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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549





FORM 10-K

Annual report pursuant to section 13 OR 15(d)
of the Securities Exchange Act of 1934

For fiscal year ended
September 30, 2004

Commission File Number: 0-18933

Rochester Medical Corporation

Minnesota
    
    41-1613227State of Incorporation
    
    IRS Employer Identification No.


One Rochester Medical Drive
Stewartville, Minnesota 55976
Address of Principal Executive Offices

Telephone Number: (507) 533-9600

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

Securities Registered Pursuant to Section 12(g) of the Act:

Common Stock without par value



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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 has been
subject to such filing requirements for the past 90 days. Yes X No

Check if no disclosure of delinquent filers pursuant to Item 405 of Regulation
S-B is contained in this form, and no disclosure will be contained, to the best
of registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. X

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

The
issuers revenues for its most recent fiscal year were $15,011,419.

The
aggregate market value of voting stock held by non-affiliates based upon
the closing Nasdaq sale price on March 31, 2004 was $39,037,987.

Number
of shares outstanding on December 8, 2004 was 5,451,150 Common Shares.

DOCUMENTS INCORPORATED BY REFERENCE

Portions
of Registrants Proxy Statement for its January 20, 2005 Annual
Meeting of Shareholders are incorporated by reference in Part III.





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TABLE OF CONTENTS



|                                                      |                                                                                                         |  |  |  |  |  |  | 
|----------------------------------------------------- | ------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I                                               
|                                                      | ITEM 1. Business                                                                                       
|                                                      | ITEM 2. Properties                                                                                     
|                                                      | ITEM 3. Legal Proceedings                                                                              
|                                                      | ITEM 4. Submission of Matters to a Vote of Security Holders                                            
|PART II                                              
|                                                      | ITEM 5. Market for Registrants Common Equity and Related Stockholder Matters                          
|                                                      | ITEM 6. Selected Financial Data                                                                        
|                                                      | ITEM 7. Managements Discussion and Analysis of Financial Condition and Results of Operations          
|                                                      | ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk.                                   
|                                                      | ITEM 8. Financial Statements                                                                           
|                                                      | ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure           
|                                                      | ITEM 9A. Controls and Procedures                                                                       
|PART III                                             
|                                                      | ITEM 10. Directors and Executive Officers of the Registrant                                            
|                                                      | ITEM 11. Executive Compensation                                                                        
|                                                      | ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
|                                                      | ITEM 13. Certain Relationships and Related Transactions                                                
|                                                      | ITEM 14. Principal Accountant Fees and Services                                                        
|                                                      | ITEM 15. Exhibit and Financial Statement Schedules                                                     
|SIGNATURES                                           
|INDEX TO EXHIBITS                                    
|The Company's Fiscal 2005 Executive Compensation Plan
|Consent of Ernst & Young LLP                         
|EX-24 Power of Attorney                              
|Certification of CEO Pursuant to Section 302         
|Certification of CFO Pursuant to Section 302         
|Certification of CEO Pursuant to Section 906         
|Certification of CFO Pursuant to Section 906         



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PART I







ITEM 1. Business

Overview

Rochester Medical Corporation (the Company) develops, manufactures and
markets a broad line of innovative, technologically enhanced
latex-free and PVC free urinary
continence and urine drainage care products for the extended care and acute
care markets. The Companys extended care products include a line of male
external catheters for managing male urinary incontinence and a line of
intermittent catheters for managing both male and female urinary retention.
The extended care products also include the
FemSoft® Insert, a soft,
liquid-filled, conformable urethral insert for managing female stress urinary
incontinence in adult females. The Companys acute care products include a
line of standard Foley catheters and its RELEASE-NF® Catheter, an antibacterial
Foley catheter that reduces the incidence of hospital acquired urinary tract
infection (UTI). A small percentage of the Companys extended care products
also are used in the acute care market.

The
Company markets its products under its Rochester Medical®brand
through a direct sales force in the United States and independent distributors
in international markets. The Company also supplies its products to several
large medical product companies for sale under brands owned by these companies.

The Company makes its annual reports on Form 10-K, quarterly reports on
Form 10-Q and current reports on Form 8-K available free of charge through its
website, at www.rocm.com, as soon as reasonably practicable after it
electronically files such material with (or furnishes such material to) the
Securities and Exchange Commission. The information contained on the Companys
website is not incorporated by reference into this Annual Report on Form 10-K
and should not be considered to be part of this Form 10-K.

Extended Care Products

Male External Catheters. The Companys male external catheters are
self-care, disposable devices for managing male urinary incontinence. The
Company manufactures and markets four models of silicone male external
catheters: the UltraFlex®,
Pop-On®, Wide Band®and
Natural®catheters. The
UltraFlexcatheter has adhesive positioned midway down the catheter sheath.
The Pop-On catheter has a sheath that is shorter than that of a standard male
external catheter and has adhesive applied to the full length of the sheath.
It is designed to accommodate patients who require shorter-length external
catheters. The Companys Wide Bandself-adhering male external catheter has an
adhesive band which extends over the full length of the sheath, providing
approximately 70% more adhesive coverage than other conventional male external
catheters. The full length and forward placement of the Wide Bandadhesive is
designed to reduce adhesive failure and the resulting leakage, which is a
common complaint among users of male external catheters. The Naturalcatheter
is a non-adhesive version of the Companys male external catheter.





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All models of the Companys male external catheters are produced in five
sizes for better patient fit. The Companys male external catheters are made
from silicone, a non-toxic and biocompatible material that eliminates the risks
of latex-related skin irritation. Silicone catheters are also odor free and
have greater air permeability than catheters made from other materials,
including latex. Air permeability reduces skin irritation and damage from
catheter use and thereby increases patient comfort. The Companys silicone
catheters are transparent, permitting visual skin inspection without removal of
the catheters and aiding proper placement of the catheters. The Companys
catheters also have a kink-proof funnel design to ensure uninterrupted urine
flow. The self-adhering technology and patented forward-placement of the
adhesive simplifies application of the catheters and provides a strong bond to
the skin for greater patient confidence and improved wear.

The Company also manufactures and sells male external catheters made from
a proprietary non-latex, non-silicone material to certain private label
customers. Certain of these catheters use the same self-adhesive technology as
the Companys silicone male external catheters. Like the silicone male
external catheters, these non-silicone catheters eliminate the risk of latex
reactions and latex-related skin irritations. The non-silicone catheters also
are odor free.

Intermittent Catheters. The Companys Personal Catheters®are a line of
disposable intermittent catheters manufactured from silicone. The Company
produces the Personal Cathetersin three lengths for male, female, and
pediatric use and in multiple diameters. The Company produces four distinct
versions of the Personal Catheter: the basic Standard Personal Catheter, the
Antibacterial Personal Catheter, the Hydrophilic Personal
Catheter and the Antibacterial HydroPersonal Catheter. The
Antibacterial Personal Catheterprovides site-specific delivery of
nitrofurazone, a drug that has been proven effective in reducing urinary tract
infections. The Hydrophilic Personal Catheterbecomes extremely slippery when
moistened, providing a very low friction surface for ease and comfort during
insertion and removal. The Antibacterial HydroPersonal
Catheter combines these innovations to offer the most advanced
intermittant catheter technology available today. All of the Personal Catheterdesigns are latex-free and
PVC-free, eliminating the allergen, toxin or disposal concerns commonly
associated with latex and PVC catheters.

FemSoft Insert. The FemSoft Insertis a disposable device for the
management of stress urinary incontinence in active women. It is a soft,
conformable urethral insert that assists the female urethra and bladder neck to
control the involuntary loss of urine. The device can be simply inserted, worn
and removed for voiding by most women. It requires no inflation, deflation,
syringes or valving mechanisms.

The FemSoft Insertis a minimally invasive device that provides a patient
with effective control of her urinary function and eliminates the need for pads
or liners that can cause embarrassment, restrict mobility and compromise
lifestyle. In addition, the soft, liquid-filled silicone membrane of the
FemSoft Inserthas been designed to conform to anatomical variations of the
urethra and follow the movements of the urethra during normal activities,
thereby reducing leakage without chafing or abrasion of the delicate tissues of
the urethra.

The FemSoft Insertis a prescription device that requires a woman to visit
her physician. The physician will fit the patient with the proper size and
instruct the patient on proper application of the FemSoft Insert.

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Acute Care Products

Foley Catheters. The Companys RELEASE-NF Catheteris a silicone Foley
catheter that has been designed to reduce the incidence of hospital acquired
UTI. Using patented technology, the RELEASE-NF Catheterincorporates
nitrofurazone, an effective broad-spectrum antibacterial agent, into the
structure of the catheter, permitting sustained release of a controlled dosage
directly into the urinary tract to retard the onset of infection.

The Company also offers standard silicone Foley catheters in a two-lumen
version for urinary drainage management and in a three-lumen version
that also supports
irrigation of the urinary tract. These Foley catheters are available in all
adult and pediatric sizes. All of the Companys silicone Foley catheters
eliminate the risk of the allergic reactions and tissue irritation and damage
associated with latex Foley catheters. The Companys standard Foley catheters are
transparent which enables healthcare professionals to observe urine flow.
Unlike the manufacturing processes used by producers of competing silicone
Foley catheters, in which the balloon is made separately and attached by hand
in a separate process involving gluing, the Companys automated manufacturing
processes allow the Company to integrate the balloon into the structure of the
Foley catheter, resulting in a smoother, more uniform exterior that may help
reduce irritation to urinary tissue.

The Companys
Foley catheters are packaged sterile in single catheter
strips or in procedural trays and sold under the Rochester Medicalbrand and under private label
arrangements. In addition, the Company sells its Foley catheters in bulk under
private label arrangements for packaging in kits with tubing, collection bags
and other associated materials.

Technology

The Company uses proprietary, automated manufacturing technologies and
processes to manufacture continence care devices cost effectively. The
production of the Companys products also depends on its materials expertise
and know-how in the formulation of silicone and advanced polymer products. The
Companys proprietary liquid encapsulation technology enables it to manufacture
innovative products, such as its FemSoft Insert, that have soft, conformable,
liquid-filled reservoirs, which cannot be manufactured using conventional
technologies. Using this liquid encapsulation technology, the Company can mold
and form liquid encapsulated devices in a variety of shapes and sizes in an
automated process. The Companys manufacturing technologies and materials
know-how also allow the Company to incorporate a sustained release
antibacterial agent into its products. The Company believes that its
manufacturing technology is particularly well-suited to high unit volume
production and that its automated processes enable cost-effective production.
The Company further believes that its manufacturing and materials expertise,
particularly its proprietary liquid encapsulation technology, may be applicable
to a variety of other devices for medical applications. The Company plans to
consider, commensurate with its financial and personnel resources, future
research and development activities to investigate opportunities provided by
the Companys technology and know-how.

The Company believes that its proprietary manufacturing processes,
materials expertise, custom designed equipment and technical know-how allow it
to simplify and further automate

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traditional catheter manufacturing techniques to reduce the Companys
manufacturing costs. In order to manufacture high quality products at
competitive costs, the Company concurrently designs and develops new products
and the processes and equipment to manufacture them.

Marketing and Sales

To date, the majority of the Companys revenues have been derived from
sales of its male external catheters and standard Foley catheters to medical
products companies for resale under brands owned by such companies. Private
label arrangements are likely to continue to account for a significant portion
of the Companys revenues in the foreseeable future, particularly in
international markets where the Company does not maintain a direct sales
presence.

The Company sells its products in the United States under the Rochester
Medicalbrand name through a six-person direct sales force. The primary
markets for the Companys products are distributors, extended care facilities
and individual hospitals and healthcare institutions.

The Company relies on arrangements with medical product companies and
independent distributors to sell the Companys products in Europe and other
international markets. These arrangements are conducted under the Rochester
Medicalbrand name and under brands controlled by the medical product
companies.

Manufacturing

The Company designs and builds custom equipment to implement its
manufacturing technologies and processes. The Companys manufacturing
facilities are located in Stewartville, Minnesota. The Company produces its
Foley catheters on one production line and its male external catheters on other
lines. The Company has constructed a separate manufacturing facility to house
its liquid encapsulation manufacturing operations, and has installed the
FemSoft Insertand intermittent catheter manufacturing line in this facility.

The Company maintains a comprehensive quality assurance and quality
control program, which includes documentation of all material specifications,
operating procedures, equipment maintenance and quality control test methods.
The Company has obtained ISO 13485 certification for its Foley catheter, male external catheter, intermittent
catheter and FemSoft Insertproduction lines.

The Companys manufacturing facility has been designed to accommodate the
specialized requirements for the manufacture of medical devices, including the
Food and Drug Administrations (FDA) requirements for Quality System
Regulation (QSR).

Sources of Supply

The Company obtains certain raw materials and components for a number of
its products from a sole supplier or limited number of suppliers. The loss of
such a supplier or suppliers, or a material interruption of deliveries from
such a supplier or suppliers, could have a material adverse effect on the
Company. The Company believes that in most, if not all, cases the Company has
identified other potential suppliers. In the event that the Company had to
replace a supplier, however, the Company may be required to repeat
biocompatibility and other testing of
its products using the material from the new supplier and may be required
to obtain additional regulatory clearances.

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Research and Development

The Company believes that its ability to add new products to its existing
continence care product lines is important to the Companys future success.
Accordingly, the Company is engaged in ongoing research and development to
develop and introduce new products which provide additional features and
functionality. In the future, consistent with market opportunities and the
Companys financial and personnel resources, the Company intends to perform
clinical studies for other of its products in development.

Research
and development expense for fiscal years 2004, 2003 and 2002 was
$706,000, $875,000 and $835,000, respectively.

