UNITED STATES SECURITIES
AND EXCHANGE COMMISSION Washington,
D.C. 20549 FORM 10-Q |X|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly
period ended February 26, 2005 OR |_|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE SECURITIES
EXCHANGE ACT OF 1934 For the transition
period from _________ to _________ Commission file number
1-11479 E-Z-EM, Inc.
      
      
      (Exact name of registrant as specified in its charter)Delaware
      
      
      (State or other jurisdiction of 
      incorporation or organization)
    11-1999504
       
      (I.R.S. Employer 
      Identification No.)1111 Marcus
      Avenue, Lake Success, New York
      
      (Address of principal executive offices)
    11042
       
      (Zip Code)(516)
      333-8230
      
      
      Registrants telephone number, including area code  Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes    |X|                No
       |_| Indicate by check mark whether the
registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes |_|                    No
   |X| As of April 7, 2005, there were
10,777,758 shares of the issuers common stock outstanding.    E-Z-EM, Inc.
and Subsidiaries


INDEX


Part
      I: Financial Information
    PageItem
      l. Financial StatementsConsolidated
      Balance Sheets - February 26, 2005 andMay
      29, 2004
    3
      - 4Consolidated
      Statements of Earnings - Thirteen and thirty-nineweeks
      ended February 26, 2005 and February 28, 2004
    5Consolidated
      Statement of Stockholders Equity andComprehensive
      Income - Thirty-nine weeks endedFebruary
      26, 2005
    6Consolidated
      Statements of Cash Flows - Thirty-nine weeksended
      February 26, 2005 and February 28, 2004
    7
      - 8Notes
      to Consolidated Financial Statements
    9
      - 24Item
      2. Managements Discussion and Analysis of FinancialCondition
      and Results of Operations
    25
      - 36Item
      3. Quantitative and Qualitative Disclosures AboutMarket
      Risk
    36
      - 37Item
      4. Controls and Procedures
    37Part
      II: Other InformationItem
      1. Legal Proceedings
    38Item
      2. Unregistered Sales of Equity Securitiesand
      Use of Proceeds
    38Item
      3. Defaults Upon Senior Securities
    38Item
      4. Submission of Matters to a Vote of Security Holders
    38Item
      5. Other Information
    38Item
      6. Exhibits
    38
      - 39-2-
E-Z-EM, Inc. and
Subsidiaries




CONSOLIDATED BALANCE
SHEETS(in thousands)


ASSETS
    February
      26,
      2005
    
    May
      29,
      2004(unaudited)
    
    (audited)CURRENT
      ASSETSCash
      and cash equivalents
    $
    10,412
    
    $
    12,334Debt
      and equity securities, at fair value
    
    15,304
    
    
    12,130Accounts
      receivable, principallytrade,
      net
    
    21,141
    
    
    16,673Inventories
    
    22,405
    
    
    18,901Other
      current assets
    
    6,729
    
    
    5,792Current
      assets of discontinued operation
    
    
    
    
    40,290Total
      current assets
    
    75,991
    
    
    106,120PROPERTY,
      PLANT AND EQUIPMENT - AT COST,less
      accumulated depreciation andamortization
    
    17,076
    
    
    15,415INTANGIBLE
      ASSETS, less accumulatedamortization
    
    588
    
    
    133DEBT AND
      EQUITY SECURITIES, at fair value
    
    1,643
    
    
    3,107INVESTMENTS
      AT COST
    
    490
    
    
    1,000OTHER ASSETS
    
    7,772
    
    
    7,409NONCURRENT
      ASSETS OF DISCONTINUED OPERATION
    
    
    
    
    9,352$
    103,560
    
    $
    142,536The accompanying notes are an
integral part of these statements.


-3-
E-Z-EM, Inc. and
Subsidiaries


CONSOLIDATED BALANCE
SHEETS(in thousands, except share and per
share data)


LIABILITIES
      AND STOCKHOLDERS EQUITY
    February
      26,
      2005
    
    May
      29,
      2004(unaudited)
    
    (audited)CURRENT
      LIABILITIESNotes
      payable
    $
    407
    
    $
    440Current
      maturities of long-term debt
    
    94
    
    
    149Accounts
      payable
    
    6,158
    
    
    4,415Accrued
      liabilities
    
    7,335
    
    
    6,557Accrued
      income taxes
    
    210
    
    
    179Current
      liabilities of discontinuedoperation
    
    
    
    
    5,744Total
      current liabilities
    
    14,204
    
    
    17,484LONG-TERM
      DEBT, less current maturities
    
    123
    
    
    178OTHER NONCURRENT
      LIABILITIES
    
    3,747
    
    
    3,488NONCURRENT
      LIABILITIES AND MINORITY INTERESTOF
      DISCONTINUED OPERATION
    
    
    
    
    9,611Total
      liabilities
    
    18,074
    
    
    30,761COMMITMENTS
      AND CONTINGENCIESSTOCKHOLDERS
      EQUITYPreferred
      stock, par value $.10 pershare
      - authorized, 1,000,000 shares;issued,
      noneCommon
      stock, par value $.10 per share -authorized,
      16,000,000 shares; issuedand
      outstanding 10,772,286 shares atFebruary
      26, 2005 and 10,698,216 sharesat
      May 29, 2004 (excluding 86,288 and83,062
      shares held in treasury at February26,
      2005 and May 29, 2004, respectively)
    
    1,077
    
    
    1,070Additional
      paid-in capital
    
    28,170
    
    
    38,445Retained
      earnings
    
    53,161
    
    
    70,638Accumulated
      other comprehensive income
    
    3,078
    
    
    1,622Total
      stockholders equity
    
    85,486
    
    
    111,775$
    103,560
    
    $
    142,536The accompanying notes are an
integral part of these statements.


-4-
E-Z-EM, Inc. and
Subsidiaries




CONSOLIDATED STATEMENTS
OF EARNINGS(unaudited)(in thousands, except per share data)



Thirteen
      weeks ended
    
    Thirty-nine
      weeks endedFebruary
      26,
       2005
    
    February
      28,
      2004
    
    February
      26,
       2005
    
    February
      28,
      2004Net
      sales
    $
    30,833
    
    $
    24,950
    
    $
    81,067
    
    $
    72,879Cost
      of goods sold
    
    18,106
    
    
    15,207
    
    
    46,462
    
    
    44,255Gross
      profit
    
    12,727
    
    
    9,743
    
    
    34,605
    
    
    28,624Operating
      expensesSelling
      and administrative
    
    8,923
    
    
    7,963
    
    
    26,192
    
    
    23,233Plant
      closing and operationalrestructuring
      costs
    
    649
    
    
    500
    
    
    2,074
    
    
    1,700Research
      and development
    
    1,421
    
    
    1,047
    
    
    3,919
    
    
    3,229Total
      operating expenses
    
    10,993
    
    
    9,510
    
    
    32,185
    
    
    28,162Operating
      profit
    
    1,734
    
    
    233
    
    
    2,420
    
    
    462Other
      income (expense)Interest
      income
    
    83
    
    
    162
    
    
    230
    
    
    672Interest
      expense
    
    (84
    )
    
    (82
    )
    
    (249
    )
    
    (235
    )Other,
      net
    
    1,496
    
    
    828
    
    
    2,522
    
    
    1,378Earnings
      from continuingoperations
      before incometaxes
    
    3,229
    
    
    1,141
    
    
    4,923
    
    
    2,277Income
      tax provision
    
    311
    
    
    593
    
    
    551
    
    
    1,182Earnings
      from continuingoperations
    
    2,918
    
    
    548
    
    
    4,372
    
    
    1,095Earnings
      from discontinuedoperation,
      net of income taxprovision
    
    
    
    
    681
    
    
    1,228
    
    
    1,604NET
      EARNINGS
    $
    2,918
    
    $
    1,229
    
    $
    5,600
    
    $
    2,699Basic
      earnings per common shareFrom
      continuing operations
    $
    0.27
    
    $
    0.05
    
    $
    0.41
    
    $
    0.11From
      discontinued operation,net
      of income tax provision
    
    0.00
    
    
    0.07
    
    
    0.11
    
    
    0.15Net
      earnings
    $
    0.27
    
    $
    0.12
    
    $
    0.52
    
    $
    0.26Diluted
      earnings per common shareFrom
      continuing operations
    $
    0.27
    
    $
    0.05
    
    $
    0.40
    
    $
    0.11From
      discontinued operation,net
      of income tax provision
    
    0.00
    
    
    0.07
    
    
    0.11
    
    
    0.15Net
      earnings
    $
    0.27
    
    $
    0.12
    
    $
    0.51
    
    $
    0.26Weighted
      average common sharesBasic
    
    10,772
    
    
    10,348
    
    
    10,751
    
    
    10,261Diluted
    
    10,960
    
    
    10,683
    
    
    10,943
    
    
    10,544The accompanying notes
are an integral part of these statements.


-5-
E-Z-EM, Inc. and
Subsidiaries




CONSOLIDATED STATEMENT
OF STOCKHOLDERS EQUITY AND COMPREHENSIVE INCOME


Thirty-nine weeks ended
February 26, 2005(unaudited)(in thousands, except share data)


Common
      stock
    
    Additional
      paid-in 
      capital
    
    Retained
      earnings
    
    Accumulated 
      other 
      comprehensive
      income
    
    Total
    
    Compre-
      
      hensive 
      incomeShares
    
    AmountBalance
      at May 29, 2004
    
    10,698,216
    
    $
    1,070
    
    $
    38,445
    
    $
    70,638
    
    $
    1,622
    
    $
    111,775Exercise
      of stock options,net
      of 3,226 shares tenderedto
      satisfy withholding taxes
    
    65,303
    
    
    6
    
    
    219
    
    
    
    
    
    
    
    
    225Income
      tax benefits onstock
      options exercised
    
    
    
    
    
    
    
    1,217
    
    
    
    
    
    
    
    
    1,217Compensation
      related tostock
      option plans, net ofincome
      tax benefit
    
    
    
    
    
    
    
    421
    
    
    
    
    
    
    
    
    421Issuance
      of stock
    
    8,767
    
    
    1
    
    
    107
    
    
    
    
    
    
    
    
    108Proceeds
      from subsidiarysinitial
      public offering, netof
      financing costs andminority
      interest
    
    
    
    
    
    
    
    1,442
    
    
    
    
    
    
    
    
    1,442Net
      earnings
    
    
    
    
    
    
    
    
    
    
    5,600
    
    
    
    
    
    5,600
    
    $
    5,600Cash
      dividend ($.30 percommon
      share)
    
    
    
    
    
    
    
    
    
    
    (3,220
    )
    
    
    
    
    (3,220
    )Net
      book value of discontinuedoperation
      at date of spin-off
    
    
    
    
    
    
    
    (13,681
    )
    
    (19,857
    )
    
    173
    
    
    (33,365
    )Unrealized
      holding gain on debtand
      equity securitiesArising
      during the period
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,108
    
    
    1,108
    
    
    1,108Reclassification
      adjustmentfor
      gains included innet
      earnings
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,385
    )
    
    (2,385
    )
    
    (2,385
    )Decrease
      in fair market valueon
      interest rate swap
    
    
    
    
    
    
    
    
    
    
    
    
    
    (55
    )
    
    (55
    )
    
    (55
    )Foreign
      currency translationadjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,615
    
    
    2,615
    
    
    2,615Comprehensive
      income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    6,883Balance
      at February 26, 2005
    
    10,772,286
    
    $
    1,077
    
    $
    28,170
    
    $
    53,161
    
    $
    3,078
    
    $
    85,486The accompanying notes are an
integral part of this statement.


