1
Item 2
Description of Properties
14
Item 3
Legal Proceedings
14
Item 4
Submission of Matters to a    Vote of Security Holders
14**PART II
Item 5
Market for Common Equity and    Related Stockholder Matters
15
Item 6
Management's Discussion and    Analysis or Plan of Operation
16
Item 7
Financial Statements
25
Item 8
Changes in and Disagreements    with Accountants on Accounting and Financial Disclosure
25
Item 8A
Controls and Procedures
25**PART III
Item 9
Directors and Executive    Officers, Promoters and Control Persons Compliance with Section 16(a) of the Exchange Act
26
Item 10
Executive Compensation
27
Item 11
Security Ownership of Certain    Beneficial Owners and Management and Related Stockholders Matters
28
Item 12
Certain Relationships and    Related Transactions
30
Item 13
Exhibits 
30
Item 14
Principal Accountant Fees and    Services
30**Signatures
32** **
**PART I**

This annual report on Form 10-KSB and the documents incorporated hereinby reference contain forward-looking statements within the meaning of Section 27A ofthe Securities Act of 1933, as amended, and Section 21E of the Securities ExchangeAct of 1934, as amended. In particular, forward-looking statements regarding the Company'sexpected performance and financial results in future periods – which include wordssuch as "expect(s)", "feel(s)", "believe(s)","will", "would", "may", "anticipate(s)", andsimilar expressions – are based upon management's current expectations and beliefsand are subject to a number of risks and uncertainties that could cause actual results todiffer materially from those described in the preceding forward-looking statements. Youare cautioned not to place undue reliance on these forward-looking statements which speakonly as of the date of the filing of this Form 10-KSB. The following factors known tomanagement, among others, could cause actual results to differ materially from thosedescribed in such forward-looking statements: our ability to continue to attract newcustomers and obtain new and expanded business opportunities from existing customers;management of our growth and successful integration of our operations; continued growth indemand in the United States and abroad for products and consulting services such as thoseoffered by the Company; and the effect of intensifying competition among a rising numberof companies offering products and services similar to those offered by the Company.Unless required by law, the Company undertakes no obligation to update publicly anyforward-looking statements, whether as a result of new information, future events, orotherwise. In addition, we encourage you to review the risk factors contained in thisAnnual Report on Form 10-KSB and in the Company's other reports, registration statementsand other documents filed from time to time with the SEC which describe a number ofadditional risks and uncertainties that could cause actual results to differ materiallyfrom those expected in the forward-looking statements made in this Form 10-KSB. Allreferences to "us," "we," "our," "Clinical Data,""the Company," and other similar expressions, unless otherwise defined herein,refer to Clinical Data, Inc., its predecessors and subsidiaries.
**Item 1. Description of Business

General**
Clinical Data, Inc. ("Clinical Data"), formerly NovitronInternational, Inc., through our domestic and foreign subsidiaries, focuses on theoperational needs of physician’s office laboratories ("POLs") and othersmall to medium sized clinical laboratories. We provide a complete range of technicalproducts and consulting services to the growing domestic POL market and offer bloodanalysis instrumentation and diagnostic assays for use in clinics and hospitalsinternationally. 

Through our Dutch subsidiary, Vital Scientific NV ("VitalScientific"), we manufacture and distribute blood chemistry and coagulationanalyzers. The instruments are marketed worldwide through distributors and OEMpartnerships. Worldwide we have an installed base of over 15,000 units. Our Australiansubsidiary, Vital Diagnostics Pty. Ltd. ("Vital Diagnostics") distributesdiagnostic instruments and assays in the South Pacific region. 

In April 2003, we completed the acquisition of certain of the assets ofElan Diagnostics, Inc., ("Elan"), a domestic manufacturer of clinical chemistryreagents and a distributor of instrumentation. As a result of this acquisition, we securedan installed base of clinical chemistry and erythrocyte sedimentation rate("ESR") analyzers in the domestic POL market. Our Dutch manufactured analyzersnow have a distribution channel in the U.S. market and our domestically produced reagentshave a potential for sale worldwide through our international distribution capabilities.

In April 2003, we also completed a merger with Group Practice ServicesIncorporated ("GPSI"), which was primarily engaged in helping medical grouppractices identify, implement and manage their clinical laboratories to enhance quality ofcare and operating efficiencies, and to provide additional revenue opportunities for thegroup practice. Also in April 2003, we completed a merger with Landmark Scientific, Inc.("Landmark"), a laboratory equipment, supply and reagent distribution company.

As a result of these transactions, we now supply a complete range ofproducts and services, from equipment and reagents to lab management and consultingservices, to small and medium sized medical laboratories both domestically andinternationally. To underscore and promote the enhanced breadth and depth of our productsand services, in October 2003 the Company was renamed Clinical Data, Inc. The operationsof Elan, GPSI and Landmark, as of April 29, 2004, have been integrated into a singlewholly-owned subsidiary, Clinical Data Sales & Service, Inc. ("CDSS"). 
**Recent Events**
On June 21, 2005, we announced that we signed an agreement and plan ofmerger pursuant to which we will acquire Genaissance Pharmaceuticals, Inc.("GNSC") in an all-stock transaction. Under the terms of the agreement, whichhas been approved by both boards of directors, GNSC stockholders will receive 0.065 sharesof our common stock for each share of GNSC common stock in a tax-free exchange. Theholders of GNSA preferred stock will receive shares of a newly designated class of ourpreferred stock. The transaction must be approved by the stockholders of both companiesand is expected to close no later than November 30, 2005. Upon completion of the merger,current GNSC board members, Kevin Rakin and Joseph Klein III, will join our board ofdirectors. Burton E. Sobel, MD, Physician-in-chief and Professor of Biochemistry at theUniversity of Vermont, will also join our board.

GNSC is engaged in the discovery and use of human gene variation forthe development of a new generation of DNA-based diagnostic and therapeutic products inpharmacogenomics. The purchase will enable us to enter the molecular diagnostics marketwhich complements our present products and services and increases our ability to providemore complete services to the POL market.

Based on the closing price of Clinical Data’s stock on June 20, 2005,the transaction is valued at approximately $56 million.
**Company History**
We were established in 1972 to offer ambulatory diagnosticphysiological monitoring for clinical and research applications. In 1984, we acquired athirty-three percent (33%) equity interest in Vital Scientific. From 1985 to 1991, ourequity position in this Dutch company was increased to ninety-four percent (94%) and inOctober 1997, Vital Scientific became a wholly owned subsidiary. 

Vital Diagnostics was established in July 1992 as Clinical Data(Australia) Pty. Ltd. to distribute diagnostic products in Australia and the SouthPacific. As described in Note 1 of the accompanying notes to the consolidated financialstatements, the Company has sold 7.5% of this subsidiary to an officer of the Company. InDecember 2000, the name of the subsidiary was changed to Vital Diagnostics Pty. Ltd.

On April 29, 2003, we executed an Amended and Restated Agreementand Plan of Merger (the "Landmark Merger Agreement"), pursuant to which weacquired 100% of Landmark, a corporation controlled by Randal J. Kirk, a member of theBoard of Directors of the Company ("Mr. Kirk"), by means of a merger (the"Landmark Merger") of Landmark with and into Spectran Holdings, Inc., awholly-owned subsidiary, which subsequently changed its name to Landmark Scientific, Inc.The Landmark Merger was consummated on April 29, 2003. In consideration of theLandmark Merger, we issued 25,000 shares of Series A Preferred Stock with an aggregatefair value of approximately $1,200,000. Transaction costs totaled approximately $179,000.On April 29, 2004, Landmark was merged with and into CDSS.

Also on April 29, 2003, we executed an Agreement and Plan of Merger(the "GPSI Merger Agreement") pursuant to which GPSI, a corporation alsocontrolled by Mr. Kirk, merged with and into CDSS and we acquired 100% of GPSI (the"GPSI Merger"). The GPSI Merger was consummated on April 29, 2003. Inconsideration of the GPSI Merger, we issued 222,250 shares of Series A Preferred Stockwith an estimated aggregate fair value of approximately $10,800,000. Transaction coststotaled approximately $243,000. 

On April 29, 2003, we acquired substantially all of the assets of ElanDiagnostics, Inc.. The acquisition was made pursuant to an Asset Purchase Agreement, datedas of December 9, 2002, as amended on February 10, 2003, March 18, 2003, March 31, 2003and April 29, 2003, among Elan Pharmaceuticals, Inc. (the parent company of Elan), Elan,and Clinical Data (as amended, the "Asset Purchase Agreement"). The aggregatepurchase price was $7,500,000 and transaction costs totaled approximately $801,000.
**Our Industry: In Vitro Diagnostic ("IVD") Testing

The worldwide market for human blood testing is estimated at $23billion per year with more than 15 billion diagnostic tests performed in hospitals,physicians’ offices and commercial laboratories worldwide. Clinical chemistry testingof blood, which includes such tests as cholesterol and glucose, represents approximatelyforty percent (40%) of the total testing market and immunoassay testing accounts foranother thirty-five percent (35%). Approximately fifty (50) assays account forseventy-five percent (75%) of all blood testing. 

The United States continues to be the largest single market for IVDtesting with an estimated thirty-seven percent (37%) of the world market. The European IVDsector comes a close second representing thirty-five percent (35%)of the global market.Japan is also a significant market with an estimated share of twelve percent (12%) and the"Rest of World" market is currently estimated at sixteen percent (16%).

Domestically, the present focus on reducing health care costs andincreasing health care availability has encouraged the movement of blood testing fromcentralized laboratories into the patient care setting. Revenues from clinical laboratorytesting are growing as a result of the aging of the population, increased healthcareawareness, and expanding insurance coverage. In addition, the physician market continuesto benefit from the shift of diagnostic testing from hospitals to alternate sites.  