Competition

The continence care market is highly competitive. The Company believes
that the primary competitive factors include price, product quality, technical
capability, breadth of product line and distribution capabilities. The
Companys ability to compete is affected by its product development and
innovation capabilities, its ability to obtain regulatory clearances, its
ability to protect the proprietary technology of its products and manufacturing
processes, its marketing capabilities, and its ability to attract and retain
skilled employees, to maintain current distribution relationships, to establish
new distribution relationships and to secure participation in purchase
contracts with group purchasing organizations. The Company believes that it is
important for the Company to differentiate its products and broaden
its product lines in order to attract
large customers, such as distributors, dealers, institutions and home care
organizations.

The Companys products compete with a number of alternative products and
treatments for continence care. The Companys ability to compete with these
alternative methods for urinary continence care depends on the relative market
acceptance of alternative products and therapies and the technological advances
in these alternative products and therapies. Any development of a broad-based
and effective cure for a significant form of incontinence could have a material
adverse effect on sales of continence care devices such as the Companys
products.

The Company competes directly for sales of continence care devices under
the Companys own brand with larger, multi-product medical device manufacturers
and distributors such as C.R. Bard, Inc., Euromedical, Unomedical, Kendall Healthcare
Products Company, Hollister, Mentor, Astra Tech AB and Coloplast. Many of the
competitive alternative products or therapies to the Companys products are
distributed by larger competitors including Johnson & Johnson Personal Products
Company, Kimberly-Clark Corporation and Proctor & Gamble Company (for adult
diapers and absorbent pads), and C.R. Bard, Inc. (for injectable materials).
Many of the Companys competitors, potential competitors and providers of
alternative products or therapies have significantly greater financial,
manufacturing, marketing, distribution and technical resources and experience
than the Company. It is possible that other large healthcare and consumer
products companies may enter this market in the future. Furthermore, academic

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institutions, governmental agencies and other public and private research
organizations will continue to conduct research, seek patent protection and
establish arrangements for commercializing products in this market. Such
products may compete directly with products which may be offered by the
Company.

Patents and Proprietary Rights

The Companys success may depend in part on its ability to obtain patent
protection for its products and manufacturing processes, to preserve its trade
secrets and to operate without infringing the proprietary rights of third
parties. The Company may seek patents on certain features of its products and
technology based on the Companys analysis of various business considerations,
such as the cost of obtaining a patent, the likely scope of patent protection
and the benefits of patent protection relative to relying on trade secret
protection. The Company also relies upon trade secrets, know-how and
continuing technological innovations to develop and maintain its competitive
position.

The Company owns 19 United States patents and a number of corresponding
foreign patents that generally relate to certain of the Companys catheters and
devices and certain of the Companys production processes. In addition, the
Company owns a number of pending United States and corresponding foreign patent
applications. The Company may file additional patent applications for certain
of the Companys current and proposed products and processes in the future.

There can be no assurance that the Companys patents will be of sufficient
scope or strength to provide meaningful protection of the Companys products
and technologies. The coverage sought in a patent application can be denied or
significantly reduced before the patent is issued. In addition, there can be
no assurance that the Companys patents will not be challenged, invalidated or
circumvented or that the rights granted thereunder will provide proprietary
protection or commercial advantage to the Company.

Should attempts be made to challenge, invalidate or circumvent the
Companys patents in the United States Patent and Trademark Office and/or
courts of competent jurisdiction, including administrative boards or tribunals,
the Company may have to participate in legal or quasi-legal proceedings
therein, to maintain, defend or enforce its rights in these patents. Any legal
proceedings to maintain, defend or enforce the Companys patent rights can be
lengthy and costly, with no guarantee of success. There also can be no
assurance that the Company will file additional patent applications or that
additional patents will issue from the Companys pending patent applications.

A claim by third parties that the Companys current products or products
under development allegedly infringe their patent rights could have a material
adverse effect on the Company. The Company is aware that others have obtained
or are pursuing patent protection for various aspects of the design, production
and manufacturing of continence care products. The medical device industry is
characterized by frequent and substantial intellectual property litigation,
particularly with respect to newly developed technology. Intellectual property
litigation is complex and expensive, and the outcome of such litigation is
difficult to predict. Any future litigation, regardless of outcome, could
result in substantial expense to the Company

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and significant diversion of the efforts of the Companys technical and
management personnel. An adverse determination in any such proceeding could
subject the Company to significant liabilities to third parties, require
disputed rights to be licensed from such parties, if licenses to such rights
could be obtained, and/or require the Company to cease using such technology.
There can be no assurance that if such licenses were obtainable, they would be
obtainable at costs reasonable to the Company. If forced to cease using such
technology, there can be no assurance that the Company would be able to develop
or obtain alternate technology. Additionally, if third party patents
containing claims affecting the Companys technology are issued and such claims
are determined to be valid, there can be no assurance that the Company would be
able to obtain licenses to such patents at costs reasonable to the Company, if
at all, or be able to develop or obtain alternate technology. Accordingly, an
adverse determination in a judicial or administrative proceeding or failure to
obtain necessary licenses could prevent the Company from manufacturing, using
or selling certain of its products, which could have a material adverse effect
on the Companys business, financial condition and results of operations.

There also can be no assurance that any third party does not currently
have, has not applied for, or might not in the future apply for, additional
patents in the United States or abroad which, if ultimately granted, might be
infringed in such country by any of the Companys products as currently
configured or any other product of the Company and provide the basis for an
infringement action in such country against the Company.

The Company also relies on proprietary manufacturing processes and
techniques, materials expertise and trade secrets applicable to the manufacture
of its products. The Company seeks to maintain the confidentiality of this
proprietary information. There can be no assurance, however, that the measures
taken by the Company will provide the Company with adequate protection of its
proprietary information or with adequate remedies in the event of unauthorized
use or disclosure. In addition, there can be no assurance that the Companys
competitors will not independently develop or otherwise gain access to
processes, techniques or trade secrets that are similar or superior to the
Companys. Finally, as with patent rights, legal action to enforce trade
secret rights can be lengthy and costly, with no guarantee of success.

Government Regulation

The manufacture and sale of the Companys products are subject to
regulation by numerous governmental authorities, principally the FDA and
corresponding foreign agencies. In the United States, the medical devices
manufactured and sold by the Company are subject to laws and regulations
administered by the FDA, including regulations concerning the prerequisites to
commercial marketing, the conduct of clinical investigations, compliance with
QSR and labeling.

A manufacturer may seek from the FDA market authorization to distribute a
new medical device by filing a 510(k) Premarket Notification (510(k)) to
establish that the device is substantially equivalent to medical devices
legally marketed in the United States prior to the Medical Device Amendments of
1976. A manufacturer may also seek market authorization for a new medical
device through the more rigorous Premarket Approval (PMA) application
process, which requires the FDA to determine that the device is safe and
effective for the purposes intended.

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The Company received FDA marketing authorization for its FemSoft Inserton
September 30, 1999 pursuant to a PMA. As a condition of FDA approval of the
Companys PMA filing based on interim clinical study results, the Company was
required to complete its most recent clinical study of the FemSoft Insertand
submit the additional data to the FDA for its further consideration to
determine whether such approval should be continued. The Company completed its
latest clinical study in fiscal 2003 and submitted the additional data to the
FDA. The Company is in the process if responding to comments from the
FDA. There can be no assurance that
these additional data will be sufficient in the FDAs opinion to permit
continued marketing of the device even though the PMA filing for the FemSoft
Insertwas initially approved by the FDA. All of the Companys other marketed
products have received FDA marketing authorization pursuant to 510(k)
notifications.

The Company is also required to register with the FDA as a medical device
manufacturer. As such, the Companys manufacturing facilities are inspected on
a routine basis for compliance with QSR. These regulations require that the
Company manufacture its products and maintain its documents in a prescribed
manner with respect to design, manufacturing, testing and quality control
activities. As a medical device manufacturer, the Company is further required
to comply with FDA requirements regarding the reporting of adverse events
associated with the use of its medical devices, as well as product malfunctions
that would likely cause or contribute to death or serious injury if the
malfunction were to recur. FDA regulations also govern product labeling and
can prohibit a manufacturer from marketing an approved device for unapproved
applications. If the FDA believes that a manufacturer is not in compliance
with the law, it can institute enforcement proceedings to detain or seize
products, issue a recall, enjoin future violations and assess civil and
criminal penalties against the manufacturer, its officers and employees.

The Company may become subject to future legislation and regulations
concerning the manufacture and marketing of medical devices. Such future
legislation and regulations could increase the cost and time necessary to begin
marketing new products and could affect the Company in other respects not
currently foreseeable. The Company cannot predict the effect of possible
future legislation and regulations.

Sales of medical devices outside the United States are subject to foreign
regulatory requirements that vary widely from country to country. These laws
and regulations range from simple product registration requirements in some
countries to complex clearance and production controls in others. As a result,
the processes and time periods required to obtain foreign marketing approval
may be longer or shorter than those necessary to obtain FDA approval. These
differences may affect the efficiency and timeliness of international market
introduction of the Companys products. For countries in the European Union
(EU), medical devices must display a CE mark before they may be imported or
sold. In order to obtain and maintain the CE mark, the Company must comply
with the Medical Device Directive and pass an initial and annual facilities
audit inspections to ISO 9001 by an EU inspection agency. The Company has
obtained ISO 13485 quality system certification for the products
its currently manufactures. In order to maintain certification, the Company is
required to pass annual facilities audit inspections conducted by EU
inspectors.

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In addition, international sales of medical devices manufactured in the
United States that have not been approved by the FDA for marketing in the
United States are subject to FDA export requirements. These require that the
Company obtain documentation from the medical device regulatory authority of
the destination country stating that sale of the medical device is not in
violation of that countrys medical device laws, and, under some circumstances,
may require the Company to apply to the FDA for permission to export a device
to that country.

Third Party Reimbursement

In the United States, healthcare providers that purchase medical devices
generally rely on third party payors, such as Medicare, Medicaid, private
health insurance plans and managed care organizations, to reimburse all or a
portion of the cost of the devices. The Medicare program is funded and
administered by the federal government, while the Medicaid program is jointly
funded by the federal government and the states, which administer the program
under general federal oversight. The Company believes its currently marketed
products, including the RELEASE-NF Catheter, are generally eligible for
coverage under these third party reimbursement programs. In some
instances, the Company has
received Medicare reimbursement for the FemSoft Insert, and several private
health insurance plans also offer this reimbursement. The competitive position
of certain of the Companys products may be partially dependent upon the extent
of reimbursement for its products.

The federal government and certain state governments continually consider
various proposals to reform the Medicare and Medicaid health care reimbursement
system. The Company is unable to evaluate what legislation may be drafted and
whether or when any such legislation will be enacted and implemented. Certain
of the proposals, if adopted, could have an adverse effect on the Companys
business, financial condition and results of operations.

In foreign countries, the policies and procedures for obtaining third
party payment of reimbursement for medical devices vary widely. Compliance
with such procedures may delay or prevent the eligibility of the Companys
branded and/or private label products for reimbursement, and have an adverse
effect on the Companys ability to sell its branded or private label products
in a particular foreign country.

Private Label Distribution Agreements

The Company supplies a number of medical product companies with products
on a private label basis. The Companys practice has been to enter into
written agreements with these distributors of the Companys products.

In two instances to date, the Company has entered into agreements with
distributors providing for certain exclusive marketing and distribution rights.
In fiscal 2002, the Company entered into an agreement with Coloplast granting
Coloplast exclusive marketing and distribution rights with respect to the
Companys Release-NFFoley catheters in certain geographic areas. In addition,
during the fiscal quarter ended September 30, 2003, the Company entered into an
agreement granting to another distributor exclusive marketing and distribution
rights in certain geographic areas with respect to the Companys hydrophilic
intermittent catheters.

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Employees

As of
September 30, 2004, the Company employed 170 full-time employees, of
whom 140 were in manufacturing, and the remainder in marketing and sales,
research and development and administration. The Company is not a party to any
collective bargaining agreement and believes its employee relations are good.

Executive Officers of the Registrant

The
executive officers of the Company as of December 1, 2004 are as follows:

Name
    
    Age
    
    PositionAnthony J. Conway
    
    
    60
    
    
    Chairman of the Board, Chief Executive Officer,President and SecretaryDavid A. Jonas
    
    
    40
    
    
    Chief Financial Officer and TreasurerPhilip J. Conway
    
    
    48
    
    
    Vice President, Production TechnologiesDara Lynn Horner
    
    
    46
    
    
    Vice President, MarketingMartyn R. Sholtis
    
    
    45
    
    
    Corporate Vice President


Anthony J. Conway, a founder of the Company, has served as Chairman of the
Board, Chief Executive Officer, President and Secretary of the Company since
May 1988. In addition to his duties as Chief Executive Officer, Mr. Anthony
Conway actively contributes to the Companys research and development and
design activities. From 1979 to March 1988, he was President, Secretary and
Treasurer of Arcon Corporation (Arcon), a company that he co-founded in 1979
to develop, manufacture and sell latex-based male external catheters and
related medical devices. Prior to founding Arcon, Mr. Anthony Conway worked
for twelve years for International Business Machines Corporation (IBM) in
various research and development capacities. Mr. Anthony Conway is one of the
named inventors on numerous patent applications that have been assigned to the
Company, of which to date 19 have resulted in issued United States patents and
32 have resulted in issued foreign patents.

David A. Jonashas served as the Companys Treasurer since November 2000
and as its Chief Financial Officer since May 2001. From June 1, 1998 until May
2001, Mr. Jonas served as the Companys Controller. From August 1999 until
October 2001, Mr. Jonas served as the Companys Director of Operations and had
principal responsibility for the Companys operational activities. Since
November 2000, Mr. Jonas has had principal responsibility for the Companys
financial activities. Prior to joining the Company, Mr. Jonas was employed in
various financial, financial management and operational management positions
with Polaris Industries, Inc. from January 1989 to June 1998. Mr. Jonas holds
a BS degree in Accounting from the University of Minnesota and is a certified
public accountant.