-6-
E-Z-EM, Inc. and
Subsidiaries




CONSOLIDATED STATEMENTS
OF CASH FLOWS(unaudited)(in thousands)


Thirty-nine
      weeks endedFebruary
      26,
      2005
    
    February
      28,
      2004Cash
      flows from operating activities:Net
      earnings
    $
    5,600
    
    $
    2,699Adjustments
      to reconcile net earnings to netcash
      provided by operating activitiesEarnings
      from discontinued operation,net
      of tax
    
    (1,228
    )
    
    (1,604
    )Depreciation
      and amortization
    
    2,262
    
    
    2,195Gain
      on sale of investments
    
    (2,385
    )
    
    (993
    )Provision
      for doubtful accounts
    
    69
    
    
    58Tax
      benefit on exercise of stock options
    
    1,217
    
    
    1,200Deferred
      income tax provision(benefit)
    
    81
    
    
    (68
    )Other
      non-cash items
    
    504
    
    
    (425
    )Changes
      in operating assets and liabilities,net
      of business divestedAccounts
      receivable
    
    (4,623
    )
    
    (579
    )Inventories
    
    (3,440
    )
    
    (324
    )Other
      current assets
    
    (913
    )
    
    (1,590
    )Other
      assets
    
    (473
    )
    
    (532
    )Accounts
      payable
    
    2,397
    
    
    84Accrued
      liabilities
    
    778
    
    
    1,118Accrued
      income taxes
    
    31
    
    
    110Other
      noncurrent liabilities
    
    184
    
    
    144Net
      cash provided by operating activitiesof
      discontinued operation
    
    567
    
    
    1,140Net
      cash provided by operatingactivities
    
    628
    
    
    2,633Cash
      flows from investing activities:Additions
      to property, plant andequipment,
      net
    
    (2,997
    )
    
    (1,764
    )Purchase
      of intangible assets
    
    (555
    )Proceeds
      from sale of investment at cost
    
    575Investment
      at cost
    
    (90
    )Available-for-sale
      securitiesPurchases
    
    (23,545
    )
    
    (17,200
    )Proceeds
      from sale
    
    23,108
    
    
    18,516Net
      cash used in investing activitiesof
      discontinued operation
    
    (11,140
    )
    
    (642
    )Net
      cash used in investing activities
    
    (14,644
    )
    
    (1,090
    )The accompanying notes are an
integral part of these statements.


-7-
E-Z-EM, Inc. and
Subsidiaries


CONSOLIDATED STATEMENTS
OF CASH FLOWS (continued)(unaudited)(in thousands)



Thirty-nine
      weeks endedFebruary
      26,
      2005
    
    February
      28,
      2004Cash
      flows from financing activities:Repayments
      of debt
    $
    (263
    )
    $
    (307
    )Proceeds
      from issuance of debt
    
    93
    
    
    151Proceeds
      from repayment of debt by discontinuedoperation
    
    3,000Dividends
      paid
    
    (3,220
    )
    
    (2,552
    )Proceeds
      from exercise of stock options
    
    225
    
    
    2,247Purchase
      of treasury stock
    
    
    
    
    (417
    )Proceeds
      from issuance of stock in connectionwith
      the stock purchase plan
    
    10
    
    
    4Cash
      distributed with discontinued operation
    
    (8,453
    )Net
      cash provided by (used in) financingactivities
      of discontinued operation
    
    18,958
    
    
    (498
    )Net
      cash provided by (used in) financingactivities
    
    10,350
    
    
    (1,372
    )Effect
      of exchange rate changes oncash
      and cash equivalents
    
    1,744
    
    
    676INCREASE
      (DECREASE) IN CASH ANDCASH
      EQUIVALENTS
    
    (1,922
    )
    
    847Cash and
      cash equivalentsBeginning
      of period
    
    12,334
    
    
    8,520End
      of period
    $
    10,412
    
    $
    9,367Supplemental
      disclosures of cash flowinformation:Cash
      paid during the period for:Interest
    $
    83
    
    $
    157Income
      taxes (net of refunds of $175in
      2004)
    $
    2,013
    
    $
    1,182The accompanying notes are an
integral part of these statements.



-8-
E-Z-EM, Inc.
and Subsidiaries




NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


February 26,
2005 and February 28, 2004 (unaudited)



NOTE A 
NATURE OF BUSINESS AND BASIS OF PRESENTATION


Nature
of BusinessE-Z-EM,
Inc. and its subsidiaries (the Company or E-Z-EM) is a leading
provider of medical products used by radiologists, gastroenterologists and speech
language pathologists primarily in screening for and diagnosing diseases and disorders of
the gastrointestinal (GI) tract. Products are used for colorectal cancer screening,
evaluation of swallowing disorders (dysphagia), and testing for other diseases and
disorders of the GI system. The Company is also a third-party contract manufacturer, a
business that enables the Company to leverage its capacity in quality control, process,
automation and manufacturing. Prior to the spin-off of AngioDynamics, Inc. (AngioDynamics)
on October 30, 2004, the Company was also a provider of innovative medical devices used
in minimally invasive, image-guided procedures to treat peripheral vascular disease, or
PVD. AngioDynamics designed, developed, manufactured and marketed a broad line of
therapeutic and diagnostic devices that enabled interventional physicians (interventional
radiologists, vascular surgeons and others) to treat PVD and other non-coronary diseases.Basis of PresentationThe
consolidated balance sheet as of February 26, 2005, the consolidated statement of
stockholders equity and comprehensive income for the period ended February 26,
2005, and the consolidated statements of earnings and cash flows for the periods ended
February 26, 2005 and February 28, 2004, have been prepared by the Company without audit.
The consolidated balance sheet as of May 29, 2004 was derived from audited consolidated
financial statements. In the opinion of management, all adjustments (which include only
normally recurring adjustments) necessary to present fairly the financial position,
changes in stockholders equity and comprehensive income, results of operations and
cash flows at February 26, 2005 (and for all periods presented) have been made.Certain
information and footnote disclosures, normally included in financial statements prepared
in accordance with accounting principles generally accepted in the United States of
America, have been condensed or omitted. It is suggested that these consolidated
financial statements be read in conjunction with the financial statements and notes
thereto included in the Annual Report on Form 10-K for the fiscal year ended May 29, 2004
filed by the Company on August 27, 2004. The results of operations for the periods ended
February 26, 2005 and February 28, 2004 are not necessarily indicative of the operating
results for the respective full years.The
consolidated financial statements include the accounts of E-Z-EM, Inc. and all wholly
owned subsidiaries, as well as the accounts of AngioDynamics through its spin-off on
October 30, 2004. As a result of the spin-off, AngioDynamics is reported separately as a
discontinued operation for all periods presented within the consolidated financial
statements (see Note B.-9-
E-Z-EM, Inc.
and Subsidiaries


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


February 26,
2005 and February 28, 2004 (unaudited)



NOTE A - NATURE OF
BUSINESS AND BASIS OF PRESENTATION (continued)


Discontinued
Operation).  All significant intercompany balances and transactions have been eliminated.NOTE B 
DISCONTINUED OPERATION


On
May 27, 2004, AngioDynamics, the Companys former subsidiary, sold 1,950,000 shares
of its common stock at $11.00 per share through an initial public offering (IPO).
Proceeds from the IPO, net of certain financing costs, totaling $19,949,000 were received
by AngioDynamics on June 2, 2004. At May 29, 2004, E-Z-EM owned 9,200,000 shares, or
82.5% of the 11,150,000 shares outstanding. On June 15, 2004, the underwriters of the IPO
exercised their over-allotment option and acquired 292,500 shares at $11.00 per share,
less underwriting discounts and commissions, and on June 18, 2004, AngioDynamics received
net proceeds of $2,992,000. At June 15, 2004, E-Z-EMs ownership interest in
AngioDynamics decreased to 80.4% (see Note M).On
November 4, 2004, the Company announced the completion of the spin-off of AngioDynamics
by means of a tax-free distribution of the Companys remaining 80.4% ownership of
AngioDynamics. In February 2004, the Company received a favorable private letter ruling
from the Internal Revenue Service regarding the tax-free treatment of the distribution of
E-Z-EMs remaining ownership in AngioDynamics. The Company made a pro rata
distribution of its 9,200,000 shares of AngioDynamics on October 30, 2004 to E-Z-EM
shareholders of record as of October 11, 2004 (the Record Date). Based on the
shares outstanding of each company on the Record Date, E-Z-EM shareholders received
..856377 shares of AngioDynamics stock for each share of E-Z-EM stock they owned on the
Record Date. For all periods presented, AngioDynamics is accounted for as a discontinued
operation in the Companys financial statements in accordance with Statement of
Financial Accounting Standards (SFAS) No. 144, Accounting for
Impairment and Disposal of Long-Lived Assets. Amounts in the financial statements
and related notes for all periods shown have been reclassified to reflect the
discontinued operation.In
fiscal 2004, E-Z-EM entered into three agreements with AngioDynamics  a master
separation and distribution agreement, a corporate agreement and a tax allocation and
indemnification agreement  that relate to its relationship with AngioDynamics both
before and after the separation of AngioDynamics from the Company. All of the agreements
between the Company and AngioDynamics were made in the context of a parent-subsidiary
relationship and were negotiated in the overall context of the spin-off.-10-
E-Z-EM, Inc.
and Subsidiaries


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


February 26,
2005 and February 28, 2004 (unaudited)


NOTE B 
DISCONTINUED OPERATION (continued)


Summarized
results of operations for AngioDynamics, including minority interest, as reported in
earnings from discontinued operation in the accompanying consolidated statements of
earnings are as follows:Thirteen
      weeks ended
    
    Thirty-nine
      weeks endedFebruary
      26,
      2005
    
    February
      28,
      2004
    February
      26,
      2005
    
    February
      28,
      2004(in
      thousands)Net
      salesFrom
      unaffiliated customers
    
    
    