Worldwide there is an increasing need for greater efficiency in diseasemanagement. Clinical laboratories, both large and small, are seeking total support fromdiagnostic companies to enable them to establish a pre-determined cost per patientoutcome. This factor is a major driver in the diagnostics market of today and for theforeseeable future.

Our primary focus is to provide a complete range of technical productsand consulting services to the growing domestic POL market and smaller laboratories and tooffer blood analysis instrumentation and diagnostic assays for use in clinics andhospitals internationally. 

The healthcare industry is subject to extensive government regulation.Government and private insurance carriers fund the cost of a significant portion ofmedical care offered in the United States and government funding is the source ofhealthcare spending internationally. The impact of cost containment on healthcareexpenditures in the future is difficult to predict. The Company’s technology issubject to regulatory control by the U.S. Food and Drug Administration ("Food andDrug Administration" or "FDA"), the European IVD Directive and otherregulatory agencies in various countries around the world.
**Products**
We supply a complete range of products and services to the POL andsmall and medium sized medical laboratories in the U.S. including equipment and reagentsand lab management and consulting services. Capable of delivering everything from the spotsale of consumables to total laboratory management, CDSS offers an entryway into over5,000 physician’s office laboratories currently conducting clinical chemistry testingin the U.S. and to the potential 15,000 physician’s offices which could justifiablyprovide such services. Whether a practice is considering establishing a new lab,consolidating lab resources from multiple sites, or improving the quality and efficiencyof an existing in-office lab, CDSS can be of assistance.

We currently provide POLs and small laboratories in the United Stateswith a choice of three private labeled blood chemistry analyzers, two ESR automatedanalyzers, over twenty different FDA approved diagnostic assays, and consumables, as wellas technical support. Our technology is tailored for the small to medium sized laboratory.The broad testing menu of our manufactured product line includes lipid, hepatic,electrolyte, and metabolic profiles. In addition, through licensing and distributionarrangements with third parties, we provide a laboratory information software system forefficient management and control of smaller laboratories.
***Clinical Chemistry***
Clinical chemistry systems use photometric or electrochemical detectionprinciples to quantify substances of diagnostic interest (referred to as"analytes") in patient blood, urine, and other body fluids. Commonly performedtests include cholesterol, triglycerides, electrolytes, and glucose. We offer a range ofautomated and semi-automated clinical chemistry systems to meet the testing requirementsof the smaller laboratory. 

Our line of clinical chemistry systems is a family of products whichinclude modular automated diagnostic instruments and the reagents, standards and otherconsumable products required to perform commonly requested diagnostic tests. Each of theproducts listed below, has been cleared for marketing in the United States by the FDA andcomplies with European IVD regulations. These include:
- The Vitalab Selectra-XL, a floor model 360 test per hour random-access,    "walk-away" clinical chemistry analyzer offering a wide range of testing    including clinical chemistry, special proteins, drugs of abuse ("DOA"),    therapeutic drug monitoring ("TDM"), and electrolytes. 
- The Vitalab Selectra E, (also trade named Selectra II and Vitalab Flexor-E), a    "walk-away" 180 test per hour clinical chemistry analyzer, capable of performing    over 70 different diagnostic tests using reagents from almost all manufacturers. 
- The Vitalab Viva, a dedicated system designed for TDM and for the detection of DOA, is    marketed by Dade Behring in over thirty countries worldwide. The distribution agreement,    originally signed in 1997, was extended in March 2000 **.** This Viva analyzer    was designed specifically for use with the Dade Behring Emit line of diagnostic assays for    TDM and DOA. 
- The HY-TEC 288 is a fully automated enzyme immunoassay system that was developed and is    manufactured for Hycor Biomedical, Inc. of Garden Grove, California, a wholly-owned    subsidiary of Stratagene Corporation of La Jolla, California. The HY-TEC 288 is a reagent    system that permits the testing of 8 autoimmune tests and 900 allergens.
- The Vitalab 300 semi-automated clinical chemistry analyzer, which permits a full range    of testing including endpoints, kinetic and bichromatic measurements. 
- The Envoy, a 350 test per hour bench top, "walk-away" clinical chemistry    analyzer offering a wide range of clinical chemistry and electrolytes.
- The soon to be introduced, Selectra Junior, a 90 test per hour bench top,    "walk-away" clinical chemistry analyzer designed for the small laboratory.
- The ATAC-8000, a clinical chemistry analyzer designed and manufactured on an OEM basis    for us as exclusive U.S. distributor. Over 800 ATAC-8000’s have been sold in the U.S.
- A complete menu of over (20 clinical chemistry tests formulated and/or packaged by us    for our range of clinical chemistry instruments.
***Specialized Diagnostic Assays***
In an effort to differentiate our products and to create uniqueopportunities for distribution, in February 2005, we entered into a distribution agreementwith Daiichi Pure Chemicals Co., Ltd. ("Daiichi") of Tokyo, Japan. Under thisagreement Clinical Data will serve as the master distributor for a new diagnostic assayfor the measurement of Prostate Specific Antigen ("PSA"), a marker for thepresence of prostate cancer. Daiichi’s unique and proprietary assay technology allowsPSA to be measured on our existing line of clinical chemistry analyzers and on mostconventional clinical chemistry systems currently in use around the world. 

The PSA assay will be marketed as a replacement for current PSAmethods, which are often run on dedicated immunochemistry analyzers. This is the firstmethod to allow the test to be performed on conventional clinical chemistry systems. Weestimate the current world market for the PSA test is approximately 25 million tests peryear, with over $450 million being spent globally. With the Daiichi technology applicableto clinical chemistry analyzers the test will be more broadly available to physicians andtheir patients.

The PSA test, which will be distributed by Clinical Data under aworldwide agreement, is an *in vitro*diagnostic assay intended to quantitativelymeasure PSA in human serum. This assay is used as an aid in screening for and in themanagement of patients with prostate cancer. PSA values are usually interpreted inconjunction with other available clinical and laboratory data. 

In the United States, the FDA has approved PSA testing along with adigital rectal exam ("DRE") to help detect prostate cancer in men age 50 andolder. Doctors often use the PSA test and DRE as prostate cancer screening tests;together, these tests can help doctors detect prostate cancer in men who have no symptomsof the disease. The FDA has also approved the PSA test to monitor patients with a historyof prostate cancer to see if the cancer has recurred. An elevated PSA level in a patientwith a history of prostate cancer does not always signal recurrence. The doctor mayrecommend repeating the PSA test or performing other tests to check for additionalevidence of recurrence. 

Product launch is expected to follow 510(k) clearance of the assay bythe FDA's Center for Devices and Radiological Health which will permit marketing of thetests in the United States for *in vitro* diagnostic use. An application wassubmitted in the fourth quarter of fiscal 2005. The FDA has now requested a resubmissionwith additional data. Clearance is expected in the second half of fiscal 2006. IVDregistration under European regulations is being sought. 

In April 2005, we entered into a worldwide distribution agreement withDaiichi for a diagnostic assay for the measurement of an extended range of highsensitivity C-Reactive Protein ("hsCRP"). Daiichi’s proprietary assay canbe used on our existing line of clinical chemistry analyzers and on most conventionalclinical chemistry systems currently in use. 

The hsCRP assay, which will be distributed by Clinical Data under anon-exclusive worldwide agreement, is an *in vitro*diagnostic test for thequantitative determination of CRP in whole blood or serum. Measurement of CRP has beenused increasingly by clinicians to aid in the detection and evaluation of infection,tissue injury, inflammatory disorders and associated diseases.

Product launch is expected to follow 510(k) clearance of the assay bythe FDA which will permit marketing of the tests in the United States for *in vitro*diagnosticuse. IVD registration under European regulations will also be sought by Clinical Data. Ourapplications for US and European regulatory clearances are expected to be submitted in thefirst half of fiscal 2006.
***Hematology**
ESR*
ESR is a time honored laboratory method for determining the acute phaseresponse to inflammation. It measures the rate at which red blood cells in a test tubeseparate from blood plasma over time to become sediment in the bottom of the test tube.The sedimentation rate increases in various disease processes.

We offer ESR analyzers and disposables produced for us on an OEM basisfor exclusive distribution in the U.S..
*Hemostasis*
Hemostasis is a biochemical process that protects the body from bloodloss caused by vascular damage. Within seconds of damage, constriction of the vessel andformation of a temporary hemostatic platelet plug occurs. Platelet aggregation triggersthe coagulation cascade that leads to clot formation. Coagulation systems provide detailedinformation used to diagnose bleeding and clotting disorders.

We offer the Fibron-1 Coagulometer and related assays for in vitrocoagulation testing of citrated human plasma in the clinical laboratory. This analyzer isdesigned for the small laboratory.
*Blood Cell Counting*
In an effort to diversify our product base, in February 2005 weobtained exclusive distribution rights for a unique line of hematology analyzers andreagents developed by Melet Schloesing Laboratoires of Cergy-Pontoise, France. Under theterms of the agreement, Clinical Data will be the exclusive distributor of four fullyautomated differential blood cell analyzers for the human diagnostics market in the UnitedStates and Canada. Reagents for the analyzers will be manufactured exclusively by ClinicalData at its Brea, California facility. 

Differential cell counting is used to diagnose such conditions asanemia, infections, allergic reactions and platelet disorders. Millions of such tests areperformed daily in hospitals and doctors’ offices worldwide. We estimate the currentU.S. market for hematology analyzers and related reagents to be over $670 million annuallyand over $1.7 billion globally. 

The proprietary analyzers and reagents, to be distributed in NorthAmerica under the Clinical Data brand name, are fully-automated devices used to count redblood cells, white blood cells, platelets, measure hemoglobin and calculate or measureseveral red cell indices, including erythrocyte mean corpuscular volume, mean corpuscularhemoglobin, and the mean corpuscular hemoglobin concentration. The analyzers perform adifferential cell count by classifying the individual white cell components intosubpopulations of lymphocytes, granulocytes,eosinophils, basophils, andmonocytes through electronic sizing. The uniqueness of Melet Schloesing’s proprietarytechnology is that it allows a 5-part differential cell count to be measured foressentially the same cost as conventional 3-part differential analyzers in use today. 