Philip J. Conway, a founder of the Company, has served as Vice President
of Production Technologies of the Company since August 1999 and as a Director
of the Company since May 1988. From 1988 to July 1999, Mr. Philip Conway
served as Vice President of Operations of the Company. Mr. Philip Conway is
responsible for plant design as well as new product and production processes,
research, design and development activities. Since November 2001, he

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has had principal responsibility for the Companys operational activities.
From 1979 to March 1988, Mr. Philip Conway served as Plant and Production
Manager of Arcon, a company that he co-founded. Prior to joining Arcon, Mr.
Philip Conway was employed in a production supervisory capacity by AFC Corp., a
manufacturer and fabricator of fiberglass, plastics and other composite
materials. He is one of the named inventors on numerous patent applications
that have been assigned to the Company, of which to date 19 have resulted in
issued United States patents and 32 have resulted in issued foreign patents.

Dara Lynn Hornerjoined the Company in November 1998 and serves as the
Companys Vice President of Marketing. From November 1998 until November 1999,
Ms. Horner served as Marketing Director for the Companys FemSoft Insert
product line. Ms. Horner has principal responsibility for management of the
Companys marketing activities. From 1990 until joining the Company in 1998,
Ms. Horner was employed by Lake Region Manufacturing, Inc., a medical device
manufacturer, most recently as Marketing Director.

Martyn R. Sholtisjoined the Company in April 1992 and serves as the
Companys Corporate Vice President. Mr. Sholtis is responsible for all
sales and for corporate business development
activities. From 1985 to 1992 Mr. Sholtis was employed by Sherwood Medical, a
company that manufactured and sold a variety of disposable medical products
including urological catheters, most recently as Regional Sales Manager for the
Nursing Care Division.

Messrs. Anthony J. Conway, Philip J. Conway and Peter R. Conway, a
director of the Company, are brothers.







ITEM 2. Properties

The Companys administrative offices and liquid encapsulation
manufacturing facilities occupy a 66,000 square foot manufacturing and office
facility on a 33 acre site owned by the Company and located in an industrial
park in Stewartville, Minnesota. The Companys male external and Foley
catheter manufacturing facilities consists of a 34,000 square foot
manufacturing and office building located on a nearby 3.5 acre site owned by
the Company in the same industrial park.







ITEM 3. Legal Proceedings

The Company is plaintiff in a lawsuit titled Rochester Medical Corporation
vs. C.R. Bard, Inc.; Tyco International (US), Inc.; Tyco Health Care Group,
L.P.; Novation LLC; VHA, Inc.; Premier, Inc.; and Premier Purchasing Partners,
in the United States District Court for the Eastern District of Texas, Civil
Action No. 504-CV-060. This suit alleges anti-competitive conduct against the
defendants in the markets for standard and anti-infection Foley catheters as
well as urethral catheters, and seeks an unspecified amount of damages and
injunctive and other relief. The litigation is in the early stages of
discovery, and the Company cannot now estimate the prospects for a favorable
outcome.

The
Company is not involved in any other material legal proceedings.

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ITEM 4. Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of security holders during the fourth
quarter ended September 30, 2004.







PART II







ITEM 5. Market for Registrants Common Equity and Related Stockholder Matters

The Common Stock is quoted on the Nasdaq National Market under the symbol
ROCM. The following table sets forth, for the periods indicated, the range of
high and low last sale prices for the Common Stock as reported by the Nasdaq
National Market.

High
    
    LowFiscal 2003First Quarter
    
    $
    8.70
    
    
    $
    5.94Second Quarter
    
    
    11.00
    
    
    
    7.90Third Quarter
    
    
    12.30
    
    
    
    9.90Fourth Quarter
    
    
    11.84
    
    
    
    10.06Fiscal 2004First Quarter
    
    $
    12.58
    
    
    $
    8.85Second Quarter
    
    
    10.42
    
    
    
    9.13Third Quarter
    
    
    10.00
    
    
    
    7.64Fourth Quarter
    
    
    9.76
    
    
    
    7.90


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Holders

As of
December 8, 2004, the Company had 151 shareholders of record. Such
number of record holders does not reflect shareholders who beneficially own
Common Stock in nominee or street name.

Dividends

The Company has paid no cash dividends on its Common Stock, and it does
not intend to pay cash dividends on its Common Stock in the future.







ITEM 6. Selected Financial Data

The following selected financial data of the Company as of September 30,
2004 and 2003 and for the three fiscal years ended September 30, 2004, 2003 and 2002 are derived from, and should be read together with, the financial
statements of the Company audited by Ernst & Young LLP, independent auditors,
included elsewhere in this Form 10-K. The following selected financial data as
of September 30, 2002, 2001 and 2000 and for the fiscal years ended

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September 30, 2001 and 2000 are derived from audited financial statements
not included herein. The information set forth below should be read in
conjunction with Managements Discussion and Analysis of Financial Condition
and Results of Operations, the Financial Statements and Notes thereto and
other financial information included elsewhere in this Form 10-K.

Fiscal Years Ended September 30,2004
    
    2003
    
    2002
    
    2001
    
    2000(in thousands, except per share data)Statements of Operations Data:Net sales
    
    $
    15,011
    
    
    $
    14,655
    
    
    $
    11,076
    
    
    $
    8,302
    
    
    $
    7,860Cost of sales
    
    
    9,615
    
    
    
    9,574
    
    
    
    7,888
    
    
    
    6,304
    
    
    
    6,151Gross profit
    
    
    5,396
    
    
    
    5,081
    
    
    
    3,188
    
    
    
    1,998
    
    
    
    1,709Operating expenses:Marketing and selling
    
    
    2,176
    
    
    
    2,225
    
    
    
    2,196
    
    
    
    2,545
    
    
    
    4,589Research and development
    
    
    706
    
    
    
    875
    
    
    
    835
    
    
    
    1,062
    
    
    
    1,008General and administrative
    
    
    1,857
    
    
    
    1,809
    
    
    
    1,763
    
    
    
    1,730
    
    
    
    2,238Total operating expenses
    
    
    4,739
    
    
    
    4,909
    
    
    
    4,794
    
    
    
    5,337
    
    
    
    7,835Income
(Loss) from operations
    
    
    657
    
    
    
    172
    
    
    
    (1,606
    )
    
    
    (3,339
    )
    
    
    (6,126
    )Interest income, net
    
    
    90
    
    
    
    158
    
    
    
    212
    
    
    
    384
    
    
    
    595Net income
(Loss)
    
    $
    747
    
    
    $
    330
    
    
    $
    (1,394
    )
    
    $
    (2,995
    )
    
    $
    (5,531
    )Net income
(Loss) per common
share  basic
    
    $
    .14
    
    
    $
    .06
    
    
    $
    (.26
    )
    
    $
    (.55
    )
    
    $
    (1.04
    )Net income
(Loss) per common
share  diluted
    
    $
    .13
    
    
    $
    .06
    
    
    $
    (.26
    )
    
    $
    (.55
    )
    
    $
    (1.04
    )Weighted average number of common
shares outstanding  basic
    
    
    5,434
    
    
    
    5,380
    
    
    
    5,329
    
    
    
    5,339
    
    
    
    5,341Weighted average number of common
shares outstanding  diluted
    
    
    5,687
    
    
    
    5,654
    
    
    
    5,329
    
    
    
    5,339
    
    
    
    5,341


As of September 30,2004
    
    2003
    
    2002
    
    2001
    
    2000(in thousands, except per share data)Balance Sheet Data:Cash, cash equivalents and
marketable securities
    
    $
    5,872
    
    
    $
    5,966
    
    
    $
    4,464
    
    
    $
    5,748
    
    
    $
    8,859Working capital



    
    
    11,119
    

    
    
    10,398
    
    
    
    8,523
    
    
    
    8,319
    
    
    
    10,329Total assets


    
    
    21,384
    



    
    
    21,125
    
    
    
    19,636
    
    
    
    19,659
    
    
    
    23,254Long-term debt and leases
    
    
    172
    
    
    
    267
    
    
    
    
    
    
    
    
    
    
    
    Accumulated deficit
    
    
    (22,979
    )
    
    
    (23,726
    )
    
    
    (24,056
    )
    
    
    (22,661
    )
    
    
    (19,706
    )Total shareholders equity
    
    $
    18,888
    
    
    $
    18,142
    
    
    $
    17,144
    
    
    $
    18,455
    
    
    $
    21,573


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ITEM 7. Managements Discussion and Analysis of Financial Condition and Results of Operations

Statements other than historical information contained herein constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements may be
identified by the use of terminology such as may, will, expect,
anticipate, predict, intend, designed, estimate, should or
continue or the negatives thereof or other variations thereon or comparable
terminology. The forward-looking statements involve known or unknown risks,
uncertainties and other factors which may cause the actual results, performance
or achievements of the Company, or industry results, to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Factors that might cause such differences
include, but are not limited to, those discussed in the section entitled Risk
Factors below. Readers are cautioned not to place undue reliance on the
forward-looking statements, which reflect managements opinion only as of the
date hereof. The Company undertakes no obligation to revise or publicly
release the results of any revisions to these forward-looking statements.

Overview

Rochester
Medical Corporation develops, manufactures and markets a broad line
of innovative, technologically enhanced latex-free and PVC free
urinary continence and urine drainage care products for the extended
care and acute care markets. The Companys products are
comprised of its base products, which include its male external
catheters and standard silicone Foley catheters, and its advanced
products, which include its intermittent catheters, its
anti-infection Foley catheters and its FemSoft Insert. The
Company markets its products under its Rochester
Medical®
brand, and also supplies its products to several large medical
product companies for sale under brands owned by these companies,
which are referred to as private label sales. The Company sells its
products both in the domestic market and internationally.

Application of Critical Accounting Policies

Managements Discussion and Analysis of Financial Condition and Results of
Operations addresses the Companys financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires that the
Company make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. On an on-going basis, the Company
evaluates these estimates and judgments. The Company bases its estimates and
judgments on historical experience and on various other factors that are
believed to be reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying value of assets and
liabilities that are not readily apparent from other sources. Actual results
may differ from these estimates under different assumptions or conditions.

The Company believes the following critical accounting policies, among
others, affect the more significant judgments and estimates used in the
preparation of the Companys financial statements.

Inventories

Inventories are valued at the lower of cost, determined using the
first-in, first-out (FIFO) method, or the current estimated market value of
the inventory. The Companys policy is to establish an excess and obsolete
reserve for its products in excess of the expected demand for such products.
At September 30, 2004, this reserve was $100,000, which was equal to the amount
of the reserve at September 30, 2003. If actual future demand or market
conditions differ from those projected by the Company, additional inventory
valuation adjustments may be required. These valuation adjustments would be
included in cost of goods sold.

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The Company maintains an allowance for doubtful accounts, which is
calculated by a combination of specific account identification as well as
percentages of past due balances. At September 30, 2004, this allowance was
$73,445 compared to $69,948 at September 30, 2003. If actual future demand or
market conditions differ from those projected by the Company, additional
receivables valuation adjustments may be required.

Revenue Recognition

The
Company recognizes revenue from product sales upon shipment when
title transfers to customers. Amounts
received for upfront license fees under multiple-element supply and
distribution arrangements are deferred and recognized over the period of
supply, if such arrangements require the Companys on-going services or
performance.

Income Taxes

The carrying value of the Companys net deferred tax assets assumes that
the Company will be able to generate sufficient taxable income in the United
States, based on estimates and assumptions. The Company records a valuation
allowance to reduce the carrying value of its net deferred tax asset to the
amount that is more likely than not to be realized. For the year ended
September 30, 2004, the Company recorded a $9.1 million valuation allowance
related to its net deferred tax assets of $9.1 million. In the event the
Company were to determine that it would be able to realize its deferred tax
assets in the future, an adjustment to the deferred tax asset would increase
net income in the period such determination is made. On a quarterly basis, the
Company evaluates the realizability of its deferred tax assets and assesses the
requirements for a valuation allowance.

