SECURITIES AND EXCHANGE COMMISSION
                      WASHINGTON, DC 20549

                          FORM 10-QSB/A

     [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
                SECURITIES EXCHANGE ACT OF 1934

         For the quarterly period ended August 31, 2004

     [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
                SECURITIES EXCHANGE ACT OF 1934

    For the transition period from            to


                 Commission file number 0-17741


                          EPOLIN, INC.
(Exact name of Small Business Issuer as Specified in its Charter)


New Jersey                                               22-2547226
(State or Other Jurisdiction                       (I.R.S. Employer
of Incorporation or                                  Identification
Organization)                                               Number)

                      358-364 Adams Street
                    Newark, New Jersey 07105
            (Address of Principal Executive Offices)

                         (973) 465-9495
        (Issuer's Telephone Number, Including Area Code)

Check  whether  the Issuer (1) filed all reports required  to  be
filed by Section 13 or 15(d) of the Exchange Act during the  past
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   [      ]

State  the  number of shares outstanding of each of  the  Issuers
classes of common equity, as of the latest practicable date:

          Common, no par value per share: 11,852,855
                outstanding as of August 31, 2004

<PAGE>



                PART I - FINANCIAL INFORMATION


Item 1.   Financial Statements.

      See  the Consolidated Financial Statements annexed to  this
report.


Item  2.    Management's  Discussion  and  Analysis  or  Plan  of
Operation.

     The  following discussion should be read in conjunction with
the Financial Statements included in this report and is qualified
in its entirety by the foregoing.

Forward-Looking Statements

      This report contains certain forward-looking statements and
information relating to the Company that are based on the beliefs
and  assumptions  made  by the Company's management  as  well  as
information currently available to the management.  When used  in
this document, the words "anticipate", "believe", "estimate", and
"expect"  and  similar  expressions,  are  intended  to  identify
forward-looking statements.  Such statements reflect the  current
views  of  the  Company  with respect to future  events  and  are
subject to certain risks, uncertainties and assumptions.   Should
one  or  more  of  these risks or uncertainties  materialize,  or
should underlying assumptions prove incorrect, actual results may
vary  materially  from  those described  herein  as  anticipated,
believed,  estimated or expected.  Certain  of  these  risks  and
uncertainties  are  discussed in this report  under  the  caption
"Uncertainties  and Risk Factors" in Part I, Item 1  "Description
of  Business"  of the Company's Form 10-KSB for  the  year  ended
February  29, 2004.  The Company does not intend to update  these
forward-looking statements.

Executive Overview

     Epolin,  Inc.  (the  "Company") is  a  specialized  chemical
company   primarily  engaged  in  the  manufacturing,  marketing,
research  and  development  of dyes and  dye  formulations.   The
Company's  business is heavily weighted towards the  development,
manufacture  and  sale of near infrared dyes.   Applications  for
these  dyes  cover several markets that include laser protection,
welding,  sunglasses, optical filters, glazing  and  imaging  and
security   inks  and  tagants.   The  Company  also  manufactures
specialty   chemicals   for  certain   United   States   chemical
manufacturers.

      The  Company has succeeded in growing over the last  decade
based  on  the development, application and manufacture  of  near
infrared  dyes.  Although the Company does not rely upon  patents
for  protection  of  its  dye business, no  competitors,  to  the
Company's  knowledge, actively market near infrared dyes  without
bundling the dyes as part of another product.  The Company's dyes
can  be uniquely formulated to each customer's specifications and
manufactured  in  the Company's own facility.  In  addition,  the
Company  holds  a broad range of dyes in inventory for  immediate
sale.

       The  Company  sells  its  products  to  manufacturers   of
plastics/resins, credit cards, electronics, glass and other basic
materials.  The Company's customers are located in all regions of
the  world, although a material portion of the Company's business
is  dependent  on certain domestic customers, the loss  of  which
could  have  a  material effect on operations.   As  the  service
economy continues to dwarf the manufacturing sector in the United
States,  the  Company  anticipates  that  its  products  will  be
increasingly  used by manufacturers located abroad.   During  the
six  months ended August 31, 2004, approximately 53.8%  of  sales
were  to three customers. Two of these customers, located in  the
eastern United States, accounted for 47.7% of sales.  During  the
six  months ended August 31, 2003, approximately 67.0%  of  sales
were to four customers.  Three of three customers, located in the
eastern United States, accounted for 58.6% of sales.

<PAGE>

Results of Operations

      The following table sets forth operations data expressed as
a percentage of sales.

                                         Three Months Ended
                                     August 31,     August 31,
                                     2004           2003

Sales                                  100%         100%

Cost of sales and expenses:
  Cost of sales                        28.4        30.1
  Selling, general and administrative  25.3        28.9
     Total                             53.7        59.0

Operating Income                       46.3        41.0

Income before taxes                    47.5        42.1

Net income (after taxes and
extraordinary item)                    30.2        11.7

                                          Six Months Ended
                                      August 31,     August 31,
                                      2004           2003

Sales                                  100%          100%

Cost of sales and expenses:
  Cost of sales                        34.0          31.6
  Selling, general and administrative  30.2          28.5
     Total                             64.2          60.1

Operating Income                       35.8          40.0

Income before taxes                    37.4          41.5

Net income (after taxes and
extraordinary item)                    23.2          17.8


Sales

      Sales  increased  to $841,000 for the  three  months  ended
August  31, 2004 from $681,000 for the three months ended  August
31,  2003, an increase of $160,000 or 23.5%.  For the six  months
ended  August  31,  2004,  sales  decreased  to  $1,304,000  from
$1,367,000  for the six months ended August 31, 2003, a  decrease
of  $63,000  or  4.6%.  The Company experienced increased  orders
from  many of its regular customers during the three months ended
August 31, 2004 compared to the first three months of the current
fiscal year  in which the Company experienced reduced orders from
many of such customers.