    $
    12,223
    
    $
    22,342
    
    $
    34,289From
      affiliates
    
    
    
    
    232
    
    
    420
    
    
    647Total
      net sales
    
    
    
    $
    12,455
    
    $
    22,762
    
    $
    34,936Earnings
      before income taxes
    
    
    
    $
    946
    
    $
    2,628
    
    $
    2,593Income
      tax provision
    
    
    
    
    265
    
    
    1,103
    
    
    989Earnings
      before minorityinterest
    
    
    
    
    681
    
    
    1,525
    
    
    1,604Minority
      interest
    
    
    
    
    
    
    
    297Earnings
      from discontinuedoperation
    
    
    
    $
    681
    
    $
    1,228
    
    $
    1,604For
the thirty-nine weeks ended February 26, 2005, the results of operations for
AngioDynamics represented twenty-two weeks activity.-11-
E-Z-EM, Inc.
and Subsidiaries


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


February 26,
2005 and February 28, 2004 (unaudited)



NOTE B 
DISCONTINUED OPERATION (continued)


The
following table represents summarized balance sheet information for AngioDynamics,
including minority interest, as of the date of the spin-off, and is provided to assist in
understanding the impact of the disposition on the consolidated balance sheet of the
Company (amounts in thousands):ASSETSCash
      and cash equivalents
    $
    10,238Debt
      and equity securities
    
    11,407Accounts
      receivable
    
    7,202Inventory
    
    9,200Other current
      assets
    
    1,363Property,
      plant and equipment
    
    7,559Other assets
    
    1,954Total
      assets
    $
    48,923LIABILITIES
      AND STOCKHOLDERS EQUITYCurrent
      maturities of long-term debt
    $
    160Accounts
      payable
    
    1,947Accrued
      liabilities
    
    2,278Accrued
      income taxes
    
    44Long-term
      debt
    
    3,060Minority
      interest
    
    8,133Stockholders
      equity
    
    33,301Total liabilities
      and stockholders equity
    $
    48,923-12-
E-Z-EM, Inc.
and Subsidiaries


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


February 26,
2005 and February 28, 2004 (unaudited)


NOTE C 
STOCK-BASED COMPENSATION


At
February 26, 2005, the Company had three stock-based compensation plans. The Company
accounts for these plans under the recognition and measurement principles of APB Opinion
No. 25, Accounting for Stock Issued to Employees and related interpretations.
Accordingly, no compensation expense has been recognized under these plans concerning
options granted to key employees and to members of the Board of Directors, as all such
options granted had an exercise price equal to or greater than the market value of the
underlying common stock on the date of grant. For the thirteen weeks ended February 26,
2005 and February 28, 2004, compensation expense of $21,000 and $2,000, respectively, was
recognized under these and certain AngioDynamics plans for options granted to consultants
and a former director serving as a consultant. For the thirty-nine weeks ended February
26, 2005 and February 28, 2004, compensation expense of $432,000 and $4,000,
respectively, was recognized under these and certain AngioDynamics plans for options
granted to consultants and a former director serving as a consultant.The
following table illustrates the effect on net earnings and earnings per share if the
Company had applied the fair value recognition provisions of SFAS No. 123 to options
granted under these plans to key employees and to members of the Board of Directors:Thirteen
      weeks ended
    
    Thirty-nine
      weeks endedFebruary
      26,
      2005
    
    February
      28,
      2004
    February
      26,
      2005
    
    February
      28,
      2004(in
      thousands, except per share data)Net
      earnings, as reported
    $
    2,918
    
    $
    1,229
    
    $
    5,600
    
    $
    2,699Deduct:
      Total stock-basedemployee
      compensation expensedetermined
      under the fair valuebased
      method for all awards,net
      of income tax effects(see
      Note N)
    
    (2,124
    )
    
    (141
    )
    
    (2,704
    )
    
    (421
    )Pro
      forma net earnings
    $
    794
    
    $
    1,088
    
    $
    2,896
    
    $
    2,278Earnings
      per common shareBasic
      - as reported
    $
    .27
    
    $
    .12
    
    $
    .52
    
    $
    .26Basic
      - pro forma
    
    .07
    
    
    .11
    
    
    .27
    
    
    .22Diluted
      - as reported
    $
    .27
    
    $
    .12
    
    $
    .51
    
    $
    .26Diluted
      - pro forma
    
    .07
    
    
    .10
    
    
    .26
    
    
    .22-13-
E-Z-EM, Inc.
and Subsidiaries


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


February 26,
2005 and February 28, 2004 (unaudited)



NOTE D 
EARNINGS PER COMMON SHARE


Basic
earnings per share are based on the weighted average number of common shares outstanding
without consideration of potential common stock. Diluted earnings per share are based on
the weighted average number of common and potential common shares outstanding. The
calculation takes into account the shares that may be issued upon exercise of stock
options, reduced by the shares that may be repurchased with the funds received from the
exercise, based on the average price during the period.The
following table sets forth the reconciliation of the weighted average number of common
shares:Thirteen
      weeks ended
    
    Thirty-nine
      weeks endedFebruary
      26,
      2005
    
    February
      28,
      2004
    February
      26,
      2005
    
    February
      28,
      2004(in
      thousands)Basic
    
    10,772
    
    
    10,348
    
    
    10,751
    
    
    10,261Effect
      of dilutive securities(stock
      options)
    
    188
    
    
    335
    
    
    192
    
    
    283Diluted
    
    10,960
    
    
    10,683
    
    
    10,943
    
    
    10,544Excluded
from the calculation of earnings per common share, are options to purchase 396,000 and
24,000 shares of common stock for the thirteen and thirty-nine weeks ended February 26,
2005, respectively, as their inclusion would be anti-dilutive. The range of exercise
prices on the excluded options was $13.45 to $14.51 per share for the thirteen weeks
ended February 26, 2005 and the exercise price on the excluded options was $13.45 for the
thirty-nine weeks ended February 26, 2005.-14-
E-Z-EM, Inc.
and Subsidiaries


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


February 26,
2005 and February 28, 2004 (unaudited)


NOTE E 
EFFECTS OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS


In
November 2004, the Financial Accounting Standards Board (FASB) issued
SFAS No. 151, Inventory Costs, an amendment of ARB No. 43, Chapter 4.
The amendments made by SFAS No. 151 will improve financial reporting by clarifying that
abnormal amounts of idle facility expense, freight, handling costs, and wasted materials
(spoilage) should be recognized as current-period charges and by requiring the
allocation of fixed production overheads to inventory based on the normal capacity of the
production facilities. SFAS No. 151 is effective for inventory costs incurred during
fiscal years beginning after June 15, 2005. Earlier application is permitted for
inventory costs incurred during fiscal years beginning after November 24, 2004. The
Company is currently evaluating the impact of adoption of SFAS No. 151 on its financial
position and results of operations.In
December 2004, the FASB issued SFAS No. 123 (R), Share-Based Payment. SFAS
No. 123 (R) establishes standards for the accounting for transactions in which an entity
exchanges its equity instruments for goods or services. This statement focuses primarily
on accounting for transactions in which an entity obtains employee services in
share-based payment transactions. SFAS No. 123 (R) requires that the fair value of such
equity instruments be recognized as an expense in the historical financial statements as
services are performed. Prior to SFAS No. 123 (R), only certain pro forma disclosures of
fair value were required. SFAS No. 123 (R) shall be effective for the Company as of the
beginning of the first interim reporting period that begins after June 15, 2005. The
adoption of this statement may have a material impact on the financial statements of the
Company commencing with the second quarter ending December 3, 2005. (See Note N).In
March 2004, the FASB Emerging Issues Task Force (EITF) released Issue No.
03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments. EITF 03-1 provides guidance for determining whether impairment for
certain debt and equity investments is other-than-temporary and the measurement of an
impaired loss. Certain disclosure requirements of EITF 03-1 were adopted in fiscal 2004
and the Company has complied with the new disclosure requirements in its consolidated
financial statements. The recognition and measurement requirements of EITF 03-1 were
initially effective for reporting periods beginning after June 15, 2004. In September
2004, the FASB Staff issued FASB Staff Position (FSP) EITF 03-1-1 that
delayed the effective date for certain measurement and recognition guidance contained in
EITF 03-1. The FSP requires that entities continue to apply previously existing other-than-temporary guidance
until a final consensus is reached. The Company does not anticipate that issuance of a
final consensus will materially impact its financial condition or results of operations.-15-
E-Z-EM, Inc.
and Subsidiaries


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


February 26,
2005 and February 28, 2004 (unaudited)


NOTE F 
COMPREHENSIVE INCOME


The
components of comprehensive income, net of related tax, are as follows:Thirteen
      weeks ended
    
    Thirty-nine
      weeks endedFebruary
      26,
      2005
    
    February
      28,
      2004
    February
      26,
      2005
    
    February
      28,
      2004(in
      thousands)Net
      earnings
    $
    2,918
    
    $
    1,229
    
    $
    5,600
    
    $
    2,699Unrealized
      holding gain (loss)on
      debt and equitysecurities:Arising
      during the period
    
    (43
    )
    
    1,599
    
    
    1,108
    
    
    3,421Reclassification
      adjustmentfor
      gains included in netearnings
    
    (979
    )
    
    (467
    )
    
    (2,385
    )
    
    (679
    )Increase
      (decrease) in fairvalue
      on interest rate swaparising
      during the period
    
    
    
    
    (35
    )
    
    (55
    )
    
    96Foreign
      currency translationadjustments
      arising duringthe
      period
    
    (1,538
    )
    
    (481
    )
    
    2,615
    
    
    866Comprehensive
      income
    $
    358
    
    $
    1,845
    
    $
    6,883
    
    $
    6,403The
components of accumulated other comprehensive income, net of related tax, are as follows:February
      26,
      2005
    
    May
      29 ,
      2004(in
      thousands)Unrealized
      holding gain on debt and equitysecurities
    $
    1,153
    
    $
    2,430Fair value
      on interest rate swap
    
    
    
    
    (118
    )Cumulative
      translation adjustments
    
    1,925
    
    
    (690
    )Accumulated
      other comprehensive income
    $
    3,078
    
    $
    1,622-16-
E-Z-EM, Inc.
and Subsidiaries


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


February 26,
2005 and February 28, 2004 (unaudited)