Results of Operations

The following table sets forth, for the periods indicated, certain items
from the statements of operations of the Company expressed as a percentage of
net sales:

Fiscal Years Ended September 30,2004
    
    2003
    
    2002Total net sales
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %Cost of sales
    
    
    64
    
    
    
    65
    
    
    
    71Gross margin
    
    
    36
    
    
    
    35
    
    
    
    29Operating expenses:Marketing and selling
    
    
    15
    
    
    
    15
    
    
    
    20Research and development
    
    
    5
    
    
    
    6
    
    
    
    8General and administrative
    
    
    12
    
    
    
    13
    
    
    
    16Total operating expenses
    
    
    32
    
    
    
    34
    
    
    
    44Income (loss) from operations
    
    
    4
    
    
    
    1
    
    
    
    (15
    )Interest income, net
    
    
    1
    
    
    
    1
    
    
    
    2Net income (loss)
    
    
    5
    %
    
    
    2
    %
    
    
    (13
    )%


The following table sets forth, for the periods indicated, net sales
information by product category (base products and advanced products),
marketing method (private label and Rochester Medical branded sales) and
distribution channel (domestic and international markets) (all dollar
amounts below are in thousands):

Fiscal Years Ended September 30,2004
    
    
    
    
    
    
    
    
    
    2003
    
    
    
    
    
    
    
    
    
    2002Domestic
    
    International
    
    Total
    
    Domestic
    
    International
    
    Total
    
    Domestic
    
    International
    
    TotalPrivate label sales:Base products
    
    $
    3,660
    
    
    $
    3,900
    
    
    $
    7,560
    
    
    $
    4,136
    
    
    $
    4,074
    
    
    $
    8,210
    
    
    $
    3,271
    
    
    $
    2,835
    
    
    $
    6,106Advanced products
    
    
    725
    
    
    
    154
    
    
    
    879
    
    
    
    
    
    
    
    135
    
    
    
    135
    
    
    
    85
    
    
    
    25
    
    
    
    110Total private label
sales
    
    $
    4,385
    
    
    $
    4,054
    
    
    $
    8,439
    
    
    $
    4,136
    
    
    $
    4,209
    
    
    $
    8,345
    
    
    $
    3,356
    
    
    $
    2,860
    
    
    $
    6,216Branded sales:Base products
    
    $
    3,027
    
    
    $
    2,618
    
    
    $
    5,645
    
    
    $
    2,910
    
    
    $
    2,695
    
    
    $
    5,605
    
    
    $
    2,596
    
    
    $
    2,052
    
    
    $
    4,648Advanced products
    
    
    575
    
    
    
    352
    
    
    
    927
    
    
    
    417
    
    
    
    289
    
    
    
    705
    
    
    
    198
    
    
    
    13
    
    
    
    211Total branded sales
    
    $
    3,602
    
    
    $
    2,970
    
    
    $
    6,572
    
    
    $
    3,327
    
    
    $
    2,984
    
    
    $
    6,310
    
    
    $
    2,794
    
    
    $
    2,065
    
    
    $
    4,859Total net sales:
    
    $
    7,987
    
    
    $
    7,024
    
    
    $
    15,011
    
    
    $
    7,463
    
    
    $
    7,193
    
    
    $
    14,655
    
    
    $
    6,150
    
    
    $
    4,925
    
    
    $
    11,075


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Fiscal Year Ended September 30, 2004 Compared to Fiscal Year Ended September 30, 2003

Net
Sales. Net sales increased 2.4% to $15.0 million in fiscal
2004 from
$14.7 million in the prior fiscal year, which sales primarily were comprised of
the Companys base products, including male external catheters
and standard Foley catheters.
The increase in net sales primarily was attributable to an increase in net
sales of advanced products, offset by a decrease in net sales of base products,
particularly to private label customers. This decrease in private label sales
primarily was attributable to an unanticipated overstocking by our customers
during a rapid, initial conversion of the European market from latex male
external catheters to silicone male external catheters, as well as in part from
changes in inventory management practice at some of the Companys major
accounts.

Gross
Margin. The Companys gross margin was 36% in fiscal 2004 compared
to 35% in the prior fiscal year. The Companys increase in gross margin in
fiscal 2004 was due to increased utilization of production capacity and
increased efficiencies in manufacturing.

Marketing and Selling. Marketing and selling expense was relatively flat
in fiscal 2004 as compared to fiscal 2003, with marketing and selling expense
of approximately $2.2 million in each of fiscal 2004 and fiscal
2003.
Marketing and selling expense as a percentage of net sales for fiscal
2004 and
fiscal 2003 was 15%. The decrease in marketing and
selling expense as a percentage of net sales primarily reflects the growth in
net sales, while expenditures relating to the Companys sales force, marketing
team and network of distributor relationships have remained at relatively
constant levels.

Research
and Development. Research and development expense decreased 19%
to $0.7 million in fiscal 2004 from $0.9 million in the prior fiscal year. The
decrease in research and development expense primarily reflects a
decrease in clinical costs, development costs associated with the
Companys advanced intermittent products and bonus compensation
to executive officers. Research and development expense as a percentage of net sales
for fiscal 2004 and fiscal 2003 was 5% and 6%, respectively. The decrease in
research and development expense as a percentage of net sales primarily
reflects the Companys growth in net sales as well as the
factors described earlier in this paragraph.

General
and Administrative. General and administrative expense increased
3% to $1.9 million in fiscal 2004 from $1.8 million in the
prior fiscal year. The increase in general and administrative
expense primarily reflects increased costs associated with being a
public company, including legal, audit and shareowner services. General
and administrative expense as a percentage of net sales
for fiscal 2004 and fiscal 2003 was 12% and 13%, respectively.

Interest
Income, Net. Interest income, net, decreased 43% to $90,000 in
fiscal 2004
from $158,000 in the prior fiscal year. The decrease in net interest income
primarily reflects generally lower interest rates in fiscal 2004, as
well as interest expense relating to debt incurred by the Company in
purchasing real property in fiscal 2003.

Income
Taxes. The Company has a history of pre-tax losses and had not
generated taxable income since inception until fiscal 2003. While the Company had pre-tax income
in fiscal 2004 and 2003, the Company utilized a portion of its net operating loss
carryforward and therefore, no federal income taxes are due for
fiscal 2004 or fiscal 2003.

As of
September 30, 2004, the Company has $23.5 million of federal net
operating loss carryforwards available to offset future taxable income which
begin to expire in 2005. The expiration by year for the upcoming five fiscal
years and thereafter are as follows: 2004: 0; 2005: 0; 2006:
0; 2007: $572,000; 2008: $892,000; 2009: $1,086,000; and thereafter,
$21.0 million.
In addition, under the Tax Reform Act of 1986, the amounts of and benefits from
net operating loss carryforwards may be impaired or limited in certain
circumstances, including significant changes in ownership interests. Future
use of the Companys net operating loss carryforwards may be restricted due to changes in
ownership or from future tax legislation.

The Company has established a valuation allowance against the entire
amount of its deferred tax asset because it has not been able to conclude that
it is more likely than not that it will be able to realize the deferred tax
asset, due primarily to its history of operating losses.

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Fiscal Year Ended September 30, 2003 Compared to Fiscal Year Ended September 30, 2002

Net Sales. Net sales increased 32.3% to $14.7 million in fiscal 2003 from
$11.1 million in the prior fiscal year, which sales primarily were comprised of
the Companys male external catheters, Foley catheters and intermittent
catheters. Domestic sales increased 22% compared to the prior fiscal year,
with growth of 19% in Rochester Medicalbrand product sales and growth of 23%
in sales to domestic private label customers. International sales increased
46% in fiscal 2003 compared to the prior fiscal year, primarily due to growth
in European markets, with international growth of 38% in Rochester Medical
brand product sales and international growth of 52% in sales to international
private label customers. The Company believes that its sales growth in part
has been attributable to an increasing preference in the marketplace for
silicone versus latex products.

The Company believes that sales growth in fiscal 2003 was in large part
attributable to an increase in net sales to five significant customers of the
Company who collectively accounted for approximately 44% of total net sales in
fiscal 2003. In fiscal 2003, sales to Mentor represented 14% of net sales,
sales to Hollister represented 13% of net sales, and sales to two subsidiaries
of Mentor, Porges and Mentor Medical (formerly Sims Portex), represented 6% and
5% of net sales, respectively. The Company anticipates that sales growth may
not continue to be as robust in the first half of fiscal 2004 as in fiscal
2003, based in part upon the outlook of the Companys top customers regarding
their anticipated purchases in fiscal 2004.

Gross Margin. The Companys gross margin was 35% in fiscal 2003 compared
to 29% in the prior fiscal year. The Companys increase in gross margin in
fiscal 2003 was due to increased utilization of production capacity and
increased efficiencies in manufacturing.

Marketing and Selling. Marketing and selling expense was relatively flat
in fiscal 2003 as compared to fiscal 2002, with marketing and selling expense
of approximately $2.2 million in each of fiscal 2003 and fiscal 2002.
Marketing and selling expense as a percentage of net sales for fiscal 2003 and
fiscal 2002 was 15% and 20%, respectively. The decrease in marketing and
selling expense as a percentage of net sales primarily reflects the growth in
net sales, while expenditures relating to the Companys sales force, marketing
team and network of distributor relationships have remained at relatively
constant levels.

Research and Development. Research and development expense increased 5%
to $0.9 million in fiscal 2003 from $0.8 million in the prior fiscal year. The
increase in research and development expense primarily reflects an increase in
compensation. Research and development expense as a percentage of net sales
for fiscal 2003 and fiscal 2002 was 6% and 8%, respectively. The decrease in
research and development expense as a percentage of net sales primarily
reflects the Companys growth in net sales.

General and Administrative. General and administrative expense was
relatively flat in fiscal 2003 as compared to fiscal 2002, with general and
administrative expense of approximately $1.8 million in each of fiscal 2003 and
fiscal 2002. General and administrative expense as a percentage of net sales
for fiscal 2003 and fiscal 2002 was 13% and 16%, respectively. The decrease in
general and administrative expense as a percentage of net sales
primarily reflects the growth in net sales, while general and
administrative expenses have remained at relatively constant levels.

Interest Income. Interest income decreased 26% to $158,000 in fiscal 2003
from $212,000 in the prior fiscal year. The decrease in interest income
primarily reflects generally lower interest rates in fiscal 2003.

Income
Taxes. The Company has a history of pre-tax losses and had not
generated taxable income since inception until fiscal 2003. While the Company had pre-tax income
in fiscal 2003, the Company utilized a portion of its net operating loss
carryforward and therefore, no federal income taxes are due for fiscal 2003.

As of
September 30, 2003, the Company had $24 million of federal net
operating loss carryforwards available to offset future taxable income which
begin to expire in 2005. The expiration by year for the upcoming five fiscal
years and thereafter are as follows: 2004: $0; 2005: $159,000; 2006:
$148,000; 2007: $1,168,000; 2008: $892,000; and thereafter: $21.6 million.
In addition, under the Tax Reform Act of 1986, the amounts of and benefits from
net operating loss carryforwards may be impaired or limited in certain
circumstances, including significant changes in ownership interests. Future
use of the Companys net operating loss carryforwards may be restricted due to changes in
ownership or from future tax legislation.

The Company has established a valuation allowance against the entire
amount of its deferred tax asset because it has not been able to conclude that
it is more likely than not that it will be able to realize the deferred tax
asset, due primarily to its history of operating losses.

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Liquidity and Capital Resources

The Company has financed its operations primarily through public offerings
and private placements of its equity securities, and has raised approximately
$40.7 million in net proceeds since its inception.

The Companys cash, cash equivalents and marketable securities were $5.9
million at September 30, 2004 compared with $6.0 million at September 30, 2003.

The
Company generated a net $1,072,000 of cash in operating activities
during the year. Investing activities, primarily capital expenditures
and the purchase of marketable securities, used
net cash of $2,202,000 in fiscal 2004.

In fiscal 2002, the Company entered into an agreement with Coloplast
granting Coloplast exclusive marketing and distribution rights with respect to
the Companys Release-NFFoley catheters in certain geographic areas.
Coloplast paid the Company $1,000,000 for these exclusive rights. In addition,
during the fiscal quarter ended September 30, 2003, the Company entered into an
agreement granting to another distributor exclusive marketing and distribution
rights in certain geographic areas with respect to the Companys hydrophilic
intermittent catheters in exchange for a cash payment of $200,000. In
accordance with generally accepted accounting principles, the Company is
recognizing these amounts over the terms of the respective agreements.

During the fiscal quarter ended March 31, 2003, the Company entered into a
$1,000,000 revolving line of credit with U.S. Bank National Association. The
Company did not have any borrowings

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outstanding
at any time during the fiscal year ended September 30,
2004. The agreement calls for a variable interest rate that is equal to 1%
plus the one-month LIBOR rate. The agreement runs through March 31, 2005.

During
fiscal 2004, the Companys working capital position, excluding cash
and marketable securities, increased by $815,000. Accounts receivable
balances
increased 7% or $177,000 during the fiscal year primarily as a result of
one past due private label account. Inventories as of September 30,
2004 increased 11% primarily as a result of
the expanded product line in the Companys intermittent catheters. Other current assets
were relatively flat as compared to the prior fiscal year. Current liabilities decreased 13%, or $235,000, during the year,
primarily as a result of a decrease in the accrual of executive bonus compensation. Changes in other asset and liability balances
related to timing of expense recognition.

In December 1999, the Board of Directors authorized a stock repurchase
program. Up to one million shares of the Companys outstanding common stock
may be repurchased under the program. Purchases may be made from time to time
at prevailing prices in the open market and through other customary means. No
time limit has been placed on the duration of the stock repurchase program and
it may be conducted over an extended period of time as business and market
conditions warrant. The Company also may discontinue the stock repurchase
program at any time. The repurchased shares will be available for reissuance
pursuant to employee stock option plans and for other corporate purposes. The
Company intends to fund such repurchases with currently available funds.
During fiscal 2004, the Company did not repurchase any shares of common stock.

The following table summarizes the Companys contractual cash commitments
as of September 30, 2004:

Payments Due by PeriodLess than
    
    
    
    
    
    
    
    
    
    After 5Contractual Obligations
    
    Total
    
    1 year
    
    1-3 years
    
    4 - 5 years
    
    yearsLong
Term Debt, including interest
    
    $
    116,280
    
    
    $
    41,140
    
    
    $
    75,140
    
    
    $
    
    
    
    $
    Capital Lease Obligations
    
    
    156,830
    
    
    
    44,615
    
    
    
    89,230
    
    
    
    22,985
    
    
    
    Purchase
Obligations (general operating)
    
    
    987,008
    
    
    
    987,008
    
    
    
    
    
    
    
    
    
    
    
    Purchase
obligations (warehouse expansion)
    
    
    137,804
    
    
    
    137,804
    
    
    
    
    
    
    
    
    
    
    
    Total Contractual
Cash Obligations
    
    $
    1,397,922
    
    
    $
    1,210,567
    
    
    $
    164,370
    
    
    $
    22,985
    
    
    $
    


The Company currently believes that its existing resources and anticipated
cash flows from operations will be sufficient to satisfy its capital needs for
the foreseeable future. However, the Companys actual liquidity and capital
requirements will depend upon numerous factors, including the costs and timing
of expansion of sales and marketing activities; the amount of revenues from
sales of the Companys existing and new products; changes in, termination of,
and the success of, existing and new distribution arrangements; the cost of
maintaining, enforcing and defending patents and other intellectual property
rights; competing technological and market developments; developments related
to regulatory and third party reimbursement matters; the cost and progress of
the Companys research and development efforts; and other factors. In the

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event that additional financing is needed, the Company may seek to raise
additional funds through public or private financing, collaborative
relationships or other arrangements. Any additional equity financing may be
dilutive to shareholders, and debt financing, if available, may involve
significant restrictive covenants. Collaborative arrangements, if necessary to
raise additional funds, may require the Company to relinquish its rights to
certain of its technologies, products or marketing territories. Failure to
raise capital when needed could have a material adverse effect on the Companys
business, financial condition and results of operations. There can be no
assurance that such financing, if required, will be available on terms
satisfactory to the Company, if at all.