Cost of Sales and Expenses

       Cost   of   sales  increased  to  $239,000  and  $443,000,
respectively, for the three and six months ended August 31,  2004
from  $205,000 and $433,000, respectively, for the three and  six
months   ended   August   31,   2003.    Selling,   general   and
administrative  expenses  increased  to  $213,000  and  $394,000,
respectively, for the three and six months ended August 31,  2004
from  $197,000 and $390,000, respectively, for the three and  six
months  ended  August 31, 2003.  The total of cost of  sales  and
expenses  for the three months ended August 31, 2004 was $452,000
as  compared  to $402,000 for the three months ended  August  31,
2003,  an  increase of $50,000.  For the six months ended  August
31,  2004, the total of costs of sales and expenses was  $837,000
as compared to $822,000 for the six months ended August 31, 2003,
an increase of $15,000.

Operating Income

      Operating income for the three months ended August 31, 2004
increased  to  $389,000 from $279,000 for the three months  ended
August  31, 2003, an increase of $110,000.  Operating income  for
the  six months ended August 31, 2004 decreased to $467,000  from
$545,000 for the six months ended August 31, 2003, a decrease  of
$78,000.   A change in operating income for the six months  ended
August  31, 2004 compared to the comparable period of  the  prior
year was primarily due to the reduced level of sales achieved  by
the  Company in the first quarter of the current fiscal year,  as
well as a relatively small increase in total of cost of

<PAGE>

sales and
expenses for the six months ended August 31, 2004.

 Other Income

     Total other income for the three and six months ended August
31,  2004  was $11,000 and $21,000, respectively, as compared  to
$7,000  and  $22,000, respectively, for the three and six  months
ended  August 31, 2003.  The Company realized $9,000 and $18,000,
respectively, in rental income for the three and six months ended
August  31, 2004 as compared to $6,000 and $18,000, respectively,
in  rental  income for the three and six months ended August  31,
2003.   Effective November 1, 2002, the Company began to sublease
approximately  2,500 square feet of its space  to  a  non-related
party  to  operate an optics and security inks laboratory  at  an
annual rent of $36,000.  The Company realized interest income  of
$1,800  and  $3,100, respectively, for the three and  six  months
ended   August   31,   2004  compared  to  $1,400   and   $4,300,
respectively, for the three and six months ended August 31, 2003.

Income

      During the three and six months ended August 31, 2004,  the
Company reported income before taxes of $400,000 and $488,000  as
compared to income before taxes of $286,000 and $568,000 for  the
three  and  six months ended August 31, 2004.  Income taxes  were
$146,000  and $185,000 for the three and six months ended  August
31,  2004 compared to $97,000 and $214,000 for the three and  six
months  ended  August  31,  2003.  Net  income  after  taxes  was
$254,000 or $0.02 per share for the three months ended August 31,
2004  as  compared  to net income after taxes (and  extraordinary
item)  of  $79,000 or $0.01 per share for the three months  ended
August  31, 2003.  Net income after taxes was $303,000  or  $0.03
per share for the six months ended August 31, 2004 as compared to
net  income  after taxes (and extraordinary item) of $243,000  or
$0.02  per  share  for  the six months  ended  August  31,  2003.
Excluding  the extraordinary item recognized in fiscal 2003,  the
Company  had net income after taxes of $190,000 and $354,000  for
the   three   and  six  months  ended  August  31,   2003.    The
extraordinary  item  was  recognized  in  connection   with   the
settlement reached in fiscal 2003 in the litigation commenced  in
December  2000  by  two individuals (each a former  director  and
former  employee  of  the Company) for  which  there  was  not  a
comparable  item in the current fiscal year.  Had this  not  been
included  in  the  prior year, net income  would  have  increased
$64,000  for  the three months ended August 31, 2004 compared  to
the  prior  year and decreased $50,000 for the six  months  ended
August 31, 2004 compared to the prior year.

      Net income in the future will be dependent upon our ability
to increase revenues faster than we increase our selling, general
and administrative expenses, research and development expense and
other  expenses.  Although we suffered a setback in sales in  the
first quarter of fiscal 2005, business improved during the second
quarter.   We  are  encouraged  that  we  have  recently  shipped
development quantities of dyes to certain new customers which  we
hope  will  lead  to  new  ongoing  business  for  the  Company's
products.  No assurance can be given however that that such  will
be  the  case  or  that  our  sales  will  remain  at  the  level
experienced in the second quarter or improve.

Operations Outlook

      We  are currently going through a period of reassessing our
direction  in order to increase value for our shareholders.   Our
business,  though reasonably healthy, has not recently  grown  to
the  degree  management anticipated.  For example, during  fiscal
2004  sales reached an all time high of $2.73 million.  But  this
was  not significantly more than in 2003 ($2.69 million) or  2002
($2.55  million). The plateau of sales over the last three  years
was  in  contrast to the sales growth we saw since  1991.   Based
upon these observations, we tried to learn what could be done  to
stimulate  growth  and recapture the promise  of  a  true  growth
company.  Our  first  task was to draw up a  business  plan.   We
believe this highlighted our one major weakness and that  was  in
sales  and marketing.  For years we felt it to be unnecessary  to
go  out  and reach our customers.  We believed that our web

<PAGE>

site
was  sufficiently explicit to attract anyone interested  in  near
infrared light management to come to us because we were the "only
game  in town". We now realize that the customer has alternatives
which  do  not  include the use of Epolin dyes.  We  believe  the
business   plan   made   clear  the   necessity   of   hiring   a
Sales/Marketing  executive along with back up  technical  service
help.    This is in process.  In order to cover the cost of these
additional personnel, we decided to make certain sacrifices.  For
this  reason  we  have  for  the time being  suspended  the  cash
dividends  program  which we have had in place  since  2002.   We
believe it is in the Company's best interest to sacrifice current
payout to shareholders for future growth.

      The  new  products that are now the firm underpinnings  for
future  growth  are  based upon security inks,  new  visible  and
infrared  dyes  and  the forward integration  of  our  dyes  into
formulated  pellets. We are making it easy for  the  customer  to
enter the field of welding and specialty filters without the need
for specialized knowledge in formulating product. This eliminates
the  need for the customer to extrude pellets, making it a simple
task to use the pellets directly in injection molding.