Applications for FDA clearance of the analyzers were submitted inDecember 2004 and approval is anticipated in the second quarter of fiscal 2006. Productlaunch should occur shortly after clearance. 
**Distribution***POL Segment*
In the United States, we sell predominantly through a well-establishednetwork of national, regional and local distributors specializing in the POL market. Wesupport these distributors with a field sales force. In some markets and in somegeographic areas we sell certain products directly to the end customer. Our consultingservices are typically sold directly to the POL. 
*Clinics and Small Hospitals Segment*
We market to clinics and small hospitals through a dealer network inEurope, the United States, the Far East, Latin America, Eastern Europe, and China.

In Australia and New Zealand we distribute the diagnostic product linesof a number of European, American, and Australian companies to clinics and smallhospitals. 
**Competition**
In the sale of clinical laboratory technology, we are subject tointense competition in the worldwide marketplace. Blood analysis is a well-establishedfield in which there are a number of competitors, which have substantially greaterfinancial resources and larger, more established marketing, sales and serviceorganizations. We believe that we compete favorably on our capabilities, the quality ofour products, and our ability to manufacture and produce our products in a timely fashion.

In offering products and services to smaller laboratories, we competewith numerous other companies. These include much larger and well-financed companies suchas Bayer, Roche Diagnostics, Alfa Wasserman and with companies such as Polestar Labs,Polymedco, and many other smaller American and European companies who distribute in thisfield.

With respect to domestic sales to the POL market, our competitionincludes hospitals and independent laboratories since most medical testing is performed inthese settings. Clinical laboratories have traditionally been effective at processinglarge numbers of tests using highly trained technicians and complex equipment. Ourproducts compete with clinical laboratories with respect to range of tests offered, theimmediacy of results and cost effectiveness.

In developing instruments for private-label sales by third parties, andin marketing directly to distributors, we compete with numerous other companies. Theseinclude much larger and well-financed companies such as Bayer, Roche Diagnostics, andThermo Electron who are direct marketers in this field, and with companies such asIntegrated Technologies Ltd., Medical Innovations, Inc. and many other smaller Europeanand American companies, which are OEM marketers in this field. We believe that we competefavorably on our capabilities, the quality of our products, and our ability to manufactureand produce our products in a timely fashion.
**Product Development**
To develop new products, we employ chemists, mechanical, electronic andsystems engineers, augmented by specialized contract vendors, and further supported by astaff of professionals from a central-European contract software group. Research anddevelopment is performed at a number of our companies and may be shared between companiesthrough licensing agreements when appropriate. We maintain mechanical prototyping andautomated assembly operations in the Netherlands. Assay development is accomplished at ourCalifornia and Rhode Island facilities.

Research and development spending including capitalization of certainsoftware development costs, we spent approximately $2,934,000 during fiscal year 2005 and$2,850,000 during fiscal year 2004.

We have developed the Viva-E which is being offered on an OEM basis byDade Behring. The Viva-E is an OEM version of the Selectra-E which is dedicated for DOAand TDM testing. We are completing development of the "Selectra Junior," a 90test per hour, "walk-away" clinical chemistry analyzer offering a wide range oftesting including clinical chemistry, special proteins, DOA, TDM, and electrolytes,designed primarily for POL’s, "stat" applications and smaller laboratories.

During fiscal 2005, at our locations in California and Rhode Island, wealso formulated, developed or validated over twenty assays or enhanced our electrodetechnology which will be employed on the new clinical chemistry analyzers to be offered byus thereby reducing the necessary data needed to allow regulatory approval for these newproducts. 

We intend to develop new products where we perceive a demand andbelieve that the products may be effectively marketed. There is no assurance that anydevelopments or enhancements will be successfully completed or that, if developed, any ofthe products will be successfully marketed.
**Manufacturing
We have been manufacturing instrumentation for the commercial marketsince 1956. To produce and commercially ship reagent products, our California facility islicensed and inspected by the State of California, and has approval from the FDA. Our twoU.S. facilities and European operations have all received ISO 9001 and EN13485certification and are FDA registered and comply with European IVD regulations. 
**OTHER BUSINESS MATTERS

Government Regulation**
Where necessary, we obtain government approval to market our productsand may have to obtain prior approval from certain European regulatory bodies or the Foodand Drug Administration to market products that we develop. In the U.S., certain of ourproducts are classified as medical devices under the Federal Food, Drug and Cosmetics Act.As such, when these products are offered for sale in the United States, these products aresubject to regulation by the FDA. In Europe, we are subject to EN13485 and CE **(ConformiteEuropene)******m**arking** and IVD registration requirements. Thecost of obtaining approvals for new products may be high and the process lengthy, with noassurance that new product approvals will be obtained. 

To date, neither the FDA nor the European medical regulatory bodieshave developed industry-wide performance standards with respect to the safety andeffectiveness of the products presently marketed by us. Although we intend to use our bestefforts to comply with domestic and international standards, when and if developed, therecan be no assurance that all of our products will be compliant. Any failure to receiveapprovals for our future products or noncompliance with any international performancestandards promulgated in the future could have a material adverse effect on us and ourresults of operations. Furthermore, any material change in the existing rules andregulations or any new regulations developed might adversely affect us and our results ofoperations.
**RISK FACTORS**
Investment in our securities involves a high degree of risk. Investorsshould carefully consider the following factors, among others, relating to Clinical Data: 
**Risk factors relating to Clinical Data’s common stock
*Ownership of Clinical Data isconcentrated among a small number of stockholders.***
Our ownership is concentrated among a small numberof stockholders, including Randal J. Kirk, Mr. Kirk’s affiliates and Israel M. Stein,M.D., our Chief Executive Officer. Together with Dr. Stein, Mr. Kirk and Mr. Kirk’saffiliates hold approximately 75% of our outstanding common stock. Under Delaware law, Dr.Stein, Mr. Kirk and Mr. Kirk’s affiliates collectively own the requisite number ofshares of our outstanding common stock to take action with respect to virtually anycorporate matter without seeking the approval of any other stockholders. This means that,although Dr. Stein and Mr. Kirk have no agreement to act in concert, together they and Mr.Kirk’s affiliates could take such action by written consent and would be required toprovide notice to the other stockholders only after they had taken such action. Althoughthey presently have the ability to act without the consent of other stockholders, Mr. Kirkand Dr. Stein, as directors of Clinical Data, have fiduciary duties under Delaware law toall the stockholders of our company. Delaware law also imposes certain fiduciary duties onMr. Kirk and Dr. Stein by virtue of their status as majority stockholders, and by virtueof Dr. Stein’s status as an officer of our company. 
***Theprice of our common stock is volatile and could cause investors to lose a substantial partof their investment**.**
The stock market in general and the stock pricesof technology companies in particular, experience volatility, which has often beenunrelated to the operating performance of any particular company or companies. Our commonstock is lightly traded and its price could decline regardless of our company’sactual operating performance. Investors also could lose a substantial part of theirinvestment as a result of industry or market-based fluctuations. If a more active publicmarket for our common stock is not created, it may be difficult for stockholders toresell their shares. A number of additional factors also could cause the prevailing marketprices of our common stock to fluctuate significantly and could adversely impact suchprices and the ability of our company to raise additional equity capital. Such factorsinclude but are not limited to the following:
-  the timing of our announcements or of our competitors’    announcements regarding significant products, contracts or acquisitions; 
-  variations in results of operations;
-  changes in earnings estimates by securities analysts;
-  general economic and market conditions; and
-  sales of substantial amounts of our common stock into the public    market, or the perception that such sales might occur.
**Risk factors relating to our business and operations
*If we choose to acquire newand complementary businesses, products or technologies, we may be unable to complete suchacquisition(s) or to integrate an acquired business or technology in a cost-effectivemanner.***
Our success depends on our ability to continuallyenhance and broaden our product offerings in response to changing technologies, customerdemands and competitive pressures. To this end, instead of developing them, from time totime we have acquired and may yet acquire additional complementary businesses, products,or technologies or may enter into cooperative ventures. We do not know if we will be ableto complete such acquisitions, or whether we will be able to successfully integrate anacquired business, operate it profitably, or retain its key employees. Integrating anyacquired business, product or technology, or any venture into which we may enter, could beexpensive and time-consuming and could disrupt our ongoing business, distract ourmanagement and materially and adversely affect our cash flows and results of operations. 
***If we are required to seek financing for an acquisition or otherventure, or to enhance our working capital, we may not be able to obtain such additionalfinancing on acceptable terms.***
In order to finance any acquisitions or other ventures, or to enhanceour working capital, we may need to raise additional funds through public or privateequity or debt financings. In that event, we could be required to obtain financing onterms that are unfavorable to us and, in the case of equity or equity-linked financing, onterms that may result in dilution to our existing stockholders. If we cannot sell oursecurities or obtain additional financing on acceptable terms, we may not be able to:
- expand our product line and service offerings; 
- hire and train new staff ;
- increase our sales and marketing presence in existing and new markets; or
- respond to competitive pressures or unanticipated requirements.