New Accounting Pronouncements

In March
2004, the FASB issued an exposure draft, Share-Based Payments,
an Amendment of FASB Statements No. 123 and 95, which may
eliminate the ability to account for share-based compensation
transactions using APB No. 25 and require companies to recognize
the cost of employee services received in exchange for equity
instruments, based on the grant-date fair value of those instruments.
In Octobr 2004, the FASB delayed the effective date of this
proposed pronouncement until fiscal or interim periods beginning
after June 15, 2005. The Company will continue to monitor the
rules and statements released by the FASB in regard to how it
accounts for stock-based employee compensation.

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RISK FACTORS

Limited Revenues; History of Losses and Potential Future Losses

The Company has generated only limited revenues to date and, prior to
fiscal 2003, experienced net losses since its inception. Net income for the
fiscal years ended September 30, 2004 and 2003 was $747,000 and
$330,000, respectively, while net losses for the
fiscal years ended September 30, 2002, 2001 and 2000 were $1.4 million, $3.0
million and $5.5 million, respectively. The Company had an accumulated deficit
of approximately $23.0 million
at September 30, 2004. The Companys ability to
increase revenues and sustain profitability and positive cash flow over the
next several years will depend primarily upon market acceptance of, and
achievement of material sales from, the Companys hydrophilic and antibacterial
intermittent catheters and the RELEASE-NF Catheter, of which there can be no
assurance. A substantial portion of the expenses associated with the Companys
manufacturing facilities are fixed in nature (i.e. depreciation) and will
reduce the Companys operating margin until such time, if ever, as the Company
is able to increase utilization of its capacity through increased sales of its
new products. As a result, there can be no assurance that the Company will
ever generate substantial revenues or sustain profitability. Although the
Company achieved profitability in fiscal 2003 and 2004, the Company may experience net
losses in subsequent fiscal years or fiscal quarters.

Dependence on a Small Number of Customers

The Company depends on a relatively small number of customers for a
significant portion of its net sales. The Companys five largest customers in
fiscal 2004 represented approximately 52% of the Companys total net sales.
Because the Companys customers typically purchase products in relatively large
quantities at a time, the Companys financial performance can fluctuate from
quarter to quarter depending upon the timing of their purchases. The Company
expects to continue to depend upon a relatively small number of customers for a
significant percentage of its net sales. Because the Companys major customers
represent such a large part of its business, the loss of any of the Companys
major customers could negatively impact the Companys business.

The Companys major customers may not continue to purchase products from
the Company at current levels or at all. In the past, the Company have lost
customers due to its customers changes in technology preferences, customers
shifting production of products to internal facilities and the acquisition of
the Companys customers. The Company may lose customers in the future for
similar reasons. The Company may not be able to expand its customer base to
make up any sales shortfalls if the Company loses a major customer. The
Companys attempts to diversify its customer base and reduce its reliance on
particular customers may not be successful.

Dependence on Distribution Arrangements

A significant portion of the Companys net sales to date have depended on
the Companys ability to provide products that meet the requirements of medical
product companies that resell or distribute the Companys products, and on the
sales and marketing efforts of such entities. Arrangements with these entities
are likely to continue to be a significant portion of the

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Companys revenues in the future. There can be no assurance that the
Companys purchasers and distributors will be able to successfully market and
sell the Companys products, that they will devote sufficient resources to
support the marketing of any of the Companys products, that they will market
any of the Companys products at prices which will permit such products to
develop, achieve, or sustain market acceptance, or that they will not develop
alternative sources of supply. The failure of the Companys purchasers and
distributors to continue to purchase products from the Company at levels
reasonably consistent with their prior purchases or to effectively market the
Companys products could have a material adverse effect on the Companys
business, financial condition and results of operations.

Dependence Upon Key Personnel

If the
Company is unable to attract, train and retain highly-skilled technical,
managerial, sales and marketing personnel, it may be at a competitive
disadvantage and unable to develop new products or increase revenue.
The Company
may grant large numbers of options to attract and retain personnel, which could
be highly dilutive to our shareholders. The failure to attract, train, retain
and effectively manage employees could negatively impact the
Companys research and
development and sales efforts. In particular, the loss of sales personnel
could lead to lost sales opportunities because it can take several months to
hire and train replacement sales personnel. Uncertainty created by turnover of
key employees could adversely affect the Companys business, operating results and stock
price.

Uncertainty of Market Acceptance of Products

The
Company has several products, including the antibacterial hydrophilic and
antibacterial hydro intermittent catheters, the RELEASE-NF Catheter, and the FemSoft
Insert, that represent new methods and improvements for urinary continence
care. There can be no assurance that these products will gain any significant
degree of market acceptance among physicians, healthcare payors and patients.
Market acceptance of these products, if it occurs, may require lengthy hospital
evaluations and/or the training of numerous physicians and clinicians, which
could delay or dampen any such market acceptance. Moreover, approval of
reimbursement for the Companys products, competing products or alternative
medical treatments, and the Companys pricing policies will be important
factors in determining market acceptance of these products. Any of the
foregoing factors, or other factors, could limit or detract from market
acceptance of these products. Insufficient market acceptance of these products
could have a material adverse effect on the Companys business, financial
condition and results of operations.

Risks Associated with Marketing and Sales of Rochester Medical Brand Products

The Companys success will depend on its ability to overcome established
market positions of competitors and to establish its own market presence under
the Rochester Medicalbrand name. One of the challenges facing the Company in
this respect is the Companys ability to compete with companies that offer a
wider array of products to hospitals and medical care institutions,
distributors and end users. In addition, the Company has been unsuccessful to
date in competing in the Group Purchasing Organization (GPO) market, where
organizations such as hospitals, rehabilitation centers and acute care
facilities acquire products not directly from manufacturers, but rather from
distributors where pricing is determined under agreements

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between those distributors and GPOs. The Company may also find it
difficult to sell its products due to the limited recognition of its brand
name.

In February 2004, the Company brought
suit against certain GPOs and individual defendants alleging
anti-competitive conduct against the defendants in the markets for
standard and anti-infection Foley catheters as well as urethral
catheters, and seeks an unspecified amount of damages and injunctive
and other relief. The litigation is in the early stages of discovery,
and there can be no assurance that the outcome of this action will
have any positive effect upon the Companys business or
financial condition.

Highly Competitive Markets; Alternative Treatments; Technological Advancements

The medical products market in general is, and the markets for urinary
continence care products in particular are, highly competitive. Many of the
Companys competitors have greater name recognition than the Company and offer
well known and established products, some of which are less expensive than the
Companys products. As a result, even if the Company can demonstrate that its
products provide greater ease of use, lifestyle improvement or beneficial
effects on medical outcomes over the course of treatment, the Company may not
be successful in capturing a significant share of the market. In addition,
many of the Companys competitors offer broader product lines than the Company,
which may be a competitive advantage in obtaining contracts with GPOs, and may
adversely affect the Companys ability to obtain contracts with such GPOs.
Additionally, many of the Companys competitors have substantially more
marketing and sales experience than the Company and substantially larger sales
forces and greater resources to devote to such efforts. There can be no
assurance that the Company will be able to compete successfully against such
competitors.

Urinary continence care can be managed with a variety of alternative
medical treatments and management products or techniques, including adult
diapers and absorbent pads, surgery, behavior therapy, pelvic muscle exercise,
implantable devices, injectable materials and other medical devices.
Manufacturers of these products or techniques are engaged in research to
develop more advanced versions of current products and techniques. Many of the
companies that are engaged in such development work have substantially greater
capital resources than the Company and greater expertise than the Company in
research, development and regulatory matters. There can be no assurance that
the Companys products will be able to compete with existing or future
alternative products, techniques or therapies, or that advancements in existing
products, techniques or therapies will not render the Companys products
obsolete.

Possible Need for Additional Capital

The Company believes its existing resources and anticipated cash flows
from operations will be sufficient to satisfy its capital needs for the
foreseeable future. However, the Companys actual liquidity and capital
requirements will depend on numerous factors, including the costs and timing of
expansion of sales and marketing activities; the amount of revenues from sales
of the Companys existing and new products, including hydrophilic and
antibacterial intermittent catheters, the RELEASE-NF Catheterand the FemSoft
Insert; changes in, termination of, and the success of, existing and new
distribution arrangements; the cost of maintaining, enforcing and defending
patents and other intellectual property rights; competing technological and
market developments; developments relating to regulatory and third party
reimbursement matters; the cost and progress of the Companys research and
development efforts; and other factors. In the event that additional financing
is needed, the Company may seek to raise additional funds through public or
private financing, collaborate relationships or other arrangements. Any
additional equity financing may be dilutive to shareholders, and debt
financing, if available, may involve significant restrictive covenants.
Failure to raise capital when needed could have a material adverse effect on
the Companys business, financial condition and results of operations.
There can be no assurance that such financing, if required, will be
available on terms satisfactory to the Company, if at all.

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Effects of Government Regulation

The Companys products, product development activities and manufacturing
processes are subject to extensive regulation by the FDA and by comparable
agencies in foreign countries. In the United States, the FDA regulates the
introduction of medical devices as well as manufacturing, labeling and record
keeping procedures for such products. The process of obtaining marketing
clearance for new medical products from the FDA can be costly and time
consuming, and there can be no assurance that such clearance will be granted
timely, if at all, for the Companys products in development, or that FDA
review will not involve delays that would adversely affect the Companys
ability to commercialize additional products or to expand permitted uses of
existing products. Even if regulatory clearance to market a product is
obtained from the FDA, this clearance may entail limitations on the indicated
uses of the product. Marketing clearance can also be withdrawn by the FDA due
to failure to comply with regulatory standards or the occurrence of unforeseen
problems following initial clearance. The Company may be required to make
further filings with the FDA under certain circumstances, such as the addition
of product claims or product reformulation. The FDA could also limit or
prevent the manufacture or distribution of the Companys products and has the
power to require the recall of such products. FDA regulations depend heavily
on administrative interpretation, and there can be no assurance that future
interpretation made by the FDA or other regulatory bodies, which may have
retroactive effect, will not adversely affect the Company. The FDA and various
state agencies inspect the Company and its facilities from time to time to
determine whether the Company is in compliance with regulations relating to
medical device manufacturing companies, including regulations concerning
design, manufacturing, testing, quality control and product labeling practices.
A determination that the Company is in material violation of such regulations
could lead to the imposition of civil penalties, including fines, product
recalls, product seizures, or, in extreme cases, criminal sanctions.

A portion of the Companys revenues are dependent upon sales of its
products outside the United States. Foreign regulatory bodies have established
varying regulations governing product standards, packaging requirements,
labeling requirements, import restrictions, tariff regulations, duties and tax
requirements. The Company relies on its third-party foreign distributors to
comply with certain foreign regulatory requirements. The inability or failure
of the Company or such foreign distributors to comply with varying foreign
regulations or the imposition of new regulations could restrict the sale of the
Companys products internationally and thereby adversely affect the Companys
business, financial condition and results of operations.

Dependence on Patents and Proprietary Rights

The Companys success may depend in part on its ability to obtain patent
protection for its products and manufacturing processes, to preserve its trade
secrets, and to operate without infringing the proprietary rights of third
parties. The validity and breadth of claims covered in medical technology
patents involve complex legal and factual questions and, therefore, may be
highly uncertain. No assurance can be given that the scope of any patent
protection under the Companys current patents, or under any patent the Company
might obtain in the future, will

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exclude competitors or provide competitive advantages to the Company; that
any of the Companys patents will be held valid if subsequently challenged; or
that others will not claim rights in or ownership of the patents and other
proprietary rights held by the Company. There can be no assurance that the
Companys technology, current or future products or activities will not be
deemed to infringe upon the rights of others. Furthermore, there can be no
assurance that others have not developed or will not develop similar products
or manufacturing processes, duplicate any of the Companys products or
manufacturing processes, or design around the Companys patents. The Company
also relies upon unpatented trade secrets to protect its proprietary
technology, and no assurance can be given that others will not independently
develop or otherwise acquire substantially equivalent technology or otherwise
gain access to the Companys proprietary technology or disclose such technology
or that the Company can ultimately protect meaningful rights to such unpatented
proprietary technology.

The medical device industry is characterized by frequent and substantial
intellectual property litigation, particularly with respect to newly developed
technology. Litigation may be necessary to enforce patents issued to the
Company, to protect trade secrets or know-how owned by the Company, or to
determine the ownership, scope or validity of the proprietary rights of the
Company and others. Intellectual property litigation is complex and expensive,
and the outcome of such litigation is difficult to predict. Any such
litigation, regardless of outcome, could result in substantial expense to the
Company and significant diversion of the efforts of the Companys technical and
management personnel. As a result, a claim by a third party that the Companys
current products or products in development allegedly infringe its patent
rights could have a material adverse effect on the Company. Moreover, an
adverse determination in any such proceeding could subject the Company to
significant liabilities to third parties, require disputed rights to be
licensed from such parties, if licenses to such rights could be obtained,
and/or require the Company to cease using such technology. If third party
patents containing claims affecting the Companys technology were issued and
such claims were determined to be valid, there can be no assurance that the
Company would be able to obtain licenses to such patents at costs reasonable to
the Company, if at all, or be able to develop or obtain alternate technology.
Accordingly, an adverse determination in a judicial or administrative
proceeding or failure to obtain necessary licenses could prevent the Company
from manufacturing, using or selling certain of its products, which could have
a material adverse effect on the Companys business, financial condition and
results of operations.