      Another factor that was considered in the business plan was
management  succession.  Murray S. Cohen, the Company's  Chairman
of  the Board and Chief Executive Officer, recently announced his
intention  to  step  down  as  Chief  Executive  Officer  at   an
undetermined future date, while continuing to remain as  Chairman
of  the  Board  and  Chief Scientist for the Company.   With  the
hiring of a Sales/Marketing executive, such will add to our  pool
of  personnel  who  can be considered at a  later  date  for  the
position of CEO.

Liquidity and Capital Resources

      The  Company's  primary source of funds is cash  flow  from
operations in the normal course of selling products.   On  August
31,  2004, the Company had working capital of $2,168,000, a  debt
to  equity  ratio  of  0.15  to 1, and  stockholders'  equity  of
$2,924,000.  On August 31, 2004, the Company had $823,000 in cash
and  cash  equivalents,  total assets  of  $3,349,000  and  total
liabilities of $425,000.

      The  Company anticipates, based on currently proposed plans
and assumptions relating to its operations, that its current cash
and  cash  equivalents together with projected  cash  flows  from
operations  and projected revenues will be sufficient to  satisfy
its  contemplated  cash requirements for more than  the  next  12
months.

      Inflation  has  not  significantly impacted  the  Company's
operations.

Other Information

     In  August  2001,  the  Board of Directors  of  the  Company
authorized a 500,000 share stock repurchase program.  Pursuant to
the  repurchase program, the Company may purchase up  to  500,000
shares  of  its common stock in the open market or  in  privately
negotiated  transactions  from time  to  time,  based  on  market
prices.  The Company indicated that the timing of the buyback  of
the  Company's  shares will be dictated by overall financial  and
market  conditions  and  other  corporate  considerations.    The
repurchase  program  may  be suspended  without  further  notice.
During  the  fiscal  year ended February 29,  2004,  a  total  of
184,000 shares were repurchased at a cumulative cost of $103,405.
During  the  six months ended August 31, 2004, no repurchases  of
shares  were made by the Company.  During the fiscal  year  ended
February 28, 2003, a total of 32,500 shares were repurchased at a
cumulative  cost  of $18,624 while during the fiscal  year  ended
February 28, 2002, a total of 30,000 shares were repurchased at a
cumulative cost of $14,837.

     During fiscal 2004, the Company paid two cash dividends, the
first  being  $.02 per share in August 2003 and the second  being
$.02  per shares in February 2004.  During the fiscal year  ended
February 28, 2003, the Company also paid two cash dividends,  the
first being $.04 per share in July 2002 and the second being $.03
per  share in January 2003.  Prior thereto, and during the fiscal
year  ended  February 28, 2002, the

<PAGE>

Company also  paid  two  cash
dividends,  the  first being $.03 per share in June  2001  (which
represented the first time that a cash dividend was paid  by  the
Company) and the second being $.04 per share in February 2002.

Off-Balance Sheet Arrangements

     The Company has no off-balance sheet arrangements as defined
in Item 303(c) of Regulation S-B.


Item 3.   Controls and Procedures.

     The   Company's   Chief  Executive  Officer  and   Principal
Financial Officer have reviewed the Company's disclosure controls
and  procedures  as  of  the end of the period  covered  by  this
report.   Based upon this review, such officers believe that  the
Company's  disclosure controls and procedures  are  effective  in
timely  alerting  them  to material information  required  to  be
included  in this report. There have been no significant  changes
in internal control over financial reporting that occurred during
the  fiscal  quarter covered by this report that have  materially
affected,  or  are  reasonably likely to materially  affect,  the
Company's internal control over financial reporting.

<PAGE>

                   PART II - OTHER INFORMATION


Item 1.  Legal Proceedings.

     There are no material pending legal proceedings to which the
Company is a party or to which any of its property is subject.


Item 2.  Changes in Securities.

     During the quarter ended August 31, 2004, the Company issued
12,500 shares of Common Stock upon exercise of previously granted
stock options at an aggregate exercise price of $3,125.

      All  of  such  shares  were issued  in  reliance  upon  the
exemption  from  registration pursuant to  Section  4(2)  of  the
Securities  Act  of  1933, as amended, for "transactions  by  the
issuer not involving any public offering".


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 and Reports on Form 8-K.

          (a)  Exhibits.

31.1 Certification of Chief Executive Officer pursuant to Section
     302 of the Sarbanes-Oxley Act of 2002 (Rules 13a-14 and 15d-14 of
     the Exchange Act)
31.2 Certification of Principal Financial Officer pursuant to
     Section 302 of the Sarbanes-Oxley Act of 2002 (Rules 13a-14 and
     15d-14 of the Exchange Act)
32.1 Certification pursuant to Section 906 of the
     Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)

          (b)  Reports on Form 8-K.

          Listed  below are reports on Form 8-K filed during  the
          fiscal quarter ended August 31, 2004.

             None.

<PAGE>

                           SIGNATURES

     In accordance with the requirements of the Exchange Act, the
Registrant caused this Report to be signed on its behalf  by  the
undersigned thereunto duly authorized.


                                   EPOLIN, INC.
                                   (Registrant)



Dated: October 15, 2004        By: /s/ Murray S. Cohen
                                   Murray S. Cohen,
                                   Chairman of the Board
                                   and Chief Executive Officer


Dated: October 15, 2004        By: /s/ James Ivchenko
                                   James Ivchenko,
                                   President (Principal Financial
                                   Officer)

<PAGE>



                           EPOLIN, INC. AND SUBSIDIARY

                              FINANCIAL STATEMENTS

                    SIX MONTHS ENDED AUGUST 31, 2004 AND 2003


<PAGE>

                                    CONTENTS





                                                                        Page
                                                                        ----

Accountant's Review Report                                                1

Consolidated Financial Statements:

    Consolidated Balance Sheets                                         2 - 3

    Consolidated Statements of Income                                   4 - 5

    Consolidated Statements of Stockholders' Equity                       6

    Consolidated Statements of Cash Flows                               7 - 8

Notes to Consolidated Financial Statements                              9 - 18

<PAGE>

                           ACCOUNTANT'S REVIEW REPORT




To the Board of Directors and Stockholders
EPOLIN INC. AND SUBSIDIARY
Newark, NJ

     We have reviewed the accompanying Consolidated Balance Sheets of Epolin
Inc. and Subsidiary as of August 31, 2004 and 2003 and the related Consolidated
Statements of Income, Stockholders' Equity and Cash Flows for the six months
then ended in accordance with Statements on Standards for Accounting and Review
Services issued by the American Institute of Certified Public Accountants. All
information included in these financial statements is the representation of the
management of Epolin, Inc. and Subsidiary.