Our failure to do any of these things could seriously harm ourfinancial condition by preventing us from being able to effectively grow our business orto take advantage of new business opportunities. 
***We are dependent upon anasset-based line of credit for much of our working capital. That loan imposes conditionsthat could adversely affect us.***
We used an asset-based line of credit to finance a portion of theassets we purchased from Elan. As of March 31, 2005, there was $798,000 outstanding onthat line. This debt may adversely affect our future operations in several important ways,including the following:
- our ability to obtain additional financing may be impaired;
- if we do not satisfy the financial covenants in the loan agreement, we would be in    default under our loan agreement and be required to immediately repay outstanding loan    balances; and 
- because we do not have a fixed rate of interest for our loans, rising interest rates    will increase our interest costs and reduce our earnings.
***Our international operations and sales expose us to foreign currencyexchange rate fluctuation risks.***
The costs of importation of instruments and other products are subjectto foreign currency fluctuations. In fiscal year 2005, sales to customers outside theUnited States accounted for approximately 51% of our revenues. We anticipate thatinternational sales will continue to account for a significant portion of ourrevenues.  Most of our sales to international distributors are denominated in Euros.To the extent that our sales and operating expenses are denominated in foreign currencies,our operating results may be affected by changes in exchange rates.  We cannotpredict whether such gains and losses will be material, nor can we predict the effect ofexchange rate fluctuations on our future operating results.  We sometimes engage inlimited, transaction specific, foreign currency hedging transactions to reduce our risk,but we cannot assure you that any such hedging transaction will allow us to avoid anycurrency exchange rate fluctuation risks.
***Our international operations and sales expose us to political andeconomic risks.***
Our international operations and reliance on international sales exposeus to foreign political and economic risks, including: 

  - regulatory approvals;      - import and export license requirements and restrictions;       - disruptions in international transport or delivery;        - difficulties in collecting receivables; and         - potentially adverse tax consequences.
If any of these risks materializes, our international sales coulddecrease and our foreign operations could suffer.
***We are dependent upon certain key personnel.***
We are highly dependent upon the principalmembers of our management, engineering and scientific staff, including Israel M. Stein,M.D., our Chief Executive Officer and President. The loss of the service of any of thesepersons could seriously harm our product development and commercialization efforts. 
***Our products require government approval to bemarketed.***
We have obtained or are in the process ofobtaining all necessary government approvals to market our current products in the UnitedStates and the European Union. However, we must obtain approval of certain Europeanregulatory bodies and the FDA to market any new products that we may develop or obtain therights to distribute. Domestically, certain of our products are classified as medicaldevices under the Food, Drug and Cosmetics Act. As such, if and when these products areoffered for sale in the United States, these products will be subject to continuingregulation and oversight by the FDA. Thecost of obtaining such approvals may be high and the process lengthy, with no assurancethat such approvals will be obtained.

To date, neither the FDA nor the European medicalregulatory bodies have developed industry-wide performance standards with respect to thesafety and effectiveness of the products that we presently market. Although we intend touse reasonable efforts to comply with international standards, when and if developed,there can be no assurance that our products as currently configured will be in compliance.Any failure to receive and maintain approvals for our products, or noncompliance with anyinternational performance standards promulgated in the future, could have a materialadverse effect on our business. Furthermore, any material change in the existing rules andregulations or the adoption of any new regulations could adversely affect us.
***Physician’s office laboratories must comply with governmentregulations.***
Clinical laboratories, including POLs, aresubject to significant governmental regulation at the Federal, state and sometimes locallevels. These regulations govern licensure and operation of clinical laboratories, paymentfor laboratory services, health care fraud and abuse, security and confidentiality ofhealth information, and environmental and occupational safety. 

The Clinical Laboratory Improvement Amendments of 1988, or CLIA,extended Federal oversight to virtually all clinical laboratories by requiring that theybe certified by the Federal government or by a Federally-approved accreditation agency.Pursuant to CLIA, clinical laboratories must meet quality assurance, quality control andpersonnel standards. Laboratories also must undergo proficiency testing and are subject toinspections. Standards for testing under CLIA are based on the complexity of the testsperformed by the laboratory, with all tests classified as either high complexity, moderatecomplexity, or waived. We specialize in providing moderate complexity test products andconsulting services for such testing, and POLs which purchase such products and servicesalso require CLIA certificates to perform such testing. Any material change in theexisting rules and regulations or the adoption of any new regulations could adverselyaffect us by making our customers less willing or able to remain in the business. The sanction for failure to comply with CLIA requirements may besuspension, revocation or limitation of a laboratory's CLIA certificate, which isnecessary to conduct business, as well as significant fines and/or criminal penalties. Theloss or suspension of a license, imposition of a fine or other penalties, or futurechanges in the CLIA law or regulations (or interpretation of the law or regulations)related to smaller labs could have a material adverse effect on our business. 

We are further regulated by the Health Insurance Portability andAccountability Act of 1996 ("HIPAA"), as amended. HIPAA includes standards ofpractice for the protection of the privacy of individually identifiable healthinformation. Failure to comply with HIPAA could result in significant fines and criminalliability. In addition, future changes in Federal, state or local regulations or policies(or in the interpretation of current regulations) could adversely affect our ability tosell products and services to POLs.
***Physician’s office laboratories aredependent on third-party payers.***
Future changes in Federal, state and localregulations (or in the interpretation of current regulations) affecting government paymentfor clinical laboratory testing could have a material adverse effect on the profitabilityof POLs and would adversely affect the sale of our products and services. We are unable topredict what type of legislation, if any, will be enacted into law. In addition, changesin rates of reimbursement made by private insurers and other third-party payers may have asimilar detrimental effect on our business.
***Manufacturing problems or delays could result in lost revenue.***
We manufacture most of our instruments in Dieren,The Netherlands and most of our reagents in Brea, California. Other products aremanufactured in Italy and France on an OEM basis. These manufacturing processes arecomplex and, as a result, any prolonged disruption in our manufacturing operations or themanufacturing operations of our third party manufacturers could seriously harm our abilityto satisfy our customer order deadlines. If we cannot deliver our systems in a timelymanner, our revenues will likely suffer.

As we develop new products,we must transition the manufacture of each new product from the development stage tocommercial production. We cannot predict whether we will be able to complete suchtransitions on a timely basis and with commercially reasonable costs. We also cannotassure that manufacturing or quality control problems will not arise as we attempt toscale-up our production for any future new products or that we can scale-up manufacturingand quality control in a timely manner or at commercially reasonable costs. If we areunable to consistently manufacture our products on a timely basis due to these or otherfactors, our product sales will decline.****
***Intense competition could reduce our market share or limit our abilityto increase market share, which could harm our financial performance.      ***
The medical products industry is rapidly evolving and developments areexpected to continue at a rapid pace. Competition in this industry, which includes ourmedical instrumentation, reagent and consulting services businesses, is intense andexpected to increase as new products, technologies and services become available and newcompetitors enter the market. Our competitors in the United States, Europe andPacific-Asia are numerous and include, among others, large, multi-national diagnostictesting and medical products companies. Our future success depends upon maintaining acompetitive position in the development of products, technologies and services in ourareas of focus in POLs and smaller clinical laboratories. Our competitors may: 
develop technologies, products and services that are more effective than our products or      services, or that render our technologies, products or services obsolete or      noncompetitive; 
obtain patent protection or other intellectual property rights that would prevent us      from developing our potential products; or 
obtain regulatory approval for the commercialization of their products more rapidly or      effectively than we do.         

Also, the possibility of intellectual property rights disputes withcompetitors holding domestic and foreign patent and other intellectual property rights maylimit or delay expansion possibilities for our businesses. In addition, many of ourexisting or potential competitors have or may have substantially greater financial andmanagerial resources, research and development capabilities, and clinical, manufacturing,regulatory and marketing experience.         
***We rely on distributors for product sales and support.***
Our sales are primarily made throughdistributors. We often rely upon distributors to provide customer support to the ultimateend users of our products. As a result, our success depends on the continued sales andcustomer support efforts of our network of distributors. The use of distributors involvescertain risks, including risks that distributors will not effectively sell or support ourproducts, or will be unable to satisfy financial obligations to us and cease theiroperations. Any reduction, delay or loss of orders from our significant distributors couldharm our business. There can be no assurance that we will continue to engage qualifieddistributors, and the failure to do so could have a material adverse effect on ourbusiness, financial condition and results of operations. 

Our distributor agreements provide for the distributor to purchaseproducts from us at standard prices that are updated periodically. We have no obligationsto the distributors after the product is shipped. We occasionally offer distributorsspecial pricing on selected products to promote sales. Such discounts and special pricingprovisions are recognized as reductions of revenue as we ship our product to thedistributor. We occasionally offer incentive programs directly to our distributors’salespeople. 
***Our results of operations will be adversely affected if we fail torealize the full value of our intangible assets.***
As of March 31, 2005, our total assets included $9.1 million of netintangible assets. Net intangible assets consist principally of (i) goodwill associatedwith acquisitions; (ii) costs associated with capitalized software; and (iii) purchasedintangibles consisting of customer relationships, net of accumulated amortization.Goodwill is not being amortized while the purchased intangibles are being amortized overtheir estimated useful lives. Amortization of capitalized software is provided over theestimated useful life of the product, which is generally four years. Goodwill is tested,at a minimum, on an annual basis using December 31 as the annual measurement date forpotential impairment by comparing the carrying value to the fair market value of thereporting unit to which the goodwill is assigned; as of March 31, 2005 all of the goodwillis assigned to the POL segment. Amortizable intangibles, including capitalized software,are subject to impairment reviews when there are indications of impairment.

The fair value of our recorded intangibles can be impacted by economicconditions, market risks, and the volatility in the markets in which Clinical Data and itscustomers operate. Changes in fair value could result in future impairment charges if thefair value of the reporting units or asset groups to which these long-lived assets areassociated are determined to be less than the carrying value of such assets. The annualassessment of goodwill or the periodic impairment testing considerations may result inimpairment charges or additional intangible asset write-offs, respectively, which couldadversely affect our results of operations. As of December 31, 2004, the most recentevaluation date, there was no impairment of goodwill. Additionally, there were noindicators of impairment that would require an assessment of the impairment of our otherintangible assets.
**Patents**
We own or have applied for patents and trademarks on certain of ourproducts. However, we do not believe that our business, as a whole, is or will bematerially dependent upon the protection afforded by such patents or trademarks, and asubstantial majority of our revenues is attributable to products without patentprotection. 
**Warranty and Product Liability**
Substantially all of our instrumentation products are covered by awarranty for workmanship which is generally for a period of 12 months from installation.Reagents, electrodes and other consumables have varying length warranties depending uponthe expected life of the product. 