NOTE G 
ASSET PURCHASE


On
January 16, 2005, the Company entered into an Asset Purchase Agreement (the Agreement)
with ODell Engineering Ltd. and Philip ODell, the sole shareholder and
officer of ODell Engineering.Under
the Agreement, the Company has agreed to purchase all of ODell Engineerings
assets related to reactive skin decontamination lotion (RSDL) business and
technology. These assets include all licenses, intellectual property, customer orders,
contracts and all other assets and properties relating to ODell Engineerings
RSDL business and technology (collectively, the RSDL Assets).The
purchase price for the RSDL Assets is (i) $5.0 million, of which $500,000 was paid upon
signing the Agreement and is included in intangible assets in the accompanying balance
sheet, $2.5 million was paid at closing on April 7, 2005, and the balance of which is
payable in three installments over the two years following the closing and (ii) royalty
payments, not to exceed $8.0 million in total, on sales of RSDL products over the seven
years following the closing.The
Agreement also provides that Philip ODell will provide consulting services to the
Company over a three-year term, with diminishing time commitments in the second and third
years, related to commercialization of the RSDL technology. Under the consulting
arrangement, Mr. ODell is entitled to royalty payments, calculated at 4% of net
sales of patented products and 2% of net sales of unpatented products, for seven years
based on inventions created or developed by him, or introduced to the Company by him,
related to decontamination that are not part of the RSDL technology being acquired by the
Company. ODell Engineering and Mr. ODell have also agreed not to compete with
the Company in the sale of RSDL products or other decontamination products anywhere in
the world for seven years following the closing of the acquisition.-17-
E-Z-EM, Inc.
and Subsidiaries


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


February 26,
2005 and February 28, 2004 (unaudited)




NOTE H 
PLANT CLOSINGS AND OPERATIONAL RESTRUCTURINGS


In
the fourth quarter of fiscal 2004, the Company completed the closing of its device
manufacturing facility in San Lorenzo, Puerto Rico as well as its heat-sealing operation
in Westbury, New York, each of which was part of the E-Z-EM segment. The Company
currently outsources these operations to a third-party manufacturer. This realignment was
part of the Companys strategic plan of restructuring its operations to achieve
greater efficiency. The Company has begun realizing the savings it had anticipated from
this project during the first quarter of fiscal 2005. For the thirteen and thirty-nine
weeks ended February 26, 2004, project costs, primarily severance relating to 98
employees, aggregated $500,000 and $1,700,000, respectively. At February 26, 2005 and
February 28, 2004, the liability for the plant closing and operational restructuring,
which is included in accrued liabilities, approximated $8,000 and $792,000, respectively.In
June 2004, the Company announced a plan to further streamline its operations in the
E-Z-EM segment, specifically by moving its powder-based barium production to its
manufacturing facility in Montreal, Canada. The Company expects the project to take 12
months to complete, and to generate savings beginning in fiscal 2006. An expected pre-tax
charge to earnings of $2,800,000 will be recorded in fiscal 2005 as a result of this
program. Of the $2,800,000 in project costs, approximately $1,400,000 is severance
relating to 71 employees and the balance relates primarily to training, relocation and
regulatory costs. For the thirteen and thirty-nine weeks ended February 26, 2005, project
costs aggregated $649,000 and $2,074,000, respectively. At February 26, 2005, the
liability for this restructuring, which is included in accrued liabilities, approximated
$687,000.NOTE I 
INVENTORIES


Inventories
consist of the following:February
      26,
      2005
    
    May
      29 ,
      2004(in
      thousands)Finished
      goods
    $
    10,689
    
    $
    9,850Work in process
    
    410
    
    
    252Raw
      materials
    
    11,306
    
    
    8,799$
    22,405
    
    $
    18,901-18-
E-Z-EM, Inc.
and Subsidiaries


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


February 26,
2005 and February 28, 2004 (unaudited)



NOTE J 
DEBT AND EQUITY SECURITIES


During
the thirteen and thirty-nine weeks ended February 26, 2005, the Company sold 100,000
shares and 300,000 shares, respectively, of its investment in Cedara Software
Corporation. The Company recognized gains on these sales totaling $979,000 and
$2,385,000, respectively, during the thirteen and thirty-nine weeks ended February 26,
2005, which are included in the consolidated statements of earnings under the caption
Other, net.NOTE K 
INCOME TAXES


For
the thirteen weeks ended February 26, 2005, the Companys effective tax rate of 10%
differed from the Federal statutory tax rate of 34% due primarily to the reversal of
valuation allowances relating to a previously impaired, non-core equity security and
losses of a U.S. subsidiary which operated in Puerto Rico, partially offset by
non-deductible expenses. For the thirty-nine weeks ended February 26, 2005, the Companys
effective tax rate of 11% differed from the Federal statutory tax rate of 34% due
primarily to the reversal of valuation allowances relating to a previously impaired,
non-core equity security and losses of a U.S. subsidiary which operated in Puerto Rico,
partially offset by non-deductible expenses, including stock option compensation costs of
$377,000.NOTE L 
CONTINGENCIES


E-Z-EM,
AngioDynamics, the Companys former subsidiary, and Medical Components, Inc., or
Medcomp, have been named as co-defendants in an action entitled Duhon, et. al vs.
Brezoria Kidney Center, Inc.et. al, case no. 27084 filed in the District Court of
Brezoria County, Texas, 239th Judicial District on December 29, 2003. The
complaint alleges that the defendants designed, manufactured, sold, distributed and
marketed a defective catheter that was used in the treatment of, and caused the death of,
a hemodialysis patient, as well as committing other negligent acts. The complaint seeks
compensatory and other monetary damages in unspecified amounts. Under AngioDynamicsdistribution
agreement with Medcomp, Medcomp is required to indemnify AngioDynamics against all its
costs and expenses, as well as losses, liabilities and expenses (including reasonable
attorneys fees) that relate in any way to products covered by the agreement. The
Company has tendered the defense of the Duhon action to Medcomp and Medcomp has accepted
defense of the action. Based upon its prior experience with Medcomp, the Company expects
Medcomp to honor its indemnification obligation to AngioDynamics if it is unsuccessful in
defending this action.-19-
E-Z-EM, Inc.
and Subsidiaries


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


February 26,
2005 and February 28, 2004 (unaudited)



NOTE L 
CONTINGENCIES (continued)


On
January 6, 2004, Diomed, Inc. filed an action against AngioDynamics entitled Diomed,
Inc., vs. AngioDynamics, Inc., civil action no. 04 10019 RGS in the U.S.
District Court for the District of Massachusetts. Diomeds complaint
alleges that AngioDynamics has infringed on Diomeds U.S. patent no.
6,398,777 by selling a kit for the treatment of varicose veins (now called the
VenaCure(TM) Procedure Kit) and two diode laser systems: the Precision 980
Laser and the Precision 810 Laser, and by conducting a training program for
physicians in the use of the VenaCure(TM) Procedure Kit. The complaint alleges
that AngioDynamics actions have caused, and continue to cause, Diomed to
suffer substantial damages. The complaint seeks to prohibit AngioDynamics from
continuing to market and sell these products, as well as conducting training programs,
and seeks compensatory and treble money damages, reasonable attorneys fees,
costs and pre-judgment interest. AngioDynamics believes that the product does not
infringe the Diomed patent. AngioDynamics purchases the lasers and laser fibers for
its laser systems from biolitec, Inc. under a supply and distribution agreement.
biolitec has engaged counsel on AngioDynamics behalf to defend this action.In
accordance with the Master Separation and Distribution Agreement between AngioDynamics
and E-Z-EM, AngioDynamics has agreed to indemnify E-Z-EM from any claims which arise out
of the business operations of AngioDynamics prior to its spin-off (October 30, 2004) in
which E-Z-EM is a named defendant solely because E-Z-EM was the sole stockholder of
AngioDynamics.The
Company has been notified by a competitor that it believes specific claims contained in
issued United States patents owned by this competitor may be relevant to certain features
of the Companys Empower CT injector. Management is currently in discussions to
resolve this matter, and the extent of any liability is not estimable at this time.The
Company is party to other claims, legal actions and complaints that arise in the ordinary
course of business. The Company believes that any liability that may ultimately result
from the resolution of these matters will not, individually or in the aggregate, have a
material adverse effect on its financial position or results of operations.-20-
E-Z-EM, Inc.
and Subsidiaries


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


February 26,
2005 and February 28, 2004 (unaudited)



NOTE M 
COMMON STOCK


AngioDynamics
Initial Public OfferingOn
May 27, 2004, AngioDynamics, the Companys former subsidiary, sold 1,950,000 shares
of its common stock at $11.00 per share through an initial public offering (IPO).
Proceeds from the IPO, net of certain financing costs, totaling $19,949,000 were received
by AngioDynamics on June 2, 2004. At May 29, 2004, the Company owned 9,200,000 shares, or
82.5% of the 11,150,000 shares outstanding. At May 29, 2004, the Company has recorded a
credit to common stock and additional paid-in capital of $12,174,000 which is net of
financing costs of $1,279,000 and minority interest of $6,496,000. On June 15, 2004, the
underwriters of the IPO exercised their over-allotment option and acquired 292,500 shares
at $11.00 per share, less underwriting discounts and commissions, and on June 18, 2004,
AngioDynamics received net proceeds of $2,992,000. At June 15, 2004, the Companys
ownership interest in AngioDynamics decreased to 80.4%. For the thirty-nine weeks ended
February 26, 2005, the Company has recorded a credit to common stock and additional
paid-in capital of $1,442,000 which is net of financing costs of $225,000 and minority
interest of $1,325,000.AngioDynamics
Spin-offOn
November 4, 2004, the Company announced the completion of the spin-off of AngioDynamics
by means of a tax-free distribution of the Companys remaining 80.4% ownership of
AngioDynamics. In February 2004, the Company received a favorable private letter ruling
from the Internal Revenue Service regarding the tax-free treatment of the distribution of
E-Z-EMs remaining ownership in AngioDynamics. The Company made a pro rata
distribution of its 9,200,000 shares of AngioDynamics on October 30, 2004 to E-Z-EM
shareholders of record as of October 11, 2004 (the Record Date). Based on the
shares outstanding of each company on the Record Date, E-Z-EM shareholders received
..856377 shares of AngioDynamics stock for each share of E-Z-EM stock they owned on the
Record Date.Stock
Repurchase ProgramIn
March 2003, the Board of Directors authorized the repurchase of up to 300,000 shares of
the Companys common stock at an aggregate purchase price of up to $3,000,000.
During the thirteen and thirty-nine weeks ended February 26, 2005, no shares were
repurchased under this program. In aggregate, the Company has repurchased 74,234 shares
of common stock for approximately $716,000 under this program.-21-
E-Z-EM, Inc.
and Subsidiaries


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


February 26,
2005 and February 28, 2004 (unaudited)



NOTE M 
COMMON STOCK (continued)


Cash
DividendsIn
June 2003, the Companys Board of Directors declared a cash dividend of $.25 per
outstanding share of the Companys common stock. The dividend was distributed on
August 1, 2003 to shareholders of record as of July 15, 2003. In June 2004, the Companys
Board of Directors declared a cash dividend of $.30 per outstanding share of the Companys
common stock. The dividend was distributed on July 1, 2004 to shareholders of record as
of June 15, 2004. Future dividends are subject to Board of Directors review of
operations and financial and other conditions then prevailing.NOTE N 
STOCK COMPENSATION PLANS