Possibility of Product Liability Litigation; Possible Inadequacy of Insurance

The medical products industry is subject to substantial product liability
litigation, and the Company faces an inherent business risk of exposure to
product liability claims in the event that the use of its products is alleged
to have resulted in adverse effects to a patient. Although the Company has not
experienced any product liability claims to date, any such claims could have a
material adverse effect on the Company, including on market acceptance of its
products. The Company maintains general insurance policies that include
coverage for product liability claims. The policies are limited to an
aggregate maximum of $6 million per product liability claim, with an annual
aggregate limit of $7 million under the policies. The Company may require
increased product liability coverage as new products are developed and
commercialized. There can be no assurance that liability claims will not
exceed the coverage limits of the Companys policies or that adequate insurance
will continue to be available on commercially reasonable terms, if at all.

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A product liability claim or other claim with respect to uninsured
liabilities or in excess of insured liabilities could have a material adverse
effect on the Companys business, financial condition and results of
operations.







ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk.

The Company does not believe its operations are currently subject to
significant market risks for interest rates, foreign currency exchange rates,
commodity prices or other relevant market price risks of a material nature.

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ITEM 8. Financial Statements

Rochester Medical Corporation

Financial Statements

Years Ended September 30,
2004, 2003 and 2002

PageReport of Independent Auditors
    
    
    29Audited Financial Statements
    
    
    30Balance Sheets
    
    
    30Statements of Operations
    
    
    31Statement of Shareholders Equity
    
    
    32Statements of Cash Flows
    
    
    33Notes to Financial Statements
    
    
    34


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Report of Independent Registered
Public Accounting Firm

The Board of Directors and Shareholders
of Rochester Medical Corporation

We have audited the accompanying balance sheets of Rochester Medical
Corporation as of September 30, 2004 and 2003, and the related statements of
operations, shareholders equity and cash flows for each of the three years in
the period ended September 30, 2004. Our audits also included the financial
statement schedule listed in Item 15(a)(2). These financial statements and
schedule are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Rochester Medical
Corporation at September 30, 2004 and 2003, and the results of its operations
and its cash flows for each of the three years in the period ended September
30, 2004, in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects, the information set forth therein.

/s/ Ernst & Young LLP


Minneapolis, Minnesota
October 22, 2004

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ROCHESTER MEDICAL CORPORATION
BALANCE SHEETS

September 30,2004
    2003Assets:Current assets:Cash and cash equivalents
    
    $
    620,441
    
    $
    1,764,499Marketable securities
    
    
    5,251,763
    
    
    4,201,736Accounts receivable, less allowance for doubtful accounts
($73,445 - 2004; $69,948 - 2003)
    
    
    2,631,188
    
    
    2,454,310Inventories, net
    
    
    3,945,313
    
    
    3,542,619Prepaid expenses and other current assets
    
    
    273,229
    
    
    272,245Total current assets
    
    
    12,721,934
    
    
    12,235,409Property, plant and equipment:Land
    
    
    365,951
    
    
    365,951Buildings
    
    
    5,881,435
    
    
    5,315,002Equipment and fixtures
    
    
    11,568,452
    
    
    11,117,42617,815,838
    
    
    16,798,379Less accumulated depreciation
    
    
    (9,373,411
    )
    
    (8,134,717
    )Total property, plant and equipment
    
    
    8,442,427
    
    
    8,663,662Patents,
less accumulated amortization ($906,698 - 2004; $850,315 - 2003)
    
    
    219,296
    
    
    225,597Total assets
    
    $
    21,383,657
    
    $
    21,124,668Liabilities and Shareholders Equity:Current liabilities:Accounts payable
    
    $
    778,766
    
    $
    507,580Accrued compensation
    
    
    275,826
    
    
    708,367Accrued expenses
    
    
    319,319
    
    
    390,211Deferred revenue
    
    
    157,143
    
    
    157,143Current maturities of debt
    
    
    34,000
    
    
    34,000Current maturities of capital leases
    
    
    37,611
    
    
    40,263Total current liabilities
    
    
    1,602,665
    
    
    1,837,564Long-term liabilities:Deferred revenue
    
    
    721,429
    
    
    878,571Long-term debt, less current maturities
    
    
    68,000
    
    
    102,000Capital leases, less current maturities
    
    
    103,814
    
    
    164,806Total long-term liabilities
    
    
    893,243
    
    
    1,145,377Shareholders equity:Common Stock, no par value:Authorized Shares - 20,000,000
Issued and outstanding shares; (5,441,131 - 2004;5,424,700 - 2003)
    
    
    41,940,700
    
    
    41,857,144Accumulated deficit
    
    
    (22,979,077
    )
    
    (23,725,890
    )Unrealized gain (loss) on available-for-sale securities
    
    
    (73,874
    )
    
    10,473Total shareholders equity
    
    
    18,887,749
    
    
    18,141,727Total liabilities and shareholders equity
    
    $
    21,383,657
    
    $
    21,124,668


See accompanying notes.

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ROCHESTER MEDICAL CORPORATION
STATEMENTS OF OPERATIONS

Fiscal Years Ended September 30,2004
    
    2003
    
    2002Net sales
    
    $
    15,011,419
    
    
    $
    14,655,372
    
    
    $
    11,075,496Cost of sales
    
    
    9,615,427
    
    
    
    9,574,414
    
    
    
    7,887,893Gross profit
    
    
    5,395,992
    
    
    
    5,080,958
    
    
    
    3,187,603Operating expenses:Marketing and selling
    
    
    2,175,665
    
    
    
    2,225,376
    
    
    
    2,196,426Research and development
    
    
    706,157
    
    
    
    874,715
    
    
    
    834,568General and administrative
    
    
    1,856,858
    
    
    
    1,808,838
    
    
    
    1,763,341Total operating expenses
    
    
    4,738,680
    
    
    
    4,908,929
    
    
    
    4,794,335Income
(loss) from operations
    
    
    657,312
    
    
    
    172,029
    
    
    
    (1,606,732
    )Other income (expense):Interest income, net
    
    
    89,501
    
    
    
    157,874
    
    
    
    211,927Net
income (loss)
    
    
    746,813
    
    
    
    329,903
    
    
    
    (1,394,805
    )Net
income (loss) per common share - basic
    
    $
    .14
    
    
    $
    .06
    
    
    $
    (.26
    )Net
income (loss) per common share - diluted
    
    $
    .13
    
    
    $
    .06
    
    
    $
    (.26
    )Weighted average number of common shares
outstanding  basic
    
    
    5,434,338
    
    
    
    5,379,954
    
    
    
    5,328,531Weighted average number of common shares
outstanding  diluted
    
    
    5,686,594
    
    
    
    5,653,859
    
    
    
    5,328,531


See accompanying notes.

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ROCHESTER MEDICAL CORPORATION
STATEMENT OF SHAREHOLDERS EQUITY

UnrealizedGain (Loss)Common Stock
    
    
    
    
    
    on Available-Accumulated
    
    for-SaleShares
    
    Amount
    
    Deficit
    
    Securities
    
    TotalBalance at September 30, 2001
    
    
    5,328,500
    
    
    $
    41,249,003
    
    
    $
    (22,660,988
    )
    
    $
    (132,830
    )
    
    $
    18,455,185Net loss for the year
    
    
    
    
    
    
    
    
    
    
    (1,394,805
    )
    
    
    
    
    
    
    (1,394,805
    )Unrealized gain on
available-for-sale securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    79,426
    
    
    
    79,426Subtotal  comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,315,379
    )Stock option exercise
    
    
    750
    
    
    
    4,125
    
    
    
    
    
    
    
    
    
    
    
    4,125Balance at September 30, 2002
    
    
    5,329,250
    
    
    
    41,253,128
    
    
    
    (24,055,793
    )
    
    
    (53,404
    )
    
    
    17,143,931Net income for the year
    
    
    
    
    
    
    
    
    
    
    329,903
    
    
    
    
    
    
    
    329,903Unrealized gain on
available-for-sale securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    63,877
    
    
    
    63,877Subtotal  comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    393,780Stock option exercise
    
    
    95,450
    
    
    
    604,016
    
    
    
    
    
    
    
    
    
    
    
    604,016Balance at September 30, 2003
    
    
    5,424,700
    
    
    
    41,857,144
    
    
    
    (23,725,890
    )
    
    
    10,473
    
    
    
    18,141,727Net income for the year
    
    
    
    
    
    
    
    
    
    
    746,813
    
    
    
    
    
    
    
    746,813Unrealized loss on available-for-sale securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (84,347
    )
    
    
    (84,347
    )Subtotal-comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    662,466Stock option exercise
    
    
    16,431
    
    
    
    83,556
    
    
    
    
    
    
    
    
    
    
    
    83,556Balance at September 30, 2004
    
    
    5,441,131
    
    
    $
    41,940,700
    
    
    $
    (22,979,077
    )
    
    $
    (73,874
    )
    
    $
    18,887,749


See accompanying notes.

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ROCHESTER MEDICAL CORPORATION
STATEMENTS OF CASH FLOWS

Fiscal Years Ended September 30,2004

    2003
    
    2002Operating Activities:Net income (loss)
    
    $
    746,813
    

    $
    329,903
    
    
    $
    (1,394,805
    )Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:Depreciation
    
    
    1,238,694
    

    
    1,206,666
    
    
    
    1,245,962Amortization
    
    
    56,383
    

    
    54,051
    
    
    
    45,267Deferred revenue
    
    
    (157,142
    )

    
    85,714
    
    
    
    950,000Changes in operating assets and liabilities:Accounts receivable
    
    
    (176,878
    )

    
    (548,868
    )
    
    
    (406,105
    )Inventories
    
    
    (402,694
    )

    
    35,312
    
    
    
    (1,478,705
    )Other current assets
    
    
    (984
    )

    
    (54,062
    )
    
    
    (41,078
    )Accounts payable
    
    
    271,186
    

    
    (126,354
    )
    
    
    250,789Other current liabilities
    
    
    (503,433
    )

    
    190,277
    
    
    
    87,334Net cash provided by (used in) operating
activities
    
    
    1,071,945
    

    
    1,172,639
    
    
    
    (741,340
    )Investing Activities:Capital expenditures
    
    
    (1,017,459
    )

    
    (244,357
    )
    
    
    (559,840
    )Patents
    
    
    (50,082
    )

    
    (70,570
    )
    
    
    (66,000
    )Purchase of marketable securities
    
    
    (3,474,519
    )

    
    (4,093,145
    )
    
    
    (1,121,195
    )Sales and maturities of marketable securities
    
    
    2,340,145
    

    
    4,007,676
    
    
    
    1,053,072Net cash used in investing activities
    
    
    (2,201,915
    )

    
    (400,396
    )
    
    
    (693,963
    )Financing Activities:Payments on capital leases
    
    
    (63,644
    )

    
    (23,378
    )
    
    
    Payments
on long-term debt
    
    
    (34,000
    )

    
    
    
    
    
    Sale of Common Stock
    
    
    83,556
    

    
    604,016
    
    
    
    4,125Net
cash provided by (used in) financing activities
    
    
    (14,088
    )

    
    580,638
    
    
    
    4,125Increase (decrease) in cash and
cash equivalents
    
    
    (1,144,058
    )

    
    1,352,881
    
    
    
    (1,431,178
    )Cash and cash equivalents at
beginning of year
    
    
    1,764,499
    

    
    411,618
    
    
    
    1,842,796Cash and cash equivalents at end of year
    
    $
    620,441
    

    $
    1,764,499
    
    
    $
    411,618Supplemental
Cash Flow Information:Interest
Paid
    
    $
    22,903
    

    $
    8,109
    
    
    $
    Non-Cash Investing and Financing Activities:Capital lease arrangements
    
    $
    
    

    $
    222,622
    
    
    $
    Land purchased with debt
    
    
    
    

    
    136,000
    
    
    
    


See accompanying notes.

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ROCHESTER MEDICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS




September 30, 2004

1. Business Activity

Rochester Medical Corporation (the Company) develops, manufactures and
markets a broad line of innovative, technologically enhanced latex-free urinary
continence and urine drainage care products for the home care and
acute/extended care markets. The Company currently manufactures and markets
standard continence care products, including male external catheters, Foley
catheters and intermittent catheters and innovative and technologically
advanced products such as its FemSoft Insert, Release-NFcatheter and
antibacterial and hydrophilic intermittent catheters.

2. Summary of Significant Accounting Policies

Cash Equivalents

The Company considers all highly liquid investments with a remaining
maturity of three months or less when purchased to be cash equivalents.

Marketable Securities

Marketable securities are classified as available for sale and are carried
at fair value, with unrealized gains or losses included as a separate component
of shareholders equity. At September 30, 2004 and 2003, the balance consists
of corporate bonds with remaining contractual maturities of one month to twelve
months. The amortized cost and estimated market value of available-for-sale
securities are as follows:

Amortized
    
    Unrealized
    
    EstimatedCost
    
    Gain (Loss)
    
    Market ValueSeptember 30, 2004
    
    $
    5,325,637
    
    
    $
    (73,874
    )
    
    $
    5,251,763September 30, 2003
    
    
    4,191,263
    
    
    
    10,473
    
    
    
    4,201,736


Concentration
of Credit

The Company manufactures and sells its products to a full range of
companies in the medical industry on a worldwide basis. There is a
concentration of sales to larger medical wholesalers and distributors. Sales
of products are recorded upon shipment when title transfers to
customers. The Company performs periodic credit
evaluations of its customers financial condition. The Company requires
irrevocable letters of credit on sales to certain foreign customers.
Receivables generally are due within 30 to 60 days. Credit losses relating to
customers consistently have been within management expectations.