We maintain product liability insurance for sales of our laboratoryinstrumentation in amounts we believe are adequate, given our past sales levels and ouranticipated sales levels. We reevaluate the adequacy of this coverage when and if oursales levels change substantially. To date, no product liability claims have been broughtagainst us. However, there can be no assurance that product liability insurance willcontinue to be available to us on acceptable terms, or that product liability claims inexcess of our insurance coverage, if any, will not be successfully asserted against us. 
**Production and Availability of Raw Materials**
Our manufacturing operations require a variety of purchased componentsand supplies. We purchase these items in sufficient quantities to take advantage of pricediscounts and currently have an adequate inventory. Most of the components and suppliesare available from multiple sources and we anticipate that they will continue to bereadily available. Certain components and supplies are available from single sources only.If such suppliers should fail in deliveries, delays in production could result. However,these components and supplies are generally not manufactured to our specifications, butare produced for other applications, and we believe that they will continue to beavailable in the foreseeable future. Where appropriate, we place a sufficient number ofsuch components in inventory or provide vendors with greater lead time for filling ordersfor such components.
**Backlog**
As of ended March 31, 2005, we had an instrumentation backlog (or orderbook) of approximately $3,624,000 as compared to $7,770,000 in 2004 in the Clinics andSmall Hospitals segment. It is anticipated that all of the existing backlog will be filledby shipments during the first quarter of fiscal year 2006. The prior year backlogprimarily is related to one large order which was fulfilled by the second quarter offiscal 2005. The POL segment operates with limited backlog because products are shippedshortly after orders are received. 
**Seasonality**
Our second fiscal quarter includes the months of July, August andSeptember. Our European facility normally closes its operations for two weeks during thisperiod. In the United States, medical practices also experience a decline in voluntaryprocedures such as examinations, resulting in a decline in testing. Consequently, we mayexperience a decline in revenue and net income from first fiscal quarter levels during ourfiscal second quarter, reflecting this slowdown in business activity. This seasonality isexpected to effect only the second fiscal quarter. 
**Employees**
The Company had two hundred forty-seven (247) full, part-time, andcontract employees as of March 31, 2005. One hundred forty (142) of these employees areemployed in the United States, eighty-eight (88) are employed in the Netherlands andseventeen (17) in Australia and New Zealand. 
**Environmental matters**
We do not believe that compliance with Federal, state or localregulations relating to the protection of the environment have any material effect on ourfinancial or competitive position.
**Significant Customers**
During fiscal year 2005, we had sales of scientific and blood analysisequipment and reagents to two significant customers amounting to approximately 16% and11%, respectively, of consolidated revenues. Approximately 22% of accounts receivable atMarch 31, 2005 were receivable from these two customers. During fiscal year 2004, we hadsales of scientific and process monitoring equipment to two significant customersapproximating 14% and 13%, respectively, of consolidated revenues.
**Item 2. Description of Properties**
We lease approximately 800 square feet of corporate office space inNewton, Massachusetts, under a short-term lease.

We lease approximately 30,000 square feet in Smithfield, Rhode Island.The facility in Smithfield is comprised of corporate office space, research anddevelopment facilities and facilities for warehousing and distribution. The facility isleased until 2007. We also lease approximately 33,000 square feet in Brea, Californiaunder a lease expiring in 2010. The Brea facility is largely utilized for manufacturingand distribution.

We lease approximately 35,000 square feet in Dieren, The Netherlands,which houses our offices, research and development and manufacturing. The facility isleased until 2008 with renewal and expansion options. 

We lease approximately 10,000 square feet of office, manufacturing andwarehousing space in Castle Hill, New South Wales, under leases expiring in June 2005 andAugust 2007.

We believe our current facilities are adequate for our planned needs inthe near future.
**Item 3. Legal Proceedings**
We, are from time to time subject to disputes arising in the normalcourse of our business. While the ultimate results of any such disputes cannot bepredicted with certainty, at March 31, 2005, there were no asserted claims against uswhich, in the opinion of management, if adversely decided, would have a material adverseeffect on our financial position and cash flows. 
**Item 4. Submission of Matters to a Vote of Security Holders**
No matters were submitted to our stockholders during the fourthquarter.
** 

PART II

Item 5. Market for Common Equity and Related Stockholder Matters**- Market information: Our common stock trades on the NASDAQ Stock Market under the symbol    CLDA. The following table sets forth the range of high and low sale prices per share of    common stock for each quarter in fiscal 2005 and 2004 as reported by the NASDAQ Stock    Market and the cash dividends paid with respect to the common stock.

 
   
**Prices**  
Fiscal Year    Ended March 31, 2005
**High**
**Low**
**Dividends    Paid**
First Quarter
$19.00
$11.00
$0.01
Second Quarter
$20.98
$13.50
$0.01
Third Quarter
$ 16.82
$12.50
$0.03
Fourth Quarter
$17.85
$11.41
$0.03  
**       Prices**
      
Fiscal Year    Ended March 31, 2004
**High**
**Low**
**Dividends    Paid**
First Quarter
$ 6.20
$3.80
$0.01
Second Quarter
$10.50
$7.00
$0.01
Third Quarter
$ 9.65
$7.49
$0.01
Fourth Quarter
$22.70
$9.20
$0.01
b) As of March 31, 2005, there were approximately 113 holders of record    of our common stock.

c) We have paid a quarterly dividend in each quarter since March 2001;    the payments by quarter are shown above. The payment of future dividends will be dependent    upon financial results and other relevant factors to be considered by the Board of    Directors. 

d) We have authorized common stock for issuance under equity compensation    plans as follows as of March 31, 2005: 
**Equity Compensation Plan Information**
 

Plan Category
Number of securities to be    issued upon exercise of outstanding options, warrants and rights
Weighted average exercise    price of outstanding options, warrants and rights
Number of securities    remaining available for future issuance
Equity    compensation plans approved by security holders
188,000
$5.82
117,000
Equity    compensation plans not approved by security holders
N/A
N/A
N/A
Total
188,000
$5.82
117,000
The authorized plans are more fully described in Note 6 in the    accompanying consolidated financial statements. 
** 

Item 6. Management's Discussion and Analysis or Plan of Operation**
The following discussion should be read in conjunction with theconsolidated financial statements and notes there included in Item 7 in this Annual Reporton Form 10-KSB. This item contains forward-looking statements that involve risks anduncertainties. Actual results may differ materially from those indicated in suchforward-looking statements. Factors that may cause such a difference include, but are notlimited to, those discussed in "Item 1: Description of the Business - RiskFactors." 
**Critical Accounting Policies and Estimates

The preparation of consolidated financial statements requiresmanagement to make estimates and judgments that affect the reported amounts of assets,liabilities, revenues and expenses, and related disclosure of contingent assets andliabilities. On an ongoing basis, management evaluates these estimates. We base ourestimates on historical experience and on various other assumptions that are believed tobe reasonable under the circumstances, the results of which form the basis for makingjudgments about the carrying values of assets and liabilities that are not readilyapparent from other sources. Actual results may differ from these estimates underdifferent assumptions or conditions.

We believe the following critical accounting policies affectmanagement’s more significant judgments and estimates used in preparation of theconsolidated financial statements.

*Revenue recognition -*Our product sales are recorded at the timewhen persuasive evidence of an arrangement exists, delivery has occurred, the price to thebuyer is fixed or determinable and collectibility is reasonably assured. A provision forthe estimated cost of product warranties is made at the time the related revenue isrecognized. Historically, product warranties have not been significant. Future changes inwarranty costs could increase or decrease our profitability. 

We recognize revenue from maintenance services on equipment ratablyover the term of the maintenance agreement. Revenue from services performed for customerswho do not have a maintenance agreement is recognized using the completed contract method.Consulting revenues from services provided to POLs are generally fixed fee arrangementsand such revenues are recognized ratably over the term of the consulting contract asservices are delivered. 

Our multi-element arrangements occur in the POL segment only. Alongwith the sale of products, training and installation services are provided to the end-usercustomer. At the time of the sale to the end-user customer, deferred revenue for training,installation and any extended warranty services and/or maintenance contracts purchased bythe customer is recorded. 

It has been determined that each of these transactions qualifies as aseparate unit of accounting. Because these products and services are sold individually,objective fair value is readily determined and is generally measured using list prices.The arrangement consideration is allocated to the separate units of accounting based ontheir relative fair values. Revenue for each unit of accounting is then recognized as theproduct is delivered or the services are performed. 

The training and installation services are generally delivered veryshortly after the product is shipped as the customers want the instruments to be placedinto service as soon as possible. As such, the deferred revenue related to training andinstallation is generally not material at any given balance sheet date. Extendedwarranties or maintenance contracts are recognized ratably over the service period(generally one to two years).

We do not have post-shipment obligations or customer acceptanceprovisions in our revenue arrangements. Occasionally, a customer is offered the right toreturn the product. The right of return is limited to workmanship issues and, ifapplicable, must occur within 90 days. If the right of return is offered, revenue for theproduct and related elements of the sale are deferred until the expiration of return hasexpired. 
*Allowance for doubtful accounts - Allowances for doubtful accountsare maintained for estimated losses resulting from the inability of our customers to makerequired payments. These estimated allowances are periodically reviewed, analyzing thecustomers' payment history and information known to us regarding customers' creditworthiness. If the financial condition of our customers were to deteriorate, resulting inan impairment of their ability to make payments, additional allowances may be required. 
*Inventory valuation - Inventories are stated at the lower of cost(first-in, first-out) or market. Inventory quantities are periodically reviewed and, whennecessary, provisions for excess and obsolete inventories are provided. On an ongoingbasis, we review the carrying value of the inventory and record an inventory impairmentcharge at such time as it is believed that the carrying value exceeds the inventory’snet realizable value. Such assessments are based upon historical sales, forecasted sales,market conditions and information derived from our sales and marketing professionals.