In
connection with the completion of the AngioDynamics spin-off, as of October 30, 2004, all
outstanding stock options (E-Z-EM Pre-spin Options) were adjusted and/or
exchanged with E-Z-EM options (the E-Z-EM Post-spin Options) and
AngioDynamics options (the AngioDynamics Post-spin Options), collectively
referred to as (the Replacement Options).The
exercise price and the number of shares subject to each of the Replacement Options was
established pursuant to a formula designed to ensure that: (1) the aggregate intrinsic
value (i.e., the difference between the exercise price of the option and the market
price of the common stock underlying the option) of the Replacement Option did not exceed
the aggregate intrinsic value of the outstanding E-Z-EM Pre-spin Option which was replaced
by such Replacement Option immediately prior to the spin-off, and (2) the ratio of the
exercise price of each option to the market value of the underlying stock immediately
before and after the spin-off was preserved.Substantially
all of the other terms and conditions of each Replacement Option, including the time or
times when, and the manner in which, each option is exercisable, the duration of the
exercise period, the permitted method of exercise, settlement and payment, the rules that
apply in the event of the termination of employment of the employee, is the same as those
of the replaced E-Z-EM Pre-spin Option, except that (1) in some cases, the exercise
period of the AngioDynamics Post-spin Options are shorter than the exercise period of the
E-Z-EM Pre-spin Options and (2) option holders who are employed by one company are
permitted to exercise, and are subject to all of the terms and provisions of, options to
acquire shares in the other company as if such holder was an employee of such other
company.-22-
E-Z-EM, Inc.
and Subsidiaries


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


February 26,
2005 and February 28, 2004 (unaudited)



NOTE N 
STOCK COMPENSATION PLANS (continued)


Under
the 1983 and 1984 Stock Option Plans, options for 20,000 shares were granted at $16.02
per share, options for 68,529 shares were exercised at prices ranging from $3.64 to $8.08
per share, options for 25,984 shares expired at $4.22 per share, and options for 14
shares were forfeited at prices ranging from $3.66 to $12.49 per share during the
thirty-nine weeks ended February 26, 2005. Under the 2004 Stock and Incentive Award Plan,
which was adopted on October 26, 2004, options for 492,500 shares were granted at prices
ranging from $12.66 to $14.51 per share and no options were exercised, forfeited or
expired during the thirty-nine weeks ended February 26, 2005.On
January 17, 2005, the Companys Board of Directors accelerated the vesting of the
outstanding unvested stock options awarded to the officers, directors and employees under
the E-Z-EM, Inc. 2004 Stock and Incentive Award Plan, all of which had an exercise price
greater than the price of the common stock on January 14, 2005. As a result of the
acceleration, options to acquire 372,000 shares of common stock (representing
approximately 38.6% of the total outstanding options under all of the Companys
compensation plans), which otherwise would have vested from time to time in one-third
increments in 2005, 2006 and 2007, became immediately exercisable. The boards
decision to accelerate the vesting of these options was in response to the issuance by
the FASB of SFAS No. 123 (R), Share-Based Payment. By accelerating the
vesting of these options, the Company avoided recognizing any compensation expense in
future periods associated with these options. The pro forma charge relating to the
accelerated options was $2,260,000 for the thirteen and thirty-nine weeks ended February
26, 2005.Effective
October 26, 2004, the Company extended the exercise period of expiring stock options of a
former director who currently provides the Company with consulting services. The Company
recorded compensation charges of $21,000 and $406,000 during the thirteen and thirty-nine
weeks ended February 26, 2005, respectively, in connection with this extension.NOTE O 
OPERATING SEGMENT


The
Company currently operates in one reportable segment: the E-Z-EM segment. Prior to
October 30, 2004, the Company operated in two reportable segments: the E-Z-EM segment and
the AngioDynamics segment, through its majority-owned subsidiary, AngioDynamics, Inc.
Effective as of October 30, 2004, E-Z-EM spun off AngioDynamics by distributing to E-Z-EMs
shareholders 9,200,000 shares of AngioDynamics common stock then held by E-Z-EM. As
discussed in Note B. Discontinued Operation, the AngioDynamics segment is being reported
as a discontinued operation and the E-Z-EM segment is being reported as the Companys
continuing operations.-23-
E-Z-EM, Inc.
and Subsidiaries


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


February 26,
2005 and February 28, 2004 (unaudited)



NOTE O 
OPERATING SEGMENT (continued)


In
the E-Z-EM segment, the Company develops, manufactures and markets medical products used
by radiologists, gastroenterologists and speech language pathologists primarily in
screening for and diagnosing diseases and disorders of the gastrointestinal (GI) tract.
Products in this segment are used for colorectal cancer screening, evaluation of
swallowing disorders (dysphagia), and testing for other diseases and disorders of the GI
system. The Company is also a third-party contract manufacturer, a business that enables
the Company to leverage its capacity in quality control, process, automation and
manufacturing. The entire business is focused in the following general areas: X-ray
fluoroscopy, CT imaging, contract manufacturing, virtual colonoscopy, gastroenterology
and accessory medical devices.-24-
Item 2.
Managements
Discussion and Analysis of Financial Condition and Results of OperationsThe following information should be
read together with the consolidated financial statements and the notes thereto and other
information included elsewhere in this Quarterly Report on Form 10-Q.


Forward-Looking
Statements and Risk Factors


Our disclosure and analysis in this
report, including but not limited to the information discussed in this Quarterly Report on
Form 10-Q, contain forward-looking information about our companys financial results
and estimates, business prospects and products in research that involve substantial risks
and uncertainties. From time to time, we also may provide oral or written forward-looking
statements in other materials we release to the public. Forward-looking statements give
our current expectations or forecasts of future events. You can identify these statements
by the fact that they do not relate strictly to historic or current facts. They use words
such as anticipate, estimate, expect,
project, intend, plan, believe,
will, and other words and terms of similar meaning in connection with any
discussion of future operating or financial performance. In particular, these include
statements relating to future actions, prospective products or product approvals, future
performance or results of current and anticipated products, sales efforts, expenses,
interest rates, foreign exchange rates, the outcome of contingencies, such as legal
proceedings, and financial results. Among the factors that could cause actual results to
differ materially are the following:



our
pricing flexibility is constrained by the formation of large Group Purchasing
Organizations;
if
we fail to adequately protect our intellectual property rights, our business may suffer;
if
third parties claim that our products infringe their intellectual rights, we may be
forced to expend significant financial resources and management time defending against
such actions and our results of operations could suffer;
we
currently  purchase  significant  amounts of products,  product  components and raw
materials from several  single-source              suppliers;
our
reliance on a single  Canadian  manufacturing  facility to produce most of our X-ray
 fluoroscopy  and CT barium sulfate              formulation  products may impair our
ability to respond to natural disasters or other adverse events,  and also exposes us
             to the effects of changes in Canadian dollar - U.S. dollar exchange rate;
the
market potential for our Reactive Skin Decontamination Lotion product is uncertain;
if
we fail to develop new products and enhance existing products, we could lose market share
to our competitors and our results of operations could suffer;
the
adoption rate of virtual colonoscopy as a screening modality for colon cancer has been
slower than we anticipated;-25-

the
market dynamics and competitive  environment in the healthcare industry are subject to
rapid change,  which may affect              our operations;
if
we cannot obtain approval from governmental agencies for new or modified products, we
will not be able to sell those products; and
inadequate
levels of reimbursement from governmental or other third-party payors for procedures
using our products may cause our revenues to decline.We cannot guarantee that any
forward-looking statement will be realized, although we believe we have been prudent in
our plans and assumptions. Achievement of future results is subject to risks,
uncertainties and inaccurate assumptions. Should known or unknown risks or uncertainties
materialize, or should underlying assumptions prove inaccurate, actual results could vary
materially from past results and those anticipated, estimated or projected. Investors
should bear this in mind as they consider forward-looking statements.


We undertake no obligation to
publicly update forward-looking statements, whether as a result of new information,
future events or otherwise. You are advised, however, to consult any further disclosures
we make on related subjects in our Forms 10-Q, 8-K and 10-K reports to the Securities and
Exchange Commission. Our Form 10-K filing for the 2004 fiscal year listed various
important factors that could cause actual results to differ materially from expected and
historic results. We note these factors for investors as permitted by the Private
Securities Litigation Reform Act of 1995. Readers can find them in Item 7 of that filing
under the heading Risk Factors. You should understand that it is not possible
to predict or identify all such factors. Consequently, you should not consider any such
list to be a complete set of all potential risks or uncertainties.


Overview


We are a leading provider of medical
diagnostic oral contrast agents used in the diagnosis of abdominal disease. Our customers
include radiologists and gastroenterologists. We are focused on becoming a CT solutions
company for the computed tomography (CT) market. This focus is driven by the trend away
from older fluoroscopic procedures (e.g., barium enema) to CT small bowel imaging
procedures. Frost & Sullivan, a leading market research firm, has estimated that CT
procedures will grow at 11.25% compound annual growth rate over the period 2003 through
2010.


We have pioneered solutions for the
emerging area of Virtual Colonography, which may offer unique capabilities for the early
detection of colorectal cancer, and have also developed new contrast agents that focus on
CT and CT Angiography applications in Multidetector CT technology. We also manufacture
and market several lines of CT power injectors, which are used to deliver CT contrast
agents. We were recently rated # 1 in user satisfaction among vendors of CT Power
injectors by MD Buyline.


In addition to our products for the
radiology market, we have focused our efforts in the area of healthcare decontamination.
Reactive Skin Decontamination Lotion (RSDL), is a liquid skin decontaminant that is
effective in neutralizing a broad spectrum of chemical warfare and toxic agents. In
January 2005, we entered into an agreement to purchase all of the RSDL Assets of ODell
Engineering Ltd., the licensee of the RSDL technology. We completed this
transaction on April 7, 2005.



-26-
Prior to our spin-off of
AngioDynamics on October 30, 2004, we were also a provider of innovative medical devices
used in minimally invasive, image-guided procedures to treat peripheral vascular disease,
or PVD. AngioDynamics designed, developed, manufactured and marketed a broad line of
therapeutic and diagnostic devices that enabled interventional physicians (interventional
radiologists, vascular surgeons and others) to treat PVD and other non-coronary diseases.