     A review consists principally of inquiries of Company personnel and
analytical procedures applied to financial data. It is substantially less in
scope than an audit in accordance with generally accepted auditing standards,
the objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.

     Based on our review, we are not aware of any material modifications that
should be made to the accompanying August 31, 2004 financial statements in order
for them to be in conformity with generally accepted accounting principles.








/s/ IWA FINANCIAL CONSULTING LLC
--------------------------------
IWA FINANCIAL CONSULTING LLC
Livingston, NJ 07039




September 20, 2004

                                        1

<PAGE>

                           EPOLIN, INC. AND SUBSIDIARY

                           CONSOLIDATED BALANCE SHEETS

                                     ASSETS

                                                              August 31,
                                                     ---------------------------
Current assets:                                          2004           2003
                                                     ------------   ------------
  Cash and cash equivalents                          $    823,429        367,782
  Accounts receivable                                     646,224        831,410
  Inventories                                             822,458        687,018
  Prepaid expenses                                         22,855         30,523
  Deferred tax assets-current portion                       1,376          1,376
                                                     ------------   ------------

      Total current assets                              2,316,342      1,918,109
                                                     ------------   ------------

Plant, property and equipment - at cost:
  Land                                                     81,000         81,000
  Building                                                369,000        369,000
  Machinery and equipment                                 254,027        243,111
  Furniture and fixtures                                   12,223         12,223
  Leasehold improvements                                  629,391        591,543
                                                     ------------   ------------

      Total                                             1,345,641      1,296,877

Less:  Accumulated depreciation and amortization          732,295        702,291
                                                     ------------   ------------

      Net plant, property and equipment                   613,346        594,586
                                                     ------------   ------------

Other assets:
  Deferred tax assets-non current portion                 220,904        226,816
  Cash value - life insurance policy                      198,290        144,413
                                                     ------------   ------------

      Total other assets                                  419,194        371,229
                                                     ------------   ------------

      Total                                          $  3,348,882      2,883,924
                                                     ============   ============

        The accompanying notes are an integral part of these statements.

                                        2
<PAGE>

                           EPOLIN, INC. AND SUBSIDIARY

                     CONSOLIDATED BALANCE SHEETS (CONTINUED)

                      LIABILITIES AND STOCKHOLDERS' EQUITY


<TABLE>
<CAPTION>
                                                                            August 31,
                                                                    ---------------------------
                                                                        2004           2003
                                                                    ------------   ------------
<S>                                                                 <C>                   <C>
Current liabilities:
  Accounts payable                                                  $     16,047          8,099
  Accrued expenses                                                       113,092         98,664
  Taxes payable:
    Payroll                                                                1,719          1,737
    Income                                                                17,820          1,819
                                                                    ------------   ------------

    Total current liabilities                                            148,678        110,319
                                                                    ------------   ------------


Other liabilities - Deferred compensation                                276,050        251,971
                                                                    ------------   ------------


        Total liabilities                                                424,728        362,290
                                                                    ------------   ------------

Commitments and Contingencies

Stockholders' equity:
  Preferred stock, $15.513 par value; 940,000 shares authorized;
    none issued
   Preferred stock, series A convertible non-cumulative,
    $2.50 par value; redemption price and liquidation preference;
    60,000 shares authorized; 5,478 shares issued and redeemed
   Common stock, no par value; 20,000,000 shares authorized;
    12,716,500 and 12,641,500 shares issued, 11,852,855 and
    11,825,355 shares outstanding at 2004 and 2003, respectively       2,337,058      2,320,808
    Paid-in capital                                                        6,486          6,486
    Retained earnings                                                    872,792        458,872
                                                                    ------------   ------------

        Total                                                          3,216,336      2,786,166
    Less: Treasury stock-at cost                                         292,182        264,532
                                                                    ------------   ------------

      Total stockholders' equity                                       2,924,154      2,521,634
                                                                    ------------   ------------

      Total                                                         $  3,348,882      2,883,924
                                                                    ============   ============
</TABLE>

        The accompanying notes are an integral part of these statements.

                                        3
<PAGE>

                           EPOLIN, INC. AND SUBSIDIARY

                        CONSOLIDATED STATEMENTS OF INCOME
                    SIX MONTHS ENDED AUGUST 31, 2004 AND 2003

<TABLE>
<CAPTION>
                                                             2004           2003
                                                         ------------   ------------
<S>                                                      <C>               <C>
Sales                                                    $  1,304,302      1,367,485
                                                         ------------   ------------

Cost of sales and expenses:
  Cost of sales                                               442,878        432,590
  Selling, general and administrative                         394,451        389,525
                                                         ------------   ------------

     Total                                                    837,329        822,115
                                                         ------------   ------------

Operating income                                              466,973        545,370
                                                         ------------   ------------

Other income:
  Rental income                                                18,000         18,000
  Interest                                                      3,066          4,277
                                                         ------------   ------------

     Total other income                                        21,066         22,277
                                                         ------------   ------------

Income before taxes                                           488,039        567,647

Income taxes                                                  185,367        214,107
                                                         ------------   ------------

Income before extraordinary item                              302,672        353,540

Extraordinary item - litigation settlement (net of
income tax benefit of $83,179)                                     --        110,261
                                                         ------------   ------------

Net income                                               $    302,672        243,279
                                                         ============   ============

Per share data:
  Basic earnings per common share                        $       0.03           0.02
                                                         ============   ============

  Fully diluted earnings per common share                $       0.03           0.02
                                                         ============   ============

  Weighted average number of common shares outstanding     11,847,828     11,881,948
                                                         ============   ============
</TABLE>

        The accompanying notes are an integral part of these statements.