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Inventories

Inventories, consisting of material, labor and manufacturing overhead, are
stated at the lower of cost or market. Cost is determined by the first-in,
first-out (FIFO) method.

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation.
Depreciation is based on estimated useful lives of 4  35 years computed using
the straight-line method.

Patents

Capitalized costs include costs incurred in connection with making patent
applications for the Companys products and are amortized on a straight-line
basis over eight years. The Company periodically reviews its patents for
impairment of value. Any adjustment from the analysis is charged to
operations.

Research and Development Costs

Research and development costs are charged to operations as incurred.
Research and development costs include clinical testing costs, certain salary
and related expenses, other labor costs, materials and an allocation of certain
overhead expenses.

Revenue Recognition

The
Company recognizes revenue from product sales upon shipment when
title transfers to customers. Amounts
received for upfront license fees under multiple-element supply and
distribution arrangements are deferred and recognized over the period of
supply, if such arrangements require the Companys on-going services or
performance.

Income Taxes

Income taxes are accounted for under the liability method. Deferred
income taxes are provided for temporary differences between financial reporting
and tax bases of assets and liabilities. The Company records a
valuation allowance to reduce the carrying value of its net deferred
tax assets to the amount that is more likely than not to be realized.

Stock-Based Compensation

At
September 30, 2004, the Company has three stock-based employee
compensation plans, which are described more fully in Note 5. The Company
accounts for those plans under the recognition and measurement principles of
APB Opinion No. 25, Accounting for Stock Issued to Employees, and related
Interpretations. No stock-based employee compensation cost is reflected in net
income (loss), as all options granted under those plans had an exercise price
equal to the market value of the underlying common stock on the date of grant.
The following table illustrates the effect on net income (loss) and net income
(loss) per common share if the Company had applied the fair value recognition
provisions of FASB Statement No. 123, Accounting for Stock-Based
Compensation, to stock-based employee compensation.

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Year ended September 30,2004
    
    2003
    
    2002Net income (loss), as reported
    
    $
    746,813
    
    
    $
    329,903
    
    
    $
    (1,394,805
    )Deduct: total stock-based employee
compensation expense under fair value method for all awards
    
    
    (462,276
    )
    
    
    (537,847
    )
    
    
    (762,615
    )Pro forma net income (loss)
    
    $
    284,537
    
    
    $
    (207,944
    )
    
    $
    (2,157,420
    )Net Income (loss) per common share:Basic  as reported
    
    $
    .14
    
    
    $
    .06
    
    
    $
    (.26
    )Diluted  as reported
    
    $
    .13
    
    
    $
    .06
    
    
    $
    (.26
    )Basic and diluted  pro forma
    
    $
    .05
    
    
    $
    (.04
    )
    
    $
    (.40
    )


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 amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

Impairment of Long-Lived Assets

The Company will record impairment losses on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets
carrying amount.

Net Income (Loss) Per Share

Net income (loss) per common share is calculated in accordance with
Financial Accounting Standards Board Statement No. 128, Earnings Per Share.
The Companys basic net income (loss) per common share is computed by dividing
net income (loss) by the weighted average number of common shares outstanding
during the period. Diluted net income per common share is computed by dividing
net income by the weighted average number of common shares outstanding during
the period, increased to include dilutive potential common shares issuable upon
the exercise of stock options that were outstanding during the period. For
periods of net loss, diluted net loss per common share equals basic net loss
per common share because common stock equivalents are not included in periods
where there is a loss, as they are antidilutive. A reconciliation of the
numerator and denominator in the basic and diluted net income (loss) per share
calculation is as follows:

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Year ended September 30,2004
    
    2003
    
    2002Numerator:Net income (loss)
    
    $
    746,813


    $
    329,903
    
    
    $
    (1,394,805
    )Denominator:Denominator for basic net income (loss) per common
share  weighted average shares outstanding
    

    5,434,338


    
    5,379,954
    
    
    
    5,328,531Effect of dilutive stock options
    

    252,256

    
    273,905
    
    
    
    Denominator for diluted net income (loss) per common
share  weighted average shares outstanding
    

   5,686,594

    
    5,653,859
    
    
    
    5,328,531Net
income (loss) per common share  basic
    
    $
    0.14

    $
    0.06
    
    
    $
    (0.26
    )Net
income (loss) per common share  diluted
    
    $
    0.13

    $
    0.06
    
    
    $
    (0.26
    )


Employee stock options of 351,000 for the fiscal year ended September 30, 2004
and 355,500 for the fiscal year ended September 30, 2003 have been excluded from the diluted net income per common share calculations
because their exercise prices were greater than the average market price of the
Companys common stock. In addition, the effect of stock options for the
fiscal year ended September 30, 2002 have been excluded from the
diluted net loss per common share calculation because they are antidilutive.

In March
2004, the FASB issued an exposure draft, Share-Based Payments,
an Amendment of FASB Statements No. 123 and 95, which may
eliminate the ability to account for share-based compensation
transactions using APB No. 25 and require companies to recognize
the cost of employee services received in exchange for equity
instruments, based on the grant-date fair value of those instruments.
In Octobr 2004, the FASB delayed the effective date of this
proposed pronouncement until fiscal or interim periods beginning
after June 15, 2005. The Company will continue to monitor the
rules and statements released by the FASB in regard to how it
accounts for stock-based employee compensation.

3. Advertising Costs

The
Company incurred advertising expenses of $165,000, $126,000 and $334,000
for the years ended September 30, 2004, 2003 and 2002, respectively.
All advertising costs are charged to operations as incurred.

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4. Inventories

Inventories are summarized as follows:

September 30,2004
    
    2003Raw materials
    
    $
    686,492
    
    
    $
    614,763Work-in-process
    
    
    1,890,860
    
    
    
    1,565,213Finished goods
    
    
    1,467,961
    
    
    
    1,462,643Reserve for inventory obsolescence
    
    
    (100,000
    )
    
    
    (100,000
    )$
    3,945,313
    
    
    $
    3,542,619


5. Shareholders Equity

Stock Options

In February 2001, the Companys shareholders approved the 2001 Stock
Incentive Plan. Under the terms of the 2001 Stock Incentive Plan, 500,000
shares are authorized for issuance pursuant to grants of incentive stock
options and non-qualified options. Per the terms of the 2001 Stock Incentive
Plan, options may be granted with a term no longer than ten years. The vesting
schedule and term for options granted under the 2001 Stock Incentive Plan is
determined by the Compensation Committee of the Companys Board of Directors.

In August 1998, the 1991 Stock Option Plan was amended to increase by
300,000 shares the number of shares authorized for issuance to 1,000,000
shares. Under terms of the 1991 Plan, the Board of Directors may grant
employee incentive stock options equal to fair market value of the Companys
Common Stock or employee non-qualified options at a price which cannot be less
than 85% of the fair market value. Per the terms of the 1991 Plan, as of April
20, 2001, no new stock options may be granted under the 1991 Plan.

The 1995 Non-Statutory Stock Option Plan authorizes the issuance of up to
50,000 shares of Common Stock. Per the terms of the 1995 Non-Statutory Stock
Option Plan, no option may be granted with a term longer than ten years. The
vesting schedule for options granted under the 1995 Non-Statutory Stock Option
Plan is determined by the Compensation Committee of the Companys Board of
Directors. In September 1995, Medical Advisory Board members were granted
options to purchase 12,000 shares of the Companys Common Stock at an exercise
price of $15.75 per share. In April 1999, one member of the Medical Advisory
Board was granted options to purchase 6,000 shares of the Companys Common
Stock at an exercise price of $10.125 per share.

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Option activity is summarized as follows:

WeightedAverageShares
    
    
    
    
    
    ExerciseReserved
    
    Options
    
    Price PerFor Grant
    
    Outstanding
    
    ShareBalance as of September 30, 2001
    
    
    477,000
    
    
    
    960,000
    
    
    $
    9.16Options granted
    
    
    (203,000
    )
    
    
    203,000
    
    
    
    4.44Options exercised
    
    
    
    
    
    
    (750
    )
    
    
    5.50Options canceled
    
    
    127,250
    
    
    
    (127,250
    )
    
    
    8.491991 Plan  options canceled and not reissuable
    
    
    (111,000
    )
    
    
    
    
    
    
    Balance as of September 30, 2002
    
    
    290,250
    
    
    
    1,035,000
    
    
    
    8.32Options granted
    
    
    (73,000
    )
    
    
    73,000
    
    
    
    8.36Options exercised
    
    
    
    
    
    
    (95,450
    )
    
    
    6.33Options canceled
    
    
    47,250
    
    
    
    (47,250
    )
    
    
    8.181991 Plan  options canceled and not reissuable
    
    
    (33,250
    )
    
    
    
    
    
    
    Balance as of September 30, 2003
    
    
    230,250
    
    
    
    965,300
    
    
    
    8.52Options granted
    
    
    (66,000
    )
    
    
    66,000
    
    
    
    9.25Options exercised
    
    
    
    
    
    
    (16,431
    )
    
    
    5.09Options canceled
    
    
    2,250
    
    
    
    (2,250
    )
    
    
    8.251991 Plan  options canceled and not reissuable
    
    
    
    
    
    
    
    
    
    
    Balance
as of September 30, 2004
    
    
    166,500
    
    
    
    1,012,619
    
    
    $
    8.62


The
number of stock options exercisable at September 30, 2004, 2003
and 2002
 was 775,869, 636,800 and 586,750 at a weighted average exercise price of
$9.34, $10.08 and $10.59 per share, respectively.

The Company has elected to follow Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees (APB 25) and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided under FASB
Statement No. 123, Accounting for Stock-Based Compensation (Statement 123),
requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, when the exercise price of the
Companys employee stock options equals the market price of the underlying
stock on the date of grant, no compensation expense is recognized.

Pro forma information
regarding net income (loss) and income (loss) per share is required by
Statement 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of Statement 123. The fair
value of these options was estimated at the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions: risk-free interest rate of 3.42%, 3.10% and 3.50% for fiscal 2004,
2003 and 2002, respectively; volatility factor of the expected market price of
the Companys common stock of

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.554, .561 and .569 for fiscal 2004,
2003 and 2002, respectively; a
weighted average expected life of the option of 6.6 years,
6.6 years and 6.4 years for fiscal 2004, 2003 and 2002, respectively; and an expected dividend
yield of 0%.

The
weighted average fair value of options granted in 2004, 2003 and 2002
was $5.34, $4.97 and $2.58 per share, respectively. The exercise price of
options outstanding at September 30, 2004 ranged from $4.33 to $20.00 per share
as summarized in the following table:

Weighted
    
    
    
    
    
    WeightedWeighted
    
    Average
    
    
    
    
    
    AverageAverage
    
    Exercise Price
    
    
    
    
    
    Exercise PriceNumber
    
    Remaining
    
    Per Share -
    
    Number
    
    Per Share -Outstanding
    
    Contractual
    
    Total Options
    
    Exercisable
    
    OptionsRange of Exercise Prices
    
    at 9/30/04
    
    Life
    
    Outstanding
    
    at 9/30/04
    
    Exercisable$4.33 - $5.00
    
    
    333,619
    
    
    6.7 years
    
    $
    4.54
    
    
    
    216,619
    
    
    $
    4.595.01 - 10.00
    
    
    382,000
    
    
    6.7 years
    
    
    7.59
    
    
    
    264,500
    
    
    
    7.4210.01 - 15.00
    
    
    187,000
    
    
    2.8 years
    
    
    13.44
    
    
    
    184,750
    
    
    
    13.4815.01 - 20.00
    
    
    110,000
    
    
    2.5 years
    
    
    16.37
    
    
    
    110,000
    
    
    
    16.371,012,619
    
    
    5.5 years
    
    $
    8.62
    
    
    
    775,869
    
    
    $
    9.34


The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions. Because the Companys employee stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can materially
affect the fair value estimate, in managements opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
employee stock options.

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6. Income Taxes

Deferred income taxes are due to temporary differences between the
carrying values of certain assets and liabilities for financial reporting and
income tax purposes. Significant components of deferred income taxes are as
follows:

September 30,2004
    
    2003Deferred
income tax assets:Net
operating loss carryforwards
    
$
8,698,000

    $
    8,956,000Research
and development credit carryforwards
    

311,000

    
    279,000Allowance
for doubtful accounts
    

27,000

    
    26,000Inventory reserves
    

37,000

    
    37,000Inventory capitalization
    

133,000

    
    128,000Accrued expenses
    

50,000

    
    60,000Deferred revenue
    

325,000

    
    383,000Total
income tax deferred assets
    

9,581,000

    
    9,869,000Deferred
income tax liability:Depreciation and amortization
    

462,000

    
    520,000Net deferred income tax assets
    

9,119,000

    
    9,349,000Valuation allowance
    

(9,119,000
)
    
    (9,349,000
    )Net deferred income taxes
    
$


    $
    


The Company records a valuation allowance to reduce the carrying value of
its net deferred tax assets to the amount that is more likely than not to be
realized. The Company will be subject to federal income taxes when operations
become profitable. The Companys net operating loss carryforwards of
approximately $23,508,000 can be carried forward to offset future taxable
income, subject to the limitation of Internal Revenue Code Section 382. The
net operating loss carryforward will expire at different times beginning in
2005. The expiration by year for the upcoming five fiscal years and thereafter
are as follows: 2005: $0; 2006: $0; 2007:
$572,000; 2008: $892,000; 2009: $1,086,000; and thereafter: $21 million.