AngioDynamics
Initial Public Offering


On May 27, 2004, AngioDynamics, our
former subsidiary, sold 1,950,000 shares of its common stock at $11.00 per share through
an initial public offering (IPO). Proceeds from the IPO, net of certain
financing costs, totaling $19,949,000 were received by AngioDynamics on June 2, 2004. At
May 29, 2004, we owned 9,200,000 shares, or 82.5% of the 11,150,000 shares outstanding.
On June 15, 2004, the underwriters of the IPO exercised their over-allotment option and
acquired 292,500 shares at $11.00 per share, less underwriting discounts and commissions,
and on June 18, 2004, AngioDynamics received net proceeds of $2,992,000. At June 15,
2004, our ownership interest in AngioDynamics decreased to 80.4%.


AngioDynamics
Spin-off


On November 4, 2004, we announced
the completion of our spin-off of AngioDynamics by means of a tax-free distribution of
our remaining 80.4% ownership of AngioDynamics. In February 2004, we received a favorable
private letter ruling from the Internal Revenue Service regarding the tax-free treatment
of the distribution of our remaining ownership in AngioDynamics. We made a pro rata
distribution of our 9,200,000 shares of AngioDynamics on October 30, 2004 to our
shareholders of record as of October 11, 2004 (the Record Date). Based on the
shares outstanding of each company on the Record Date, our shareholders received .856377
shares of AngioDynamics stock for each share of E-Z-EM stock they owned on the Record
Date. For all periods presented, AngioDynamics is accounted for as a discontinued
operation in our financial statements in accordance with SFAS No. 144, Accounting
for Impairment and Disposal of Long-Lived Assets.


Results of Operations


Recent
Developments


In mid-December 2004, our principal
competitor, Mallinckrodt, a division of Tyco International Ltd., initiated a recall of
its liquid barium products due to potential microbial contamination. As a result, we
estimate that our third quarter net sales were favorably affected by $3.3 million to $3.7
million due to our ability to provide replacement products. We anticipate that
Mallinckrodt will resume shipping these products prior to the end of our fourth quarter.
We are unable to predict what portion of the business, if any, we will be able to retain.


We recently received notice of price
increases from several of our single-source barium suppliers. While this had no affect on
the current quarter operating results, it could adversely affect our future results of
operation. We currently are negotiating with our suppliers and exploring various
alternatives to mitigate this potential cost increase.


As of the end of our current fiscal
year, we will become subject to the accelerated filing requirements and the Section 404
internal control requirements of the Sarbanes-Oxley Act of 2002. As an accelerated filer,
our



-27-
quarterly and annual SEC reports
will be subject to more stringent filing deadlines. Additionally, under Section 404 of
the Act, we will be required to design and implement a system of internal control over
financial reporting and to evaluate and determine the effectiveness of our internal
control over financial reporting. During the current quarter, we dedicated significant
amounts of time and resources to these compliance efforts. We incurred outside consulting
and auditing costs of $165,000 in the quarter, and we expect that our costs for
continuing Sarbanes-Oxley compliance will be significant.


Quarters ended
February 26, 2005 and February 28, 2004


Our fiscal quarters ended February
26, 2005 and February 28, 2004 both represent thirteen weeks.


Consolidated Results
of Operations


For the quarter ended February 26,
2005, we reported net earnings of $2,918,000, or $.27 per common share on both a basic
and diluted basis, compared to net earnings of $1,229,000, or $.12 per common share on
both a basic and diluted basis, for the comparable period of last year.


Both the current quarter and the
comparable quarter of the prior year included charges for restructuring our manufacturing
operations. The current quarter included $649,000, or $.04 per basic share, in plant
closing and operational restructuring costs related to the moving of our powder-based
barium production to our manufacturing facility in Montreal, Canada. We expect the
project to be completed by the end of fiscal 2005, and to generate projected annual
pre-tax savings of $2,200,000 beginning in fiscal 2006. An expected pre-tax charge to
earnings of $2,800,000 (inclusive of $2,074,000 in charges incurred during the nine
months ended February 26, 2005), approximately half of which is severance related, will
be recorded in the current year as a result of this program. The comparable quarter of
the prior year included $500,000, or $.04 per basic share, in plant closing and
operational restructuring costs related to the closings of our device manufacturing
facility in San Lorenzo, Puerto Rico, and our heat-sealing operation in Westbury, New
York, both of which were completed in the fourth quarter of fiscal 2004.


Excluding the effect of the plant
closings and operational restructurings, operating results improved by $1,650,000 due to
increased sales and improved gross profit, partially offset by increased operating
expenses.


Continuing
Operations


Net sales for the quarter ended
February 26, 2005 increased 24%, or $5,883,000, over the quarter ended February 28, 2004
due to sales volume increases of $5,557,000, of which we estimate $3,300,000 to
$3,700,000 can be attributed to the Mallinckrodt product recall, and foreign currency
exchange rate fluctuations, which increased the translated amounts of our foreign
subsidiariessales to U.S. dollars for financial reporting purposes by $425,000. On
a product line basis, the net sales increase resulted from increased sales of CT imaging
contrast products, particularly our CT Smoothie lines, and CT injector systems totaling
$4,322,000 and increased sales of X-ray fluoroscopy products of $1,175,000. Price
increases had minimal effect on net sales for the current quarter.


Net sales in international markets,
including direct exports from the United States, increased 11%, or $991,000, to
$9,887,000 for the current quarter



-28-
from $8,896,000 for the comparable
period of last year. This increase is attributable to higher sales volumes of $566,000
and foreign currency exchange rate fluctuations, which increased the translated amounts
of foreign subsidiariessales to U.S. dollars for financial reporting purposes by
$425,000.


Gross profit, expressed as a
percentage of net sales, improved to 41% for the current quarter from 39% for the
comparable quarter of the prior year due primarily to favorable changes in sales product
mix and cost savings from the closings of our device manufacturing facility in San
Lorenzo, Puerto Rico, and our heat-sealing operation in Westbury, New York. Our third
fiscal quarters traditionally have fewer production days than the other fiscal quarters,
resulting in somewhat lower gross profit percentages.


Selling and administrative (S&A)
expenses were $8,923,000 for the quarter ended February 26, 2005 compared to $7,963,000
for the quarter ended February 28, 2004. This increase of $960,000, or 12%, was due,
in large part, to: (i) increased compensation costs of $260,000; (ii) costs of $165,000 for
Sarbanes-Oxley Act Section 404 compliance efforts; and (iii) foreign currency exchange
rate fluctuations which increased the translated amounts of our foreign subsidiaries S&A
expenses to U.S. dollars for financial reporting purposes by $134,000.


Research and development (R&D)
expenditures increased 36% for the current quarter to $1,421,000, or 5% of net sales,
from $1,047,000, or 4% of net sales, for the comparable quarter of the prior year due
primarily to increased spending of $179,000 relating to X-ray fluoroscopy and CT imaging
projects, $74,000 relating to gastroenterology projects, $59,000 relating to general
regulatory costs and $42,000 relating to virtual colonoscopy projects. Of the R&D
expenditures for the current quarter, approximately 53% relate to X-ray fluoroscopy and
CT imaging projects, 28% to general regulatory costs, 11% to gastroenterology projects,
6% to virtual colonoscopy projects and 2% to other projects. R&D expenditures are
expected to continue at approximately current levels for the remainder of this fiscal
year.


Other income, net of other expenses,
totaled $1,495,000 for the current quarter compared to $908,000 for the comparable period
of last year. This increase was due primarily to increased foreign currency exchange
gains of $366,000, resulting from the strengthening of the U.S. dollar in the current
quarter, and increased gains of $322,000 on the sales of non-core equity securities,
partially offset by reduced interest income of $79,000. Interest income for the
comparable period of last year included $115,000 in imputed interest on loans to
AngioDynamics. Certain of these loans were capitalized in connection with the initial
public offering of AngioDynamics and the balance was repaid in the current fiscal year.


For the quarter ended February 26,
2005, our effective tax rate of 10% differed from the Federal statutory tax rate of 34%
due primarily to the reversal of valuation allowances relating to a previously impaired,
non-core equity security and losses of our subsidiary in Puerto Rico, partially offset by
non-deductible expenses. For the quarter ended February 28, 2004, our effective tax rate
of 52% differed from the Federal statutory tax rate of 34% due primarily to not currently
deductible losses incurred at our subsidiary in Puerto Rico and non-deductible expenses.
The losses incurred at our Puerto Rican subsidiary resulted from the closing of this
facility and the outsourcing of its operations.



-29-
Discontinued
Operations


We have consolidated the financial
statements of AngioDynamics and reported its results as a discontinued operation in an
amount equal to our percentage of equity ownership through October 30, 2004, the spin-off
date. Since the spin-off occurred prior to our third fiscal quarter, the results for the
discontinued operation were excluded from the accompanying consolidated statement of
earnings for the current quarter.


Summarized results of operations for
AngioDynamics as reported in earnings from discontinued operation in the accompanying
consolidated statement of earnings are as follows:



Thirteen 
      weeks ended
      February 28,
      2004(in
      thousands)Net
      salesFrom
      unaffiliated customers
    $
    12,223From
      affiliates
    
    232Total net
      sales
    $
    12,455Earnings
      before income taxes
    $
    946Income
      tax provision
    
    265Earnings
      from discontinuedoperation
    $
    681Nine months ended
February 26, 2005 and February 28, 2004


Our nine months ended February 26,
2005 and February 28, 2004 both represent thirty-nine weeks.


Consolidated Results
of Operations


For the nine months ended February
26, 2005, we reported net earnings of $5,600,000, or $.52 and $.51 per common share on a
basic and diluted basis, respectively, compared to net earnings of $2,699,000, or $.26 per
common share on both a basic and diluted basis, for the comparable period of last year.


Both the current nine months and the
comparable nine months of the prior year included charges for restructuring our
manufacturing operations. The current nine months included $2,074,000, or $.13 per basic
share, in plant closing and operational restructuring costs related to the moving of our
powder-based barium production to our manufacturing facility in Montreal, Canada. The
comparable nine months of the prior year included $1,700,000, or $.15 per basic share, in
plant closing and operational restructuring costs related to the closings of our device
manufacturing facility in San Lorenzo, Puerto Rico, and our heat-sealing operation in
Westbury, New York, both of which were completed in the fourth quarter of fiscal 2004.


Excluding the effect of the plant
closings and operational restructurings, operating results improved by $2,332,000 due to
increased sales and improved gross profit, partially offset by increased operating
expenses, including the recording of compensation costs of $406,000, resulting from the
modification of certain stock options previously granted to one of our former directors.



-30-
Continuing
Operations


Net sales for the nine months ended
February 26, 2005 increased 11%, or $8,188,000, compared to the nine months ended February
28, 2004 due to sales volume increases of $6,782,000, of which we estimate $3,300,000 to
$3,700,000 can be attributed to the Mallinckrodt product recall, and foreign currency
exchange rate fluctuations, which increased the translated amounts of our foreign
subsidiaries sales to U.S. dollars for financial reporting purposes by $1,202,000.
On a product line basis, the net sales increase resulted from increased sales of CT
imaging contrast products, particularly our CT Smoothie lines, and CT injector systems
totaling $8,188,000. Price increases accounted for less than 1% of net sales for the current period.