                                        4
<PAGE>

                           EPOLIN, INC. AND SUBSIDIARY

                        CONSOLIDATED STATEMENTS OF INCOME
                   THREE MONTHS ENDED AUGUST 31, 2004 AND 2003


                                                         2004           2003
                                                     ------------   ------------

Sales                                                $    840,579        680,718
                                                     ------------   ------------

Cost of sales and expenses:
  Cost of sales                                           238,767        204,839
  Selling, general and administrative                     212,901        196,937
                                                     ------------   ------------

     Total                                                451,668        401,776
                                                     ------------   ------------

Operating income                                          388,911        278,942
                                                     ------------   ------------

Other income:
  Rental income                                             9,000          6,000
  Interest                                                  1,782          1,435
                                                     ------------   ------------

     Total other income                                    10,782          7,435


Income before taxes                                       399,693        286,377

Income taxes                                              145,841         96,699
                                                     ------------   ------------

Income before extraordinary item                          253,852        189,678

Extraordinary item - litigation settlement (net of
income tax benefit of $83,179)                                 --        110,261
                                                     ------------   ------------

Net income                                           $    253,852         79,417
                                                     ============   ============

Per share data:
  Basic earnings per common share                    $       0.02           0.01
                                                     ============   ============

  Fully diluted earnings per common share            $       0.02           0.01
                                                     ============   ============

   Weighted average number of
     common shares outstanding                         11,847,828     11,881,948
                                                     ============   ============

        The accompanying notes are an integral part of these statements.

                                        5
<PAGE>

                           EPOLIN, INC. AND SUBSIDIARY

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

                    SIX MONTHS ENDED AUGUST 31, 2004 AND 2003

<TABLE>
<CAPTION>
                                               Additional      Retained
                                  Common        Paid-in-       Earnings       Treasury       Stockholders'
                                  Stock         Capital        Deficit          Costs           Equity
                               ------------   ------------   ------------    ------------    ------------
<S>                            <C>                   <C>          <C>            <C>            <C>
Balance - March 1, 2003        $  2,304,558          6,486        452,700        (188,777)      2,574,967

Common stock issued for
  stock option                       16,250             --             --              --          16,250

Dividends paid                           --             --       (237,107)             --        (237,107)

Treasury stock purchased                 --             --             --         (75,755)        (75,755)

Net income                               --             --        243,279              --         243,279
                               ------------   ------------   ------------    ------------    ------------

Balance - August 31, 2003      $  2,320,808          6,486        458,872        (264,532)      2,521,634
                               ============   ============   ============    ============    ============



Balance - March 1, 2004        $  2,333,933          6,486        570,120        (292,182)      2,618,357

Common stock issued for
  stock option                        3,125             --             --              --           3,125

Net income                               --             --        302,672              --         302,672
                               ------------   ------------   ------------    ------------    ------------

Balance - August 31, 2004      $  2,337,058          6,486        872,792        (292,182)      2,924,154
                               ============   ============   ============    ============    ============
</TABLE>

        The accompanying notes are an integral part of these statements.

                                        6
<PAGE>

                           EPOLIN, INC. AND SUBSIDIARY

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                    SIX MONTHS ENDED AUGUST 31, 2004 AND 2003


<TABLE>
<CAPTION>
                                                                    2004            2003
                                                                ------------    ------------
<S>                                                             <C>                  <C>
Cash flows from operating activities:
  Net income                                                    $    302,672         243,279
  Adjustments to reconcile net income to net cash provided by
   operating activities:
     Depreciation and amortization                                    16,214          14,871
     Deferred tax expense                                             10,847          57,184
     Obligation under deferred compensation agreement                 12,039         (95,587)
  (Increase) decrease in:
     Accounts receivable                                              (2,643)       (459,949)
     Inventories                                                     (64,691)        (57,706)
     Prepaid expenses                                                105,180         110,459
  Increase (decrease) in:
     Accounts payable                                                 14,788           1,689
     Accrued expenses                                                (64,998)        (60,258)
     Taxes payable                                                    14,112           1,416
                                                                ------------    ------------

        Net cash provided (used) by operating activities             343,520        (244,602)
                                                                ------------    ------------

Cash flows from investing activities:
  Increase in cash value - life insurance policy                     (31,518)        (15,827)
  Notes receivable                                                        --          14,139
  Payments for equipment                                             (39,628)        (58,793)
                                                                ------------    ------------

         Net cash used by investing activities                       (71,146)        (60,481)
                                                                ------------    ------------
</TABLE>

        The accompanying notes are an integral part of these statements.

                                        7
<PAGE>

                           EPOLIN, INC. AND SUBSIDIARY

                CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

                    SIX MONTHS ENDED AUGUST 31, 2004 AND 2003

<TABLE>
<CAPTION>
                                                                2004           2003
                                                            ------------   ------------
<S>                                                         <C>                 <C>
Cash flows from financing activities:
  Issuance of common stock                                         3,125         16,250
  Dividends paid                                                      --       (237,107)
  Treasury stock purchased                                            --        (75,755)
                                                            ------------   ------------

     Net cash provided (used) by financing activities              3,125       (296,612)
                                                            ------------   ------------

Increase (decrease) in cash                                      275,499       (601,695)

Cash and cash equivalents:
  Beginning                                                      547,930        969,477
                                                            ------------   ------------

  Ending                                                    $    823,429        367,782
                                                            ============   ============

Supplemental information:
  Income taxes paid                                         $    151,200        186,400
                                                            ============   ============
</TABLE>

        The accompanying notes are an integral part of these statements.

                                        8

<PAGE>

                           EPOLIN, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                            AUGUST 31, 2004 AND 2003



NOTE A - ORGANIZATION AND BASIS OF PRESENTATION:

     The Company is engaged in the development, production and sale of near
infrared dyes to the optical industry for laser protection and welding
applications and other dyes and specialty chemical products that serve as
intermediates and additives used in the adhesive, plastic, aerospace, credit
card security and protective documents industries to customers located in the
United States and throughout the world.