In addition, certain of our products are perishable, and in the eventthat the product is not sold before the expiration date, a full valuation reserve againstsuch inventory is provided as soon as it is determined that the product is no longermarketable due to the expiration date. The product is then disposed and written off.

*Valuation of intangibles -* As discussed in Note 3 to theconsolidated financial statements, we completed three business combinations in April 2003.In accordance with Statement of Financial Accounting Standard ("SFAS") No. 141, *BusinessCombinations*, the transactions have been accounted for based on the fair value of theassets purchased. As a result of the purchase price allocations, we recorded purchasedintangibles of $1.5 million and goodwill totaling $6.4 million.

In accordance with the requirements of SFAS No. 142, *Goodwill andIntangible Assets*, we perform an annual impairment test of the carrying value ofgoodwill using December 31 as our selected annual evaluation date. The fair value of ourrecorded intangibles can be impacted by economic conditions, market risks, and thevolatility in the markets in which we and our customers operate. Changes in fair valuecould result in future impairment charges if the fair value of the reporting units orasset groups to which these long-lived assets are associated are determined to be lessthan the carrying value of such assets. As of December 31, 2004, the most recentevaluation date, there was no impairment of goodwill. 

In accordance with the requirements of SFAS No. 144, *Accounting forthe Impairment or Disposal of Long-Lived Assets*, when facts and circumstances suggestthat there may be an impairment, we will assess the carrying value of amortizingintangibles, including purchased intangibles and capitalized software. When a potentialimpairment has been identified, forecasted undiscounted net cash flows of the operationsto which the asset relates are compared to the current carrying value of the assetspresent in that operations. If such cash flows are less than such carrying amounts, suchintangibles are written down to their respective fair values. The results of theseperiodic impairment tests can be impacted by our future expected operating results andcash flows, economic conditions, market risks, and the volatility in the markets in whichClinical Data and its customers operate. No impairment charges have been recognized forthe periods presented in this annual report.
*Income taxes – We operate in and file taxes in a number ofinternational, provincial and state jurisdictions. Net operating loss carryforwards andtax credits generated in various jurisdictions are subject to valuation allowances becausethe realization of these tax benefits is considered unlikely. Future changes in ouroperations and organizational structure could impact the utilization of these netoperating loss carryforwards and tax credits, which could require us to increase thosevaluation allowances or to release valuations allowances that have previously beenprovided. As of March 31, 2005, substantially all net operating losses and tax creditshave been fully reserved. See Note 7 in the accompanying notes to the consolidatedfinancial statements for further details.
**Liquidity and Capital ResourcesWe have cash and cash equivalents ofapproximately $4.2 million and working capital of approximately $12.7 million at March 31,2005. Approximately $4,389,000 of cash was provided by operations during the fiscal yearended March 31, 2005. The net cash flows from operations were primarily from net incomeand non-cash expenses offset by working capital uses (primarily the decrease in accountspayable and accrued expenses, partially offset by the decrease in accounts receivable).During fiscal 2005, approximately $930,000 was used in investing activities chiefly forthe purchase of equipment. Financing activities during the year ended March 31, 2005 usedapproximately $1,386,000, principally pay down of the line of credit and the dividendspaid offset by the net proceeds of borrowing.

In April 1998, we entered into a relationship with a Dutch bank thatprovides for a €1,815,000 (approximately $2,354,000) line of credit. The line ofcredit bears interest at 1.25% above the base rate as reported by the Netherlands CentralBank with a minimum base rate of 3.25%. At March 31, 2005 the base rate was 4.75%;therefore the cost to borrow under this line of credit would be 6.00%. Outstandingprincipal is secured by the trade receivables and inventory of the Dutch operations. Theline of credit requires us to comply with certain financial covenants relating tosolvency. As of March 31, 2005, we were in compliance with such covenants, and there wasno principal outstanding.

In March 2003, we entered into a line of credit agreement with a U.S.bank which provides for revolving availability for up to $10,000,000. The line of creditbears interest at the rate of either  one quarter of one percent in excess of primeor 300 basis points above the LIBOR rate. The loan agreement has an original term of threeyears and automatically renews from year to year if neither we nor the bank terminate theloan agreement. Trade receivables and inventory of CDSS are provided as collateral forthis facility. The facility was obtained in connection with the acquisitions described inthe Company History. Approximately $5,500,000 was drawn on the credit facility to assistin funding the business combinations in April 2003. $798,000 was outstanding and anadditional $4,490,000 was available for borrowing at March 31, 2005. The prime rate onthat date was 5.75% resulting in an effective interest rate on the loan of 6.00%. The lineof credit requires us to comply with certain financial covenants with respect to tangiblenet worth, fixed charge coverage and capital expenditures. As of March 31, 2005, were incompliance with such covenants.

In August 2003, we entered into a relationship with an Australian bankthat provides for an A$300,000 (approximately $232,000) line of credit. The line of creditbears interest at 2.98% above the base rate as reported by the bank’s BusinessMortgage Index (8.40% at March 31, 2005). Outstanding principal is secured by the assetsof our Australian subsidiary. The line of credit requires us to comply with certainfinancial covenants. There are no amounts outstanding at March 31, 2005.

In January, 2005, we entered into a term loan agreement with MicrosoftCredit Corporation for the financing of a new ERP system. The proceeds will be applied tosoftware and consulting services obtained from Microsoft business partners. This loan, inthe amount of $923,000, is a 60-month fixed rate loan at 4% interest. The loan requiresfixed monthly payments over its term.

Our sources of cash include cash balances and the aforementioned linesof credit. We believe that available funds and cash flows from operations will provide uswith sufficient liquidity for the next 12 months.

A significant portion of our balance sheet is denominated in Euros, thefunctional currency of our Dutch operations, and a minor portion of our balance sheet isdenominated in Australian dollars. The effect of translation of these local currenciesinto U.S. dollars for reporting purposes is reflected as a separate component ofstockholders' equity. The gains or losses from foreign currency transactions are includedin other income (expense) and have not been material to the financial statements. The Eurostrengthened against the U.S. dollar by 5.9% during fiscal year 2005 and 18.2% duringfiscal year 2004 from the respective prior fiscal year closing rates. The translation ofour results of operations from the Euro to the U.S. dollar has been significantly impactedby the changes in these foreign exchange rates.

Periodically we enter into foreign exchange forward contracts to reducethe exposure to currency fluctuations on customer accounts receivable denominated inforeign currency. The objective of these contracts is to minimize the impact of foreigncurrency exchange rate fluctuations on operating results. Derivative financial instrumentsare not used for speculative or trading purposes. There were foreign exchange forwardcontracts with a notional of $888,000 outstanding at March 31, 2005. The fair value ofthese instruments at March 31, 2005 was de minimus. Gains and losses related to thesederivative instruments for fiscal years 2005 and 2004 were not significant. We do notanticipate any material adverse effect on our consolidated financial position, results ofoperations, or cash flows resulting from the use of these instruments. However, there canbe no assurance that these strategies will be effective or that transaction losses can beminimized or forecasted accurately.

As part of our strategy, we continually evaluate possible mergers,acquisitions and investments. The financing of such activities is evaluated as part of ourreview of the opportunity. 
**Contractual Commitments and Commercial Obligations

The following table summarizes our contractual obligations at March 31,2005 and the effects we expect those obligations to have on our liquidity and cash flow infuture fiscal years. 

**Operating    Leases**
**Capitalized    Lease Obligations**
**Government    Funded Development Credits**
**Revolving    Debt Facilities**
**Long-term    Debt**
**Total**
2006
$ 2,064,000
$373,000
$78,000
$798,000
$249,000
$3,562,000
2007
1,808,000
365,000
88,000
-
252,000
2,513,000
2008
1,257,000
346,000
91,000
-
259,000
1,953,000
2009
380,000
319,000
91,000
-
228,000
1,018,000
2010
314,000
205,000
-
-
190,000
709,000
2011 and beyond
48,000
-
-
-
-
48,000
Total
$5,871,000
$1,608,000
$348,000
$798,000
$ 1,178,000
$9,803,000
We entered into a financing arrangement with a Netherlands governmentalagency in connection with the development of a new product. The grant is to be repaid as apercentage (13.6%) of the product's gross revenues as long as the product is a commercialsuccess. We began to ship this product during fiscal year 1998, evidencing its commercialsuccess. We have deferred all funding received and reported those amounts as developmentcredits included in accrued expenses, $348,000 at March 31, 2005. When we make a paymentto the Netherlands government, the recorded liability is reduced. There is no obligationto repay any remaining amounts after 2008.

During the fiscal year ended March 31, 2005, we began to acquirecertain fixed assets using capitalized leases. A total of $1,346,000 of fixed assets wasacquired pursuant to this method of financing. Also during fiscal 2005, we entered into a$923,000 five year note to finance the purchase of a new Enterprise Resource Planning("ERP") system.

We entered into an employment agreement with our Chief ExecutiveOfficer that expires on October 28, 2005. This agreement is automatically renewed forsuccessive one-year periods thereafter unless either party provides written notice ofnonrenewal at least six months in advance of the expiration date. 