Net sales in international markets,
including direct exports from the United States, increased 4%, or $931,000, to $27,019,000
for the current period from $26,088,000 for the comparable period of last year. Foreign
currency exchange rate fluctuations, which increased the translated amounts of foreign
subsidiaries sales to U.S. dollars for financial reporting purposes by $1,202,000,
were partially offset by lower sales volumes.


Gross profit, expressed as a
percentage of net sales, improved to 43% for the current period from 39% for the
comparable period of the prior year due primarily to: (i) cost savings from the closings
of our device manufacturing facility in San Lorenzo, Puerto Rico, and our heat-sealing
operation in Westbury, New York; (ii) the decline in distributor rebates; and (iii)
reduced raw material and purchased finished product costs.


S&A expenses were $26,192,000 for
the nine months ended February 26, 2005 compared to $23,233,000 for the nine months ended
February 28, 2004. This increase of $2,959,000, or 13%, was due, in large part, to: (i)
increased compensation costs of $596,000; (ii) foreign currency exchange rate
fluctuations, which increased the translated amounts of our foreign subsidiaries
S&A expenses to U.S. dollars for financial reporting purposes by $435,000; (iii) the
recording of a non-cash compensation charge of $406,000, resulting from the modification
of certain stock options previously granted to one of our former directors; and (iv) costs
of $165,000 for Sarbanes-Oxley Act Section 404 compliance efforts.


R&D expenditures increased 21%
for the current period to $3,919,000, or 5% of net sales, from $3,229,000, or 4% of net
sales, for the comparable period of the prior year due primarily to increased spending of
$313,000 relating to gastroenterology projects, $198,000 relating to X-ray fluoroscopy and
CT imaging projects, $73,000 relating to general regulatory costs and $60,000 relating to
virtual colonoscopy projects. Of the R&D expenditures for the current period,
approximately 48% relate to X-ray fluoroscopy and CT imaging projects, 28% to general
regulatory costs, 14% to gastroenterology projects, 8% to virtual colonoscopy projects and
2% to other projects.


Other income, net of other expenses,
totaled $2,503,000 for the current period compared to $1,815,000 for the comparable period
of last year. This improvement was due primarily to increased gains of $1,392,000 on the
sales of non-core equity securities, partially offset by reduced interest income of
$442,000 and unfavorable changes in foreign currency exchange gains and losses of
$183,000, resulting from the weakening of the U.S. dollar. Interest income for the
comparable period of last year included $535,000 in imputed interest on loans to
AngioDynamics. Certain of these loans were capitalized in connection with the initial
public offering of AngioDynamics and the balance was repaid in the current fiscal year.



-31-
For the nine months ended February
26, 2005, our effective tax rate of 11% differed from the Federal statutory tax rate of
34% due primarily to the reversal of valuation allowances relating to a previously
impaired, non-core equity security and losses of our subsidiary in Puerto Rico, partially
offset by non-deductible expenses, including stock option compensation costs of $377,000.
For the nine ended February 28, 2004, our effective tax rate of 52% differed from the
Federal statutory tax rate of 34% due primarily to not currently deductible losses
incurred at our subsidiary in Puerto Rico and non-deductible expenses, partially offset by
the utilization of previously unrecorded net operating loss carryforwards in certain
foreign jurisdictions. The losses incurred at our Puerto Rican subsidiary resulted from
the closing of this facility and the outsourcing of its operations.


Discontinued
Operations


We have consolidated the financial
statements of AngioDynamics and reported its results as a discontinued operation in an
amount equal to our percentage of equity ownership through October 30, 2004, the spin-off
date. The results for the discontinued operation for the current nine months represent
only twenty-two weeks activity and, therefore, are not comparative to the results for the
prior years first nine months.


Summarized results of operations for
AngioDynamics, including minority interest, as reported in earnings from discontinued
operation in the accompanying consolidated statements of earnings are as follows:


Twenty-two 
      weeks ended
      October 30, 
      2004
    
    Thirty-nine
      weeks ended
      February 28, 
      2004(in
      thousands)Net
      salesFrom
      unaffiliated customers
    $
    22,342
    
    $
    34,289From
      affiliates
    
    420
    
    
    647Total net
      sales
    $
    22,762
    
    $
    34,936Earnings
      before income taxes
    $
    2,628
    
    $
    2,593Income
      tax provision
    
    1,103
    
    
    989Earnings
      before minorityinterest
    
    1,525
    
    
    1,604Minority
      interest
    
    297Earnings
      from discontinuedoperation
    $
    1,228
    
    $
    1,604Liquidity and Capital
Resources


For the nine months ended February
26, 2005, cash dividends and capital expenditures were funded by working capital, cash
reserves and the repayment of intercompany debt by AngioDynamics from the proceeds of its
IPO. Our policy has generally been to fund operations and capital requirements without
incurring significant debt. At February 26, 2005, debt (notes payable, current maturities
of long-term debt and long-term debt) was $624,000, as compared to $767,000 at May 29,
2004. We have available $1,614,000 under a bank line of credit, of which no amounts were
outstanding at February 26, 2005.



-32-
Our contractual obligations and their
effect on liquidity and cash flows as of February 26, 2005 are set forth in the table
below. We have no variable interest entities or other off-balance sheet obligations.




Payments
      Due By Period as of February 26, 2005Total
    
    Less
      than
      1 year
    
    1-3
      years
    
    3-5
      years
    
    More
      than
      5 years(in
      thousands)Contractual
      Obligations:Long-term
      debt
    $
    217
    
    $
    107
    
    $
    110Notes
      payable
    
    407
    
    
    407Operating
      leases (1)
    
    9,652
    
    
    1,763
    
    
    3,552
    
    $
    3,550
    
    $
    787Purchase
      obligations (1)
    
    4,876
    
    
    4,876Employment
      contract (1)
    
    680
    
    
    680Consulting
      contracts (1)
    
    77
    
    
    42
    
    
    35Other
      long-term liabilitiesreflected
      on theconsolidated
      balance sheetDeferred
      compensation (2)
    
    2,713
    
    
    16
    
    
    40
    
    
    51
    
    
    2,606Accrued
      retirementbenefits
    
    200
    
    
    62
    
    
    
    
    
    
    
    
    138Total
    $
    18,822
    
    $
    7,953
    
    $
    3,737
    
    $
    3,601
    
    $
    3,531(1)
The
non-cancelable  operating leases,  purchase obligations,  and employment and consulting
contracts are not reflected on the          consolidated  balance sheet under  accounting
 principles  generally  accepted in the United  States of America.  The purchase
         obligations consist primarily of finished good product and component parts.(2)
Deferred
 compensation costs covering active employees are assumed payable after five years,
 although certain  circumstances,          such as termination, would require earlier
payment.At February 26, 2005, approximately
$25,716,000, or 25%, of our assets consisted of cash and cash equivalents and short-term
debt and equity securities. The current ratio was 5.35 to 1, with net working capital of
$61,787,000, at February 26, 2005, compared to a current ratio of 6.07 to 1, with net
working capital of $88,636,000, at May 29, 2004. The decrease in net working capital
resulted from our spin-off of AngioDynamics. We believe that our cash reserves, cash
provided from continuing operations and our existing bank line of credit will provide
sufficient liquidity to meet our current obligations for the next 12 months.


In March 2003, the Board of Directors
authorized the repurchase of up to 300,000 shares of our common stock at an aggregate
purchase price of up to $3,000,000. During the nine months ended February 26, 2005, no
shares were repurchased under this program. In aggregate, we have repurchased 74,234
shares of common stock for approximately $716,000 under this program.


In June 2003, our Board of Directors
declared a cash dividend of $.25 per outstanding share of our common stock. The dividend
was distributed on August 1, 2003 to shareholders of record as of July 15, 2003. In June
2004, our Board of Directors declared a cash dividend of $.30 per outstanding share of our
common stock. The dividend was distributed on July 1, 2004 to shareholders of record as of
June 15, 2004. Future dividends are subject to our Board of Directors review of
operations and financial and other conditions then prevailing.



-33-
Critical Accounting
Policies


Our significant accounting policies
are summarized in Note A to the Consolidated Financial Statements included in our Annual
Report on Form 10-K for our fiscal year ended May 29, 2004. While all these significant
accounting policies affect the reporting of our financial condition and results of
operations, we view certain of these policies as critical. Policies determined to be
critical are those policies that have the most significant impact on our financial
statements and require us to use a greater degree of judgment and/or estimates. Actual
results may differ from those estimates.


We believe that given current facts
and circumstances, it is unlikely that applying any other reasonable judgment or estimate
methodologies would cause a material effect on our consolidated results of operations,
financial position or liquidity for the periods presented in this report. The accounting
policies identified as critical are as follows:


Revenue
Recognition


We recognize revenues in accordance
with generally accepted accounting principles as outlined in Staff Accounting Bulletin No.
104, Revenue Recognition in Financial Statements, which requires that four
basic criteria be met before revenue can be recognized: (1) persuasive evidence of an
arrangement exists; (2) the price is fixed or determinable; (3) collectibility is
reasonably assured; and (4) product delivery has occurred or services have been rendered.
Decisions relative to criterion (3) regarding collectibility are based upon our judgments,
as discussed under Accounts Receivable below. Should conditions change in the
future and cause us to determine this criterion is not met, our results of operations may
be affected. We recognize revenue on the date the product is shipped, which is when title
passes to the customer. Shipping and credit terms are negotiated on a customer-by-customer
basis. Products are shipped primarily to distributors at an agreed-upon list price. The
distributor then resells the products primarily to hospitals and, depending upon contracts
between us, the distributor and the hospital, the distributor may be entitled to a rebate.
We deduct all rebates from sales and have a provision for rebates based on historical
information for all rebates that have not yet been submitted to us by the distributors.
All product returns must be pre-approved by us and customers may be subject to a 20%
restocking charge. To be accepted, a returned product must be unadulterated, undamaged and
must have at least 12 months remaining prior to its expiration date. We record revenue on
warranties and extended warranties on a straight-line basis over the term of the related
warranty contracts, which generally cover one year. Deferred revenues related to
warranties and extended warranties are $510,000 at February 26, 2005. Service costs are
expensed as incurred.