The Company's wholly owned Subsidiary, Epolin Holding, Corp., was incorporated
in New Jersey as a real estate holding company whose assets consist of land and
a building. Prior to being acquired on January 29, 1998, two
officers/stockholders of the Company controlled it.

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Cash and Cash Equivalents - Includes cash in bank and money market accounts for
purposes of preparing the Statement of Cash Flows.

Concentrations of Credit Risks - The Company and its Subsidiary had cash
deposits in a financial institution and brokerage house in excess of the amount
insured by agencies of the federal government in amounts of $752,004 and
$267,800 at August 31, 2004 and 2003, respectively. In evaluating this credit
risk, the Company periodically evaluates the stability of the financial
institution and brokerage house.

Inventories - Consists of raw materials, work in process, finished goods and
supplies valued at the lower of cost or market under the first-in, first-out
method.

Fair Value of Financial Instruments - The carrying amount of all reported assets
and liabilities, which represent financial instruments, approximate the fair
values of such amounts due to the nature of their relatively short maturity.

Plant, Property and Equipment - Stated at cost. Provisions for depreciation are
computed on the straight-line and declining balance methods, based upon the
estimated useful lives of the various assets.

The costs of major renewals and betterments are capitalized. Repairs and
maintenance are charged to operations as incurred. Upon disposition, the cost
and related accumulated depreciation are removed and any related gain or loss is
reflected in earnings.

Depreciation and amortization expense totaled $16,214 and $14,871 for the six
months ended August 31, 2004 and 2003, respectively.

                                        9
<PAGE>

                           EPOLIN, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 AUGUST 31, 2004



NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Principles of Consolidation - The accompanying Consolidated Financial Statements
include the accounts of the Company and Subsidiary. Intercompany transactions
and balances have been eliminated in consolidation. Condensed consolidating
financial statements for the six months ended August 31, 2004 are:

                      CONDENSED CONSOLIDATING BALANCE SHEET

<TABLE>
<CAPTION>
                                                         Epolin
                                         Epolin          Holding     Eliminations    Consolidated
                                      ------------    ------------   ------------    ------------
<S>                                   <C>                  <C>           <C>            <C>
Current assets                        $  2,102,185         214,157             --       2,316,342
Non-current assets                       1,246,697         545,475       (759,632)      1,032,540
                                      ------------    ------------   ------------    ------------
      Total                           $  3,348,882         759,632       (759,632)      3,348,882
                                      ============    ============   ============    ============

    Total liabilities                      424,728         180,492       (180,492)        424,728
                                      ------------    ------------   ------------    ------------

Stockholders' equity:
  Common stock                           2,337,058              --             --       2,337,058
  Additional paid-in capital                 6,486              --             --           6,486
  Retained earnings                        872,792         579,140       (579,140)        872,792
  Treasury stock                          (292,182)             --             --        (292,182)
                                      ------------    ------------   ------------    ------------

   Total stockholders' equity            2,924,154         579,140       (579,140)      2,924,154
                                      ------------    ------------   ------------    ------------

    Total                             $  3,348,882         759,632       (759,632)      3,348,882
                                      ============    ============   ============    ============

<CAPTION>

                   CONDENSED CONSOLIDATING STATEMENT OF INCOME

                                                         Epolin
                                         Epolin          Holding     Eliminations    Consolidated
                                      ------------    ------------   ------------    ------------
<S>                                   <C>                  <C>           <C>            <C>
Sales                                 $  1,304,302              --             --       1,304,302
Other revenue                                   --          66,870        (48,870)         18,000
                                      ------------    ------------   ------------    ------------
    Total                                1,304,302          66,870        (48,870)      1,322,302
                                      ------------    ------------   ------------    ------------

Cost of sales                              442,878              --             --         442,878
Selling, general and administrative        436,108           7,213        (48,870)        394,451
                                      ------------    ------------   ------------    ------------

    Total                                  878,986           7,213        (48,870)        837,329

Operating income                           425,316          59,657             --         484,973

Other income - interest                      2,142             924             --           3,066
                                      ------------    ------------   ------------    ------------

Income before taxes                        427,458          60,581             --         488,039

Income taxes                               179,917           5,450             --         185,367
                                      ------------    ------------   ------------    ------------

Net income                            $    247,541          55,131             --         302,672
                                      ============    ============   ============    ============
</TABLE>

                                       10

<PAGE>

                           EPOLIN, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                            AUGUST 31, 2004 AND 2003



NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued):

Income taxes - The Company accounts for income taxes under Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes", wherein
the asset and liability method is used in accounting for income taxes. Deferred
taxes are recognized for temporary differences between the basis of assets and
liabilities for financial statement and for income tax purposes. Temporary
differences relate primarily to different accounting methods used for
depreciation and amortization of property and equipment and deferred
compensation.

Stock Option Plans - The Company measures compensation cost for stock options
using the intrinsic value method of accounting as prescribed by Accounting
Principles Board Opinion (APB) Opinion No. 25, "Accounting for Stock Issued to
Employees." As permitted by FASB Statement of Financial Accounting Standards No.
123, and explained in Note G, compensation expense is recognized only to the
extent that the market price for stock options granted exceeds the exercise
price of the underlying common stock at the date of grant. As of August 31, 2004
market price in excess of exercise price of certain options was deemed
immaterial to the financial statements.

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

Revenue Recognition - Revenue is recorded on the accrual basis and is recognized
at the point of sale as products are shipped.

Source of Raw Materials - The Company purchases chemicals from several large
chemical manufacturers, further processing them into its saleable products.
Although the Company limits itself to a relatively small number of suppliers, it
is not restricted to such suppliers, and availability of such raw materials is
widespread.

Advertising Costs - Advertising costs, included in operating expenses, are
expensed as incurred. Advertising expenses amounted to $14,817 and $1,765 for
the six months ended August 31, 2004 and 2003, respectively.

Regulations - The Company expended approximately $9,713 to maintain compliance
with certain Federal and State and City government regulations relative to the
production of near infrared dyes and specialty chemicals.

Net Income Per Share - Basic net income per share is calculated on the basis of
the weighted average number of shares outstanding during the period, excluding
dilution. Diluted net income per share is computed on the basis of the weighted
average number of shares plus potentially dilutive common shares arising from
the assumed exercise of stock options.