During fiscal 2006, we expect to make capital expenditures ofapproximately $550,000 primarily to introduce new products, and improve production ofexisting products. We expect to use our available cash, credit lines and capital leases tofund these expenditures.
**Indemnifications**
In connection with the April 29, 2003 business combinations, we agreedto indemnify Elan Pharmaceuticals, Inc. with respect to certain customer and vendoragreements and, in connection therewith, pledged our shares of Landmark as collateralsecurity for our performance of such indemnification obligations. These indemnificationobligations expired on April 29, 2004 and no claims were made against us. Theseindemnifications did not have a material adverse effect on its consolidated financialposition or results of operations; the liabilities recorded in respect of theseindemnification arrangements were de minimis.

Prior to our acquisition of substantially all of the assets of ElanDiagnostics on April 29, 2003, Elan offered one of its distributors an incentive programproviding that for each instrument sold during the specified incentive period, Elan wouldredeem instruments previously leased by the distributor’s customers and indemnifysuch customer for any remaining lease obligation. Pursuant to the terms of ouracquisition, we assumed Elan’s liability to indemnify this distributor’scustomers under these arrangements and we recorded a liability representing the fair valueof the indemnifications. We used cash flow projections of the remaining lease payments oneach outstanding lease to determine the fair value of the potential liability. Since ouracquisition of Elan, certain customers have exercised their rights under thesearrangements and we have had to satisfy the lease indemnification obligation incurred byElan. All such payments have been charged against the liability that had been establishedin purchase accounting. Each quarter we update the reserve to reflect the fair value ofthe remaining obligations, again using cash flow projections in arriving at our estimateof the fair value of our remaining obligation. We have recognized no revenue on thesetransactions as these arrangements were completed prior to the acquisition date. The onlyimpact on our results of operations from this program has been reflected in operatingexpenses as we adjust the fair value of our remaining potential liability to theparticipants in the program. Such fair value adjustments have not been material since thedate of the Elan asset acquisition. We have not offered any plan of this nature since theacquisition. At March 31, 2005 and 2004, the recorded liability totaled $88,000 and$253,000, respectively.

Pursuant to the provisions of some of our distribution and end-useragreements assumed in connection with the April 2003 acquisitions, we agreed, subject tocertain limitations and conditions, to defend any suit or proceeding brought against adistributor or end user based on a claim that our product infringes the intellectualproperty rights of a third party for the period of one year from the date of assumption.We have never incurred costs to defend lawsuits or settle claims related to these contractprovisions. As such the liabilities recorded in respect of these indemnificationarrangements were de minimis and any potential claim for damages expired on April 28,2004.
**Results of Operations**
The following discussion of our financial condition and results ofoperation should be read in conjunction with our financial statements and the notesthereto. In addition to the historical information presented, there are forward-lookingstatements contained in this discussion and in other parts of this report. Such statementsinvolve risks and uncertainties including, but not limited to, competitive, governmental,economic and technological factors that may affect our operations, products, markets andservices. Our actual results could be materially different from those statementsanticipated by such forward-looking statements.

Our business was affected by the three acquisitions completed on April29, 2003. Our traditional business was multinational, focusing on scientificinstrumentation used in medical, veterinary and analytical laboratories and in processmonitoring. We wanted to add the capability to serve a growing market of small andmedium-sized medical laboratories in the United States and around the world. Theacquisitions of GPSI, Landmark and substantially all the assets of Elan (described inCompany History and in Note 3 in the accompanying notes to consolidated financialstatements) enable us to offer a full range of products and services to this market. Wecan now provide equipment and reagents in addition to laboratory management and consultingservices to create a complete solution for our customers.
**Fiscal Year Ended March 31, 2005 Compared to Fiscal Year Ended March31, 2004**
We manage our business as three operating segments: sales ofinstruments and consumables to Clinics and Small Hospitals; sales of instruments,consumables and services to Physician’s Office Laboratories and All Other. All Otherincludes corporate related items, results of insignificant operations and income andexpense not allocated to reportable segments. 

The Clinic and Small Hospital segment includes the activities of VitalDiagnostics and Vital Scientific. The Physician’s Office Laboratories segmentconsists of the business created through the acquisition of the assets of Elan Diagnosticsand the mergers of GPSI and Landmark. 

While analyzing the comparative revenues and expenses of the Clinic andSmall Hospital segment, which is primarily international operations, consideration shouldbe given to the strengthening of our predominant foreign functional currency, the Euro,against the U.S. Dollar. The Euro spot rate on March 31, 2005 is up 5.9% as compared tothe spot rate on March 31, 2004. For year ended March 31, 2005 and 2004, the averageEuro/dollar exchange rate is up 5.6% against the U.S. Dollar for the year then ended. 

The following table presents our operating results for the years endedMarch 31, 2005 and 2004 (all amounts in thousands):

 
**2005**
**2005 as a Percent    of Revenues**
**2004**
**2004 as a Percent    of Revenues**
REVENUES
$56,400
100.0%
$52,520
100.0%
COST OF REVENUES 
36,047
63.9%
35,995
68.5%
Gross profit
20,353
36.1%
16,525
31.5%
OPERATING EXPENSES:    
Sales and marketing
5,455
9.6%
5,321
10.1%
Research and development
2,687
4.8%
2,391
4.6%
General and administrative
6,647
11.8%
6,195
11.8%
Total operating expenses
14,789
26.2%
13,907
26.5%
Income from operations
5,564
9.9%
2,618
5.0%
Interest expense
(208)
(0.4%)
(240)
(0.4%)
Interest income 
76
0.1%
72
0.1%
Other income (expense), net
97
0.2%
25
0.0%
Income before provision for    income taxes and minority interest
5,529
9.8%
2,475
4.7%
Provision for income taxes
(2,118)
(3.8%)
(287)
(0.6%)
Minority interest 
(16)
(0.0%)
(17)
(0.0%)
Net income 
$ 3,395
6.0%
$ 2,171
4.1%
In the discussion below, it should be noted that the prior fiscal yearhad only 11 months of operations of the POL segment because this segment was created as aresult of the three acquisitions consummated on April 29, 2003.

 
*Revenues*
Consolidated revenues increased $3.9 million from fiscal year 2004 tofiscal year 2005, or 7.4%. The revenues at the Clinics and Small Hospitals segmentincreased 10.2% with 4.3% of the increase attributable to foreign exchange rates. The POLsegment reflected an increase of 3.9%.

Clinics and Small Hospitals revenues increased $2.8 million.Approximately $1.2 million is attributable to the increase in the exchange rate. Althoughthe number of instruments sold was essentially the same from fiscal 2004 to 2005, the mixof sales was toward higher priced instruments, resulting in the increase in revenue. Wealso experienced an increase in sales totaling $1.0 million of spare parts andconsumables, as our installed base increased.

Revenues at our POL segment were $1.1 million greater than in fiscal2004, or 3.9%, with the increase principally from the recognition of a full twelve monthsof revenue from the segment versus only eleven months in the prior year, based upon thebusiness combinations of April, 2003. 
*Gross Margin*
The gross margin as a percentage of revenues increased from 31.5% infiscal 2004 to 36.1% in fiscal 2005. The margin at the Clinics and Small Hospitals segmentincreased from 30.6% in the prior year to 32.9% in the current year and the comparativemargins in the POL segment were 32.2% and 39.1%.

At Clinics and Small Hospitals, there was a transitioning from olderinstruments to newer ones which have a larger contribution to the gross profit margin.Additionally we undertook a project to reduce procurement costs and increase efficienciesthat resulted in a 5% reduction in costs. 

The POL segment’s gross margins fluctuate from period to periodbased on the mix of sales of equipment and reagents, as well as the absorption levels ofcertain fixed expenses, including the costs of quality control, service, and associatedoverhead costs. The 6.9% increase in the POL segment’s gross margin was affected bythis product mix, as well as an unusually low margin in 2004 due to the $1.7 millioncharge to cost of sales from the write-up of inventory. In accordance with purchaseaccounting, this charge was due to the elimination of the manufacturing profit on theacquired inventories from the April 2003 mergers. Prior to such charge, the 2004 grossmargin was 34.7%. The year ended March 31, 2005 experienced an increase of reagent salestotaling $1.3 million as compared to the year ended March 31, 2004 which resulted in apositive effect on gross margin. *Sales and Marketing*
Sales and marketing expenses consist primarily of employee salaries,benefits, commissions and associated overhead costs, and the cost of marketing programssuch as direct mailings, trade shows, seminars, and related communication costs. Sales andmarketing expenses increased 2.5% or $134,000 from fiscal year 2004. 

In the Clinics and Small Hospitals segment, sales and marketingexpenses increased $508,000 or 29.7%. During the year we retained the services of a salesagent in China which provided $179,000 of the increase in the expense at this segment.$96,000 of the increase was attributable to the change in the currency exchange rates. Theremainder of the increase was the result of increased marketing activities such asadvertising.

In the POL segment, sales and marketing expenses include the generalsales and marketing expenses as discussed above, as well as costs for technical supportand customer service. This segment’s sales and marketing costs are affected by thelife of its product lines, whereby more costs are incurred at the early stages of aproduct line’s introduction to the market as compared to the later stages of theproduct’s life. The POL segment’s sales and marketing expenses decreased$374,000, or 10.4%, due to fewer expenses incurred and spent in advertising and marketingprograms in 2005, as compared to 2004. 
*Research and Development*
Research and development expenses consist primarily of employeesalaries, benefits and associated overhead costs, as well as consulting and suppliesexpenses. Research & development expenses increased approximately $296,000 or 12.4%,for the year ended March 31, 2005, compared to the year ended March 31, 2004. 

While our total expenses in the Clinics and Small Hospital segmentdecreased by $76,000 from the prior year, R&D expenses as reported on the financialstatements increased $191,000 or 12.8% because the level of activity on certain projectsfor which the costs had been capitalized under SFAS 86 decreased by $267,000.  Thesecosts are now applied to non-capitalized projects and are expensed currently.