Accounts
Receivable


Accounts receivable are generally
due within 30 to 90 days and are stated at amounts due from customers, net of an
allowance for doubtful accounts. We perform ongoing credit evaluations and adjust credit
limits based upon payment history and the customers current credit worthiness, as
determined by a review of their current credit information. We continuously monitor aging
reports, collections and payments from customers, and maintain a provision for estimated
credit losses based upon historical experience and any specific customer collection
issues we identify. While such credit losses have historically been within expectations
and the provisions established, we cannot guarantee the same credit loss rates will be



-34-
experienced in the future. We write
off accounts receivable when they become uncollectible. Concentration risk exists
relative to our accounts receivable, as 35% of our total accounts receivable balance at
February 26, 2005 is concentrated in one distributor. While the accounts receivable
related to this distributor are significant, we do not believe the credit loss risk to be
significant given the distributors consistent payment history.


Income Taxes


In preparing our financial
statements, income tax expense is calculated for each jurisdiction in which we operate.
This involves estimating actual current taxes due plus assessing temporary differences
arising from differing treatment for tax and accounting purposes that are recorded as
deferred tax assets and liabilities. Deferred tax assets are periodically evaluated to
determine their recoverability, based primarily on our ability to generate future taxable
income. Where their recovery is not likely, we establish a valuation allowance and record
a corresponding additional tax expense in our statement of earnings. If actual results
differ from our estimates due to changes in assumptions, the provision for income taxes
could be materially affected.


Inventories


We value inventories at the lower of
cost (on the first-in, first-out method) or market. On a quarterly basis, we review
inventory quantities on hand and analyze the provision for excess and obsolete inventory
based primarily on product expiration dating and our estimated sales forecast, which is
based on sales history and anticipated future demand. Our estimates of future product
demand may not be accurate and we may understate or overstate the provision required for
excess and obsolete inventory. Accordingly, any significant unanticipated changes in
demand could have a significant impact on the value of our inventory and results of
operations. At February 26, 2005, our reserve for excess and obsolete inventory was
$1,763,000.


Property,
Plant and Equipment


We state property, plant and
equipment at cost, less accumulated depreciation, and depreciate principally using the
straight-line method over their estimated useful lives. We determine this based on our
estimates of the period over which the asset will generate revenue. Any change in
condition that would cause us to change our estimate of the useful lives of a group or
class of assets may significantly affect depreciation expense on a prospective basis.


Effects of Recently
Issued Accounting Pronouncements


In November 2004, the Financial
Accounting Standards Board (FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 151, Inventory Costs, an amendment of ARB No. 43,
Chapter 4. The amendments made by SFAS No. 151 will improve financial reporting by
clarifying that abnormal amounts of idle facility expense, freight, handling costs, and
wasted materials (spoilage) should be recognized as current-period charges and by
requiring the allocation of fixed production overheads to inventory based on the normal
capacity of the production facilities. SFAS No. 151 is effective for inventory costs
incurred during fiscal years beginning after June 15, 2005. Earlier application is
permitted for inventory costs incurred during fiscal years beginning after November 24,
2004. We are currently evaluating the



-35-
impact of adoption of SFAS No. 151
on our financial position and results of operations.


In December 2004, the FASB issued
SFAS No. 123 (R), Accounting for Stock-Based Compensation. SFAS No. 123 (R)
establishes standards for the accounting for transactions in which an entity exchanges its
equity instruments for goods or services. This statement focuses primarily on accounting
for transactions in which an entity obtains employee services in share-based payment
transactions. SFAS No. 123 (R) requires that the fair value of such equity instruments be
recognized as an expense in the historical financial statements as services are performed.
Prior to SFAS No. 123 (R), only certain pro forma disclosures of fair value were required.
SFAS No. 123 (R) shall be effective for us as of the beginning of the first interim
reporting period that begins after June 15, 2005. The adoption of this statement may have
a material impact on our financial statements commencing with the second quarter ending
December 3, 2005.


In March 2004, the FASB Emerging
Issues Task Force (EITF) released Issue No. 03-1, The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments. EITF
03-1 provides guidance for determining whether impairment for certain debt and equity
investments is other-than-temporary and the measurement of an impaired loss. Certain
disclosure requirements of EITF 03-1 were adopted in fiscal 2004 and we have complied with
the new disclosure requirements in its consolidated financial statements. The recognition
and measurement requirements of EITF 03-1 were initially effective for reporting periods
beginning after June 15, 2004. In September 2004, the FASB Staff issued FASB Staff
Position (FSP) EITF 03-1-1 that delayed the effective date for certain
measurement and recognition guidance contained in EITF 03-1. The FSP requires that
entities continue to apply previously existing other-than-temporary guidance
until a final consensus is reached. We do not anticipate that issuance of a final
consensus will materially impact our financial condition or results of operations.




Item 3. Quantitative and Qualitative
Disclosures About Market Risk


We are exposed to market risk from
changes in foreign currency exchange rates and, to a much lesser extent, interest rates on
investments and financing, which could impact our results of operations and financial
position. We do not currently engage in any hedging or market risk management tools. There
have been no material changes with respect to market risk previously disclosed in our
Annual Report on Form 10-K for our 2004 fiscal year.


Foreign
Currency Exchange Rate Risk


The financial reporting of our
international subsidiaries is denominated in currencies other than the U.S. dollar. Since
the functional currency of our international subsidiaries is the local currency, foreign
currency translation adjustments are accumulated as a component of accumulated other
comprehensive income in stockholders equity. Assuming a hypothetical aggregate
change in the exchange rates of foreign currencies versus the U.S. dollar of 10% at
February 26, 2005, our assets and liabilities would increase or decrease by $3,771,000 and
$534,000, respectively, and our net sales and net earnings would increase or decrease by
$2,575,000 and $433,000, respectively, on an annual basis.


We also maintain intercompany
balances and loans receivable with subsidiaries with different local currencies. These
amounts are at risk of foreign exchange losses if exchange rates fluctuate. Assuming a
hypothetical



-36-
aggregate change in the exchange
rates of foreign currencies versus the U.S. dollar of 10% at February 26, 2005, our
pre-tax earnings would be favorably or unfavorably impacted by approximately $620,000 on
an annual basis.


Interest Rate
Risk


Our excess cash is invested in highly
liquid, short-term, investment grade securities with maturities of less than one year.
These investments are not held for speculative or trading purposes. Changes in interest
rates may affect the investment income we earn on cash, cash equivalents and debt
securities and therefore affect our cash flows and results of operations. As of February
26, 2005, we were exposed to interest rate change market risk with respect to our
investments in tax-free municipal bonds in the amount of $15,160,000. The bonds bear
interest at a floating rate established between seven and 35 days. For the nine months
ended February 26, 2005, the after-tax interest rate on the bonds approximated 1.5%. Each
100 basis point (or 1%) fluctuation in interest rates will increase or decrease interest
income on the bonds by approximately $152,000 on an annual basis.


As our principal amount of fixed
interest rate financing approximated $624,000 at February 26, 2005, a change in interest
rates would not materially impact results of operations or financial position. At February
26, 2005, we did not maintain any variable interest rate financing.


As of February 26, 2005, we have
available $1,614,000 under a working capital bank line of credit. Advances under this line
of credit will bear interest at an annual rate indexed to prime. We will thus be exposed
to interest rate risk with respect to this credit facility to the extent that interest
rates rise when there are amounts outstanding under this facility.




Item 4. Controls and Procedures


Evaluation of
Disclosure Controls and Procedures


As of the end of the period covered
by this report, our management, under the supervision and with the participation of our
Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the
design and operation of our disclosure controls and procedures pursuant to Rule 13a-15(b)
of the Securities Exchange Act of 1934, as amended (the Exchange Act). Based
on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded
that our disclosure controls and procedures as of the end of the period covered by this
report have been designed and are functioning effectively to provide reasonable assurance
that the information we (including our consolidated subsidiaries) are required to disclose
in reports filed under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commissions rules
and forms.


Changes in
Internal Controls over Financial Reporting


There was no change in our internal
control over financial reporting that occurred in the quarter ended February 26, 2005,
that has materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.



-37-
E-Z-EM, Inc.
and Subsidiaries


Part II:
Other Information




Item 1. Legal Proceedings


Certain legal proceedings in which we
are involved are discussed in Part I, Item 3 of our Annual Report on Form 10-K for the
fiscal year ended May 29, 2004.




Item 2. Unregistered Sales of
Securities and Use of Proceeds


None.




Item 3. Defaults Upon Senior
Securities


None.




Item 4. Submission Of Matters to a
Vote of Security Holders


None.




Item 5. Other Information


None.




Item 6. Exhibits



No.
    
    Description
    Page3.1
    
    Restated
      Certificate of Incorporation of the Registrant, asamended
    (a)3.2
    
    Amended
      and Restated Bylaws of the Registrant
    (b)10.1
    
    Asset
      Purchase Agreement dated January 16, 2005 by and amongE-Z-EM,
      Inc. and ODell Engineering Ltd. and Philip ODell
    4110.2
    
    Form
      of Non-statutory Stock Option Agreement for 2004 Stock andIncentive
      Award Plan (Employee)
    8410.3
    
    Form
      of Non-statutory Stock Option Agreement for 2004 Stock andIncentive
      Award Plan (Member of the Board of Directors)
    8910.4
    
    Form
      of Incentive Stock Option Agreement for 2004 Stock andIncentive
      Award Plan (Employee)
    9331.1
    
    Certification
      pursuant to Rule 13a-14(a)/15d-14(a) as adoptedpursuant
      to Section 302 of the Sarbanes-Oxley Act of 2002(Anthony
      A. Lombardo)
    98-38-
No.
    
    Description
    Page31.2
    
    Certification
      pursuant to Rule 13a-14(a)/15d-14(a) as adoptedpursuant
      to Section 302 of the Sarbanes-Oxley Act of 2002(Dennis
      J. Curtin)
    9932.1
    
    Certification
      pursuant to Title 18, United States Code, Section1350
      as adopted pursuant to Section 906 of the Sarbanes-OxleyAct
      of 2002 (Anthony A. Lombardo)
    10032.2
    
    Certification
      pursuant to Title 18, United States Code, Section1350
      as adopted pursuant to Section 906 of the Sarbanes-OxleyAct
      of 2002 (Dennis J. Curtin)
    101(a)
Incorporated
by reference to Exhibit 3.1 to the Registrants Registration Statement on Form 8-A
filed with the Commission                   on April 8, 2005.(b)
Incorporated
by reference to Exhibit 3.2 to the Registrants                   Current Report on
Form 8-K filed with the Commission on                   January 21, 2005 under Commission
File No. 1-11479.-39-
SIGNATURES


Pursuant to the requirements of the
Securities Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.

E-Z-EM, Inc.
      
      
      (Registrant)Date April
      12, 2005
               
    /s/
      Anthony A. Lombardo
      
      Anthony A. Lombardo, President, 
      Chief Executive Officer, DirectorDate April
      12, 2005
               
    /s/ Dennis
      J. Curtin
      
      
      Dennis J. Curtin, Senior Vice 
      President - Chief Financial 
      Officer (Principal Financial and 
      Chief Accounting Officer)-40-