                                       11
<PAGE>

                           EPOLIN, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                            AUGUST 31, 2004 AND 2003



NOTE C - ECONOMIC DEPENDENCY:

     A material portion of the Company's business is dependent on certain
domestic customers, the loss of which could have a material effect on
operations. During the six months ended August 31, 2004, approximately 53.8% of
sales were to three customers. Two of these customers, located in the Eastern
United States, accounted for 47.7% of sales. During the six months ended August
31, 2003, approximately 67.0% of sales were to four customers, three of these
customers, located in the Eastern United States, accounted for 58.6% of sales.

NOTE D - RENTAL INCOME UNDER SUBLEASE:

The Company entered into a sublease agreement with a non-related party effective
November 1, 2002 for a five-year term ending October 31, 2007. Under the terms
of the lease, the tenant is to pay a base rent of $36,000 per year. In addition,
the tenant is to reimburse the Company for all costs and expenses incurred by
the Company for improvements to such leased property in excess of $75,000. The
excess amount was recorded on the balance sheet as a note receivable. Payments
on the note were $2,500 a month including interest of 6% a year. The note was
paid in full as of August 31, 2003.

NOTE E - INVENTORIES:

                                             2004         2003
                                          ----------   ----------
         Raw materials and supplies       $   46,003       59,448
         Work in process                     279,588      119,596
         Finished goods                      496,867      507,974
                                          ----------   ----------

         Total                            $  822,458      687,018
                                          ==========   ==========


NOTE F - INCOME TAXES:
                                                            2004         2003
                                                         ----------   ----------
1. Federal and State deferred tax assets include:

     Temporary differences - principally from
       accelerated amortization of leasehold
       improvements for book purposes and
       deferred compensation                             $  222,280      228,192

     Current portion                                          1,376        1,376
                                                         ----------   ----------

     Non-current portion                                 $  220,904      226,816
                                                         ==========   ==========

                                       12
<PAGE>

                           EPOLIN, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                            AUGUST 31, 2004 AND 2003



NOTE F - INCOME TAXES (continued):

2.  Income tax expense:
                                                       2004          2003
                                                    ----------    ----------

    Current:
        Federal                                     $  135,200       157,780
        State                                           39,320        45,417
                                                    ----------    ----------

             Total current                             174,520       203,197
                                                    ----------    ----------

    Deferred:
        Federal                                          8,577         8,910
        State                                            2,270         2,000
                                                    ----------    ----------

             Total deferred                             10,847        10,910
                                                    ----------    ----------

                   Total                            $  185,367       214,107
                                                    ==========    ==========



NOTE G - EMPLOYEE BENEFITS:

Simplified Employee Pension Plan - Effective June 1, 1994, covering all eligible
participating employees as defined. Employer contributions totaled $19,469 and
$18,515 for the six months ended August 31, 2004 and 2003, respectively.

Incentive Compensation Plan - On December 1989, the Company approved the 1989
Incentive Compensation Plan for the purpose of attracting and retaining key
personnel. All employees of the Company are eligible to participate in the plan
whereby incentive bonuses are determined by the Board of Directors and payable
in shares of common stock. Shares issued are determined at fifty percent of the
closing bid price, vested, and delivered over a three-year period. During the
year ended February 28, 1999, 20,000 shares of common stock were issued covering
a previously awarded bonus to an employee on May 18, 1998.

                                       13
<PAGE>

                           EPOLIN, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                            AUGUST 31, 2004 AND 2003



NOTE G - EMPLOYEE BENEFITS (continued):

Employee Option Plan - The Company previously adopted The 1986 Stock Option
Plan. As of April 1996, under the terms of the Plan, options may no longer be
granted. On December 1, 1995, options to acquire up to 490,000 shares of the
Company's common stock were granted. Options exercised for all prior years
totaled 455,000. Options totaling 35,000 were cancelled in prior years. There
were no outstanding options as of August 31, 2004.

The Company adopted the 1998 Stock Option Plan on December 1, 1998. Under the
terms of the plan, the Company reserved 750,000 shares of common stock for
issuance pursuant to the exercise of options to be granted under the Plan, which
do not meet the requirements of Section 422 of the Code. On September 15, 2001,
the Board of Directors increased the reserve to 1,500,000. Options granted
expire five or ten years after the date granted and are subject to a vesting
period as follows: (1) none exercisable prior to the first anniversary of the
date of grant, and (2) each of the options will become exercisable as to 50% of
the shares underlying the option on each of the first and second anniversaries
of the date granted. Options exercised for all prior years totaled 575,000.
Options cancelled for all prior years totaled 75,000.

A summary of the status of the Company's 1998 stock option plan as of August 31,
2004, and the changes during the six months ended August 31, 2004 is presented
below:


                                                             Weighted-Average
Fixed Options:                                   Shares       Exercise Price
--------------                                 ----------     --------------
Balance - March 1, 2003                           367,500       $      .24
     Granted                                      162,000              .30
     Exercised                                   (137,500)             .25
                                               ----------

Balance - February 28, 2004                       392,000              .29
     Granted                                           --               --
     Exercised                                    (12,500)             .25
                                               ----------

Balance - August 31, 2004                         379,500       $      .29
                                               ==========


Exercisable at August 31, 2004                    217,500

                                       14
<PAGE>

                           EPOLIN, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                            AUGUST 31, 2004 AND 2003



NOTE G - EMPLOYEE BENEFITS (continued):

The following table summarizes information about fixed stock options outstanding
at August 31, 2004:

<TABLE>
<CAPTION>
              Outstanding Options                               Exercisable Options
---------------------------------------------------       ------------------------------
                    Number         Weighted-average         Number
Range of          Outstanding         Remaining           Exercisable    Weighted-average
Exercise Price    at 8/31/04       Contractual Life       at 8/31/04      Exercise Price
--------------    ----------       ----------------       ----------      --------------
<S>                  <C>              <C>                    <C>               <C>
     $.25            192,500          2.0 years              192,500           $ .25
      .30             25,000          3.3                     25,000             .30
      .35            162,000          9.4                         --             .35
</TABLE>


There are 458,000 options attributable to future grants.