In the POL segment, research and development expenses increasedapproximately $105,000 or 11.4%, for the year ended March 31, 2005, compared to the yearended March 31, 2004. The increase is due to an increase in activity associated with thedevelopment of new products, which resulted in an increase in staff as well as increasedoutsourcing to consultants.
*General and Administrative*
General and administrative expenses consist primarily of employeesalaries and benefits for administrative, executive, and finance personnel and associatedoverhead costs, as well as consulting, accounting, and legal expenses. General andadministrative expenses increased approximately $452,000 or 7.3%, for the year ended March31, 2005 compared to the year ended March 31, 2004. 

At the Clinics and Small Hospitals segment, the increase in general andadministrative expenses was $380,000 or 18.6%. $253,000 of the increase is attributable tothe change in the currency conversion rate from fiscal 2004 to fiscal 2005. There was alsoan increase in bad debt expense as the allowance for doubtful accounts was increased tocover one customer whose financial condition was deteriorating. In addition, we also movedthe offices at one of our subsidiaries necessitating the incursion of related costs of$21,000 including moving, legal and increased rent.

In the POL segment, general and administrative expenses increasedapproximately $72,000 or 1.8%, for the year ended March 31, 2005 compared to the yearended March 31, 2004. The increase is due to an overall increase in all general andadministrative expenses including finance personnel and related employee benefit expenses,expenses incurred in preparation for Sarbanes-Oxley Section 404 compliance. 
*Other*
Interest income increased $4,000 from the prior year and interestexpense declined $32,000 for the yearly comparatives. The decline in the interest expenseis associated with the reduction in the outstanding balance of the revolving creditfacility offset by the increase in the levels of long term debt and the capital leaseobligations.
*Income Taxes*
The provision for income tax increased from $287,000 in fiscal 2004 to$2,118,000 in fiscal 2005. The effective rate was 38.3% in fiscal 2005 versus 11.6% in2004. The tax rate in fiscal year 2004 was favorably impacted by the reversal ofpreviously established valuation allowances on domestic net operating loss carryforwardsas such net operating losses were deemed to be realizable beginning in 2004. In fiscal2005, the effective rate is reflective of the federal statutory rate, impacted by statetaxes and rate differentials related to foreign operations.

As a result of the factors described above, net income increased from$2,171,000 in the prior fiscal year to $3,395,000 in the current year.
*Balance Sheet*
Accounts receivable are $1,717,000 or 14.8% less at March 31, 2005 thanat March 31, 2004 representing a tighter control on the receivables and collections andreduced sales in the fourth quarter of fiscal 2005 versus the same period last year.

Leases receivable have decreased $321,000 or 55.0% from the prior yearend. We have collected on the outstanding lease receivables which were acquired on April29, 2003 but do not actively promote a leasing program with customers.

Equipment has increased $2,748,000 or 45.6% from last year representinga major investment in new equipment to be placed at customer sites. These assets werefinanced in part using capitalized leases totaling $1,226,000. $554,000 was placed inservice at the Clinics and Small Hospitals segment. $302,000 is the effect of the currencyconversion rates at March 31, 2005 and March 31, 2004. 

Other assets decreased $641,000 or 40.1% from last year. The decreaseof $481,000 in deferred tax assets represents the usage of the net operating losscarryforwards to reduce the current taxes payable and the long-term leases receivable wepurchased from Elan Diagnostics on April 29, 2003 have decreased $180,000.

The balance outstanding on the revolving credit facility has declinedfrom $1,818,000 to $798,000 at March 31, 2004 and 2005, respectively, which is due to cashflows generated from operating activities and which has reduced our reliance on the creditfacility.

The decline in accounts payable from $6,808, 000 at March 31, 2004 to$4,322,000 at March 31, 2005 or 36.5% is principally at the Clinics and Small Hospitalsegment. This decrease resulted from decreasing purchases due to manufacturingefficiencies and cost reduction coupled with cash available from increased revenue.

Total debt increased from $230,000 at March 31, 2004 to $1,178,000 atMarch 31, 2005 primarily due to the financing of $923,000 to purchase a new ERP system.
**Recently Issued Accounting Standards***Share-Based Payments*
In December 2004, the Financial Accounting Standards Board("FASB") issued SFAS No. 123R, *Share-Based Payment.* This statement is arevision of SFAS No. 123*, Accounting for Stock Issued to Employee*s, and its relatedimplementation guidance. SFAS No. 123R focuses primarily on accounting for transactions inwhich an entity obtains employee services in share-based payment transactions. TheStatement requires entities to recognize stock compensation expense for awards of equityinstruments to employees based on the grant-date fair value of those awards (with limitedexceptions). 

On April 15, 2005, the Securities and Exchange Commission (SEC) issueda rule entitled *Amendment to Rule 4-01(a) of Regulation S-X Regarding the ComplianceDate for Statement of Financial Accounting Standards No. 123(R), "Share-BasedPayment."* The SEC has delayed the effective date for the implementation of SFASNo. 123R until the beginning of our next fiscal year or April 1, 2006.

We expect to adopt SFAS No. 123R using the Statement’s modifiedprospective application method. Adoption of SFAS No. 123R is expected to increase stockcompensation expense. Assuming the continuation of current programs, the preliminaryestimate is that additional stock compensation expense to be recorded in the incomestatement beginning in our fiscal 2007 will be in the range of $20,000 to $30,000. Inaddition, SFAS No. 123R requires that the excess tax benefits related to stockcompensation to be reported as a financing cash inflow rather than as a reduction of taxespaid in cash from operations.
*Accounting Changes and Error Corrections*
In May 2005, the FASB issued SFAS No. 154, *Accounting Changes andError Corrections – a replacement of APB Opinion No. 20 and FASB Statement No. 3*.The statement defines accounting changes as a change in accounting principle, a change inaccounting estimate or a change in the reporting entity. The statement applies to allvoluntary changes in accounting principle and requires retrospective application to priorperiods’ financial statements of changes in accounting principle unless it isimpracticable to determine either the specific period effects or the effect of thecumulative change. Retrospective application of an accounting principle is defined asapplying the principle to the prior accounting periods as if the accounting principle hadalways been used. Changes in accounting estimate are to be applied beginning in the periodfor which the change in estimate has occurred. The statement is effective for us beginningApril 1, 2006.
*Deduction for Qualified Domestic Production Activities*
On October 22, 2004, the President signed the American Jobs CreationAct of 2004 (the "Act"). The Act provides a deduction for income from qualifieddomestic production activities, which will be phased in from 2005 through 2010. We havenot completed our analysis of the impact of this new provision but do not expect asignificant impact on our financial statements. 

Under the guidance in FASB Staff Position FAS No. 109-1, *Applicationof FASB Statement No. 109, "Accounting for Income Taxes," to the Tax Deductionon Qualified Production Activities Provided by the American Jobs Creation Act of 2004,*the deduction will be treated as a "special deduction" as described in SFAS No.109. As such, the special deduction has no effect on deferred tax assets and liabilitiesexisting at the enactment date. Rather, the impact of this deduction will be reported inthe period in which the deduction is claimed on our tax return.
*Repatriation of Foreign Earnings*
The Act creates a temporary incentive for United States corporations torepatriate accumulated income earned abroad by providing an 85 percent dividends receiveddeduction for certain dividends from controlled foreign corporations. The deduction issubject to a number of limitations and, as of today, uncertainty remains as to how tointerpret numerous provisions in the Act. As such, we are not yet in a position to decideon whether, and to what extent, foreign earnings that have not yet been remitted to theUnited States might be repatriated.
**Item 7. Financial Statements**
See Index to the Company's Financial Statements filed as part of thisForm 10-KSB.
**Item 8. Changes in and Disagreements with Accountants on Accounting andFinancial Disclosure**
None
**Item 8A. Controls and Procedures.**
Under the supervision and with the participation of our management,including our chief executive officer and chief financial officer, we conducted anevaluation of our disclosure controls and procedures, as such term is defined underRule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended(commonly referred to as the Exchange Act). Based on this evaluation, our chief executiveofficer and our chief financial officer concluded that our disclosure controls andprocedures were effective as of the end of the period covered by this Annual Report onForm 10-KSB.
**PART III

Item 9. Directors, Executive Officers, Promoters and Control Persons;Compliance With Section 16(a) of the Exchange Act.

DIRECTORS ANDEXECUTIVE OFFICERS OF THE COMPANY**
The Directors and Executive Officers of the Company, and their respectiveages and positions held in the Company, as of June 24, 2005, are as follows (1) :
**Name**Age**Position Held
Israel M. Stein, M.D. 
62
Chief Executive Officer,    President, and Director
Randal J. Kirk
51
Chairman of the Board 
Arthur B. Malman
64
Director
Larry D. Horner 
71
Director 
Mark D. Shooman
58
Senior Vice President and    Chief Financial Officer
Garth G. Gardner
50
Senior Vice President and    Chief Operating Officer
Caesar J. Belbel
45
Vice President, General    Counsel and Secretary
 

(1) The directors of the Company serve in such capacity until thenext annual meeting of stockholders or until their successors have been duly elected andqualified. The officers serve at the discretion of the Company’s Board of Directors.There are no family relationships among the Company’s officers and directors, nor arethere any arrangements or understandings between any of the directors or officers of theCompany or any other person pursuant to which any officer or director was or is to beselected as an officer or director.

 
**Item 10. Executive Compensation**** 

Name and Principal Position**Fiscal

Year(1)**Salary ($)**Bonus ($)**Securities Underlying    Options (#)(2)**All Other Compensation    ($)(3)
Israel M. Stein, M.D.    Chief Executive Officer    President
2005    2004    2003
251,274    220,250    185,000
200,000    150,000    60,000
0    12,000    0
6,775    2,555    0
Mark D. Shooman    Senior Vice President    Chief Financial Officer (4)
2005    2004
161,418    121,057
100,000    75,000
0    25,000
6,362    2,250******************************************