The reconciliation between the statutory federal income tax rate of 34%
and the effective income tax rate for the years ended September 30 is as
follows:

2004
    
    2003
    
    2002Statutory federal income tax rate
    


    34
    %

    
    34
    %
    
    
    34
    %Increase (decrease) in taxes resulting from:State taxes
    


    3
    
    
    3
    
    
    
    3Utilization of net operating loss carryforward
    

    (36
    )
    

    (21
    )
    
    
    Change in valuation allowance
    


    (1
    )

    
    (16
    )
    
    
    (37
    )Effective income tax rate
    


    0
    %

    
    0
    %
    
    
    0
    %


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7. Related Party Transactions

The Chairman
of the Board of one of the Companys significant customers,
Mentor Corporation, is the brother of the Companys Chief Executive Officer and
two other directors of the Company.

The brother-in-law of the CEO and President, the Vice President of
Production Technologies and a member of the board of directors of the Company
has performed legal services for the Company. During the years ended September
30, 2004, 2003 and 2002, the Company incurred legal fees and expenses of
approximately $60,000, $19,000 and $39,000, respectively, to such counsel for
services rendered in connection with litigation and for general legal services.
Management believes the fees paid for the services rendered to the Company
were on terms at least as favorable to the Company as could have been obtained
from an unrelated party.

The Company contracts with Petersen Blacksmith Company for the fabrication
of customized, proprietary manufacturing equipment used in the Companys
automated production lines. During 2004, 2003 and 2002, the Company paid
Petersen Blacksmith Company the sum of
$101,000,
$9,000 and $14,000,
respectively. Michael Petersen, the proprietor of Petersen Blacksmith Company,
is the brother-in-law of the former Vice President, Research and
Development of the Company. Management believes that the terms of the
agreement are at least as favorable to the Company as could have been obtained
from an unrelated party.

8. Significant Customers

Significant customers, measured as a percentage of sales, are summarized
as follows:

September 30,2004
    
    2003
    
    2002Significant customers:Hollister
    
    
    16
    
    
    
    13
    
    
    
    13Mentor
    
    
    13
    
    
    
    14
    
    
    
    15Porges (a subsidiary of Mentor)
    
    
    9
    
    
    
    6
    
    
    
    6Mentor Medical (formerly Sims Portex,
now a subsidiary of Mentor)


    
    
    3
    
    
    
    5
    
    
    
    3Total
    
    
    41
    %
    
    
    44
    %
    
    
    44
    %


9. Employee Benefit Plan

The Company has a 401(k) plan covering employees meeting certain
eligibility requirements. The Company currently does not match employee
contributions.

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##### Table of Contents



10. Geographic Area Data

Sales
related to customers in the United States, Europe and the rest of the
world are
as follows:

September 30,2004
    
    2003
    
    2002United States
    
    $
    7,990,527
    
    
    $
    7,476,812
    
    
    $
    6,150,095Europe
    
    
    4,769,601
    
    
    
    4,631,470
    
    
    
    2,983,730Rest of world
    
    
    2,251,291
    
    
    
    2,547,090
    
    
    
    1,941,671Total
    
    $
    15,011,419
    
    
    $
    14,655,372
    
    
    $
    11,075,496


Sales are attributed to countries based upon the address to which the Company
ships products, as set forth on the customers purchase order.

11. Long-Term Debt

In June 2003, the Company entered into an agreement with the City of
Stewartville to purchase additional land. The purchase price of the property
is $170,000 plus interest at 7%. The initial down payment was $34,000. The
balance outstanding at September 30, 2004 was $102,000. Annual principal
payments of $34,000 will be made, plus interest, for four years ending May 1,
2007.

12. Capital Leases

During 2003, the Company entered into commitments under two capital leases
for the lease of packaging equipment and a trash compactor. These leases are
payable in monthly installments through 2008. Future minimum lease payments
under non-cancelable capital leases as of September 30, 2004 are as follows:

Fiscal Year2005
    
    $
    44,6152006
    
    
    44,6152007
    
    
    44,6152008
    
    
    22,985Total future minimum lease payments
    
    
    156,830Less amount representing interest
    
    
    (15,405
    )Present value of net minimum lease payments
    
    
    141,425Less current portion
    
    
    (37,611
    )Long-term capital lease obligation
    
    $
    103,814


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Assets under capital leases, as included in property, plant and equipment
in the Companys balance sheets, are as follows:

September 30,2004
    
    2003Packaging equipment
    
    $
    194,024
    
    
    $
    222,622Less accumulated amortization
    
    
    (26,563
    )
    
    
    (4,085
    )$
    167,461
    
    
    $
    218,537


Amortization of assets under capital leases is included in depreciation
expense.

13. Line of Credit

The Company has a $1,000,000 line of credit with U.S. Bank National
Association. The agreement calls for a variable interest rate that is equal to
1% plus the one-month LIBOR rate. The agreement runs through
March 31, 2005.
As of September 30, 2004, the Company had no amounts outstanding under this
line of credit, and did not have any borrowings outstanding at any
time during fiscal 2004.

14. Quarterly Results (Unaudited)

Summary data relating to the results of operations for each quarter of the
years ended September 30, 2004 and 2003 follows (in thousands, except per share
amounts):

Three Months EndedDecember
    
    
    
    
    
    
    
    
    
    September31
    
    March 31
    
    June 30
    
    30Fiscal year 2004:Net sales
    
    $
    3,348
    
    
    $
    3,811
    
    
    $
    4,257
    
    
    $
    3,594Gross profit
    
    
    1,195
    
    
    
    1,345
    
    
    
    1,605
    
    
    
    1,251Income from operations
    
    
    51
    
    
    
    119
    
    
    
    358
    
    
    
    130Net income
    
    
    64
    
    
    
    139
    
    
    
    387
    
    
    
    157Net
income per common share - basic
    
    $
    .01
    
    
    $
    .03
    
    
    $
    .07
    
    
    $
    .03Net
income per common share - diluted
    
    $
    .01
    
    
    $
    .02
    
    
    $
    .07
    
    
    $
    .03Fiscal year 2003:Net sales
    
    $
    3,539
    
    
    $
    3,718
    
    
    $
    3,777
    
    
    $
    3,621Gross profit
    
    
    1,199
    
    
    
    1,344
    
    
    
    1,252
    
    
    
    1,286Income from operations
    
    
    19
    
    
    
    99
    
    
    
    49
    
    
    
    5Net income
    
    
    61
    
    
    
    142
    
    
    
    86
    
    
    
    41Net income per common share -
basic and diluted
    
    $
    .01
    
    
    $
    .03
    
    
    $
    .02
    
    
    $
    .01


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##### Table of Contents









ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.







ITEM 9A. Controls and Procedures

Evaluation of Disclosure Controls and Procedures. Under the supervision
and with the participation of our management, including the Companys Chief
Executive Officer and Chief Financial Officer, we evaluated the effectiveness
of the design and operation of our disclosure controls and procedures (as
defined in Rule 13a-15(e) under the Exchange Act) as of the end of the period
covered by this report. Based upon that evaluation, the Chief Executive Officer
and Chief Financial Officer concluded that, as of the end of the period covered
by this report, the Companys disclosure controls and procedures are adequately
designed to ensure that information required to be disclosed by the Company in
the reports that it files or submits under the Securities and Exchange Act of
1934, as amended, is recorded, processed, summarized and reported, within the
time periods specified in applicable rules and forms.

Changes in Internal Controls. During our fourth fiscal quarter, there
were no significant changes made in our internal control over financial
reporting (as defined in Rule 13(a)  15(f) under the Exchange Act) that have
materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.

ITEM 9B. Other Information

None.







PART III







ITEM 10. Directors and Executive Officers of the Registrant

Incorporated herein by reference to portions of the Proxy Statement for
Annual Meeting of Shareholders to be filed with the Securities and Exchange
Commission within 120 days of the close of the fiscal year ended September 30,
2004, and Executive Officers of the Registrant in Part I of this report.

The Company has adopted a code of ethics in compliance with applicable
rules of the Securities and Exchange Commission that applies to
all of its employees, including its principal executive officer, its principal financial officer and its principal accounting
officer or controller, or persons performing similar functions. The Company has
posted a copy of the code of ethics on the Companys website, at www.rocm.com.
The Company intends to disclose any amendments to, or waivers from, any
provision of the code of ethics by posting such information on such website.







ITEM 11. Executive Compensation

Incorporated herein by reference to portions of the Proxy Statement for
Annual Meeting of Shareholders to be filed with the Securities and Exchange
Commission within 120 days of the close of the fiscal year ended September 30,
2004.

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##### Table of Contents









ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Incorporated herein by reference to portions of the Proxy Statement for
Annual Meeting of Shareholders to be filed with the Securities and Exchange
Commission within 120 days of the close of the fiscal year ended September 30,
2004.

Equity Compensation Plan Information As of September 30, 2004

Number of securitiesremaining availableNumber of securities
    
    
    
    
    
    for future issuanceto be issued upon
    
    Weighted-average
    
    under equityexercise of
    
    exercise price of
    
    compensation plansoutstanding options,
    
    outstanding options,
    
    (excluding securitiesPlan category
    
    warrants and rights
    
    warrants and rights
    
    reflected in column(a))(a)
    
    (b)
    
    (c)Equity compensation
plans approved by
security holders(1)
    
    
    994,619
    
    
    $
    8.52
    
    
    
    134,500Equity compensation
plans not approved
by security
holders(2)
    
    
    18,000
    
    
    $
    13.88
    
    
    
    32,000Total
    
    
    1,012,619
    
    
    $
    8.62
    
    
    
    166,500




---

|(1) |  | Includes shares issuable under the Companys 1991 Stock Option Plan and
2001 Stock Incentive Plan.                                                                                                                                                                                                      
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Includes shares issuable to persons other than full-time officers or
employees of the Company pursuant to the exercise of stock options granted
under the Companys 1995 Non-Statutory Stock Option Plan that do not qualify as
incentive stock options within the meaning of Section 422 of the Code.







ITEM 13. Certain Relationships and Related Transactions

Incorporated herein by reference to portions of the Proxy Statement for
Annual Meeting of Shareholders to be filed with the Securities and Exchange
Commission within 120 days of the close of the fiscal year ended September 30,
2004.







ITEM 14. Principal Accountant Fees and Services

Incorporated herein by reference to portions of the Proxy Statement for
Annual Meeting of Shareholders to be filed with the Securities and Exchange
Commission within 120 days of the close of the fiscal year ended September 30,
2004.







ITEM 15. Exhibits and Financial Statement Schedules

(a)(1)
    
    The following financial statements are filed herewith in Item 8.




| | (i) |  | Balance Sheets as of September 30,
2004 and 2003.
| | --- |  | -------------------------------------------------



| | (ii) |  | Statements of Operations for the years ended
September 30, 2004, 2003 and 2002.
| | ---- |  | -------------------------------------------------------------------------------



| | (iii) |  | Statement of Shareholders Equity for the
years ended September 30, 2004 and 2003.
| | ----- |  | ----------------------------------------------------------------------------------



| | (iv) |  | Statements of Cash Flows for the years ended
September 30, 2004, 2003 and 2002.
| | ---- |  | -------------------------------------------------------------------------------



| | (v) |  | Notes to financial statements at
September 30, 2004.
| | --- |  | ----------------------------------------------------

(a)(2)
    
    Financial Statement Schedules.


Schedule II
 Valuation and Qualifying Accounts (page 50)

Financial statement schedules other than those listed have been
omitted since they are not required or are not applicable or the
required information is shown in the financial statements or
related notes.

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##### Table of Contents



(b) Exhibits

The following exhibits are submitted herewith:

3.1
    
    
    Articles of Incorporation of the Company, as amended. (Incorporated by reference to Exhibit 4.1 of
Registrants Registration Statement on Form S-2,
Registration Number 33-97788).3.2
    
    
    Amended and Restated
Bylaws of the Company (Incorporated by reference to Exhibit 3.2 of Registrants
Annual Report on Form 10-K for fiscal year ended September 30, 2003).4.1
    
    
    Specimen of Common Stock Certificate.
(Incorporated by reference to Exhibit 4.4 of Registrants
Annual Report on Form 10-KSB for fiscal year ended September
30, 1995).4.2
    
    
    The Companys 1991 Stock Option Plan as amended
(Incorporated by reference to Exhibit 4.5 of Registrants
Registration Statement on Form S-8, Registration Number
333-10261).4.3
    
    
    Amendment to the Companys 1991 Stock Option Plan
as amended (Incorporated by reference to Exhibit 4.3 of
Registrants Annual Report on Form 10-K for fiscal year ended
September 30, 1998).10.1
    
    
    Employment Agreement, dated August 31, 1990
between the Company and Anthony J. Conway. (Incorporated by
reference to Exhibit 10.13 of Registrants Registration
Statement on Form S-18, Registration Number 33-36362-C).10.2
    
    
    Employment Agreement, dated August 31, 1990
between the Company and Philip J. Conway. (Incorporated by
reference to Exhibit 10.14 of Registrants Registration
Statement on Form S-18, Registration Number 33-36362-C).10.3
    
    
    Change of Control Agreement dated December 4,
1998, between the Company and Philip J. Conway (Incorporated
by reference to Exhibit 10.3 of Registrants Annual Report on
Form 10-K for fiscal year ended September 30, 1998).10.4
    
    
    Employment Agreement, dated August 31, 1990
between the Company and Richard D. Fryar. (Incorporated by
reference to Exhibit 10.15 of Registrants Registration
Statement on Form S-18, Registration Number 33-36362-C).10.5
    
    
    Change of Control Agreement dated December 4,
1998, between the Company and Richard D. Fryar (Incorporated
by reference to Exhibit 10.5 of Registrants Annual Report on
Form 10-K for fiscal year ended September 30, 1998).


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##### Table of Contents



10.6
    
    
    Change of Control Agreement dated November 21,
2000, between the Company and Anthony J. Conway.
(Incorporated by reference to Exhibit