NOTE H - TREASURY STOCK:

Consists of 863,645 shares as of August 31, 2004 at a net cost of $292,182.

The Company made no purchases of shares during the six months ended August 31,
2004.

NOTE I - RESEARCH AND DEVELOPMENT:

Amounts of $202,785 and $184,330 were included in cost of sales for the six
months ended August 31, 2004 and 2003, respectively. All costs were borne by the
Company.

NOTE J - ACQUISITIONS:

On January 29, 1998, the Company acquired 100% of stock in Epolin Holding Corp.

                                       15
<PAGE>

                           EPOLIN, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                            AUGUST 31, 2004 AND 2003



NOTE K - ENVIRONMENTAL MATTERS

The Company's past and present daily operations include activities, which are
subject to extensive federal, and state environmental and safety regulations.
Compliance with these regulations has not had, nor does the Company expect such
compliance to have, any material effect upon expected capital expenditures, net
income, financial condition or competitive position of the Company. The Company
believes that its current practices and procedures comply with applicable
regulations. The Company's policy is to accrue environmental and related costs
of a non-capital nature when it is both probable that a liability has been
incurred and that the amount can be reasonably estimated. No such amounts have
been accrued in these statements.


NOTE L - COMMITMENTS AND CONTINGENCIES:

Losses for contingencies such as litigation and environmental matters are
recognized in income when they are probable and can be reasonably estimated.
Gain contingencies are not recognized in income.

LEASE OBLIGATIONS:

The company leases its real estate under an operating lease with a related
party. The lease effective November 1, 1996 was for a term of five (5) years
with three (3) five (5) year options at annual rentals of $97,740. The Cost of
Living Index adjustment effective with the second year has been waived by the
subsidiary. Rent includes reimbursed insurance costs. Generally, management
expects that the lease will be renewed in the normal course of business.


Rental expense charged to operations, eliminated in consolidation, amounted to
$48,870 for the six months ended August 31, 2004 and 2003, respectively.

Future minimum payments for the current option period:

       Fiscal years ending February:
       -----------------------------
                    2005                        $48,870
                    2006                         97,740
                    2007                         97,740
                    2008                         97,740
                    2009                         65,160

                                       16
<PAGE>

                           EPOLIN, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                            AUGUST 31, 2004 AND 2003

NOTE L - COMMITMENTS AND CONTINGENCIES (continued):

Deferred Compensation - On December 29, 1995, the Company entered into a
deferred compensation agreement with an officer whose additional annual
compensation of $19,645 plus interest is deferred until he reaches age 65 or is
terminated. The obligation is being funded by a life insurance policy. Annual
payments to the officer of $32,000 for ten consecutive years shall commence the
first day of the month following his 65th birthday or termination.

On January 1, 1996, the Company entered into a deferred compensation agreement
with another officer wherein $25,000 per year was accrued. This agreement, with
unfunded accruals of $79,041 terminated on June 25, 1998, and will be paid upon
retirement in either equal consecutive monthly payments for a period not
exceeding sixty (60) months or a single payment equal to the then present value
of the account, said selection to be at the discretion of the Company.

Effective March 1, 1999, the Company adopted deferred compensation agreements
for two of its former employees. Under the term of the agreement, each employee
would receive one twenty sixth (1/26) of fifty percent (50%) of their annual
salary (excluding bonuses) as of the date of retirement. Each has a
death-vesting schedule. These agreements are no longer operative as a result of
the settlement of the lawsuit, which had been instituted by such two former
employees, the terms of which are detailed under Note N.

Deferred compensation of $12,040 was charged to operations for the six months
ended August 31, 2004 and 2003, respectively.


Employment Agreements - Effective March 1, 1999, the Company entered into
ten-year employment agreements with officers/directors:

      Murray S. Cohen, PhD, Chairman of the Board and Chief Executive Officer -
      To be paid an annual salary of not less than the greater of his annual
      base salary in effect immediately prior to the effective date of the
      agreement or any subsequently established annual base salary. He is to
      receive 2.00% on gross annual sales of no more than $3,000,000, effective
      with the year ended February 28, 2001, increasing by 0.25% a year during
      the term of the agreement.

      James Ivchenko, President - To be paid an annual salary of not less than
      the greater of his annual base salary in effect immediately prior to the
      effective date of the agreement or any subsequently established annual
      base salary. He is to receive 1.5% on gross annual sales of no more than
      $3,000,000, effective with the year ended February 28, 2001, increasing by
      0.25% a year during the term of the agreement.

                                       17
<PAGE>

                           EPOLIN, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                            AUGUST 31, 2004 AND 2003



NOTE M - STOCK DIVIDENDS:

In July 2003, the Company's Board of Directors declared a cash dividend of two
cents per share on all common shares outstanding. The dividend was paid on
August 29, 2003 to shareholders of record August 15, 2003. In February 2004, the
Company's Board of Directors declared a cash dividend of two cents per share on
all common shares outstanding. The dividend was paid on February 27, 2004 to
shareholders of record February 23, 2004.

NOTE N - EXTRAORDINARY ITEM:

In December 2000, two individuals (each a former director and former employee of
the Company) instituted suit in the Superior Court of New Jersey, Bergen
County-Law Division, against the Company and the other directors of the Company
alleging claims pursuant to their past employment as well as a derivative claim,
as minority stockholders. Such claims included breach of contract, civil rights,
age discrimination, wrongful termination, infliction of emotional distress and a
shareholder derivative claim. In June 2003, the Company executed an agreement,
which settled the lawsuit, and the action has been dismissed. The settlement
included a lump sum payment to the plaintiffs in the amount of $312,000. In
addition, the Company agreed to buy back 126,500 shares owned by one of the
plaintiffs for the aggregate amount of $69,575 ($0.55 per share) as treasury
stock. The Company has been reimbursed a portion of the settlement payments from
its insurance company in the amount of $118,560.

The lump sum payment resulted in an extraordinary loss of $110,261, net of
income tax benefit of $83,179.

                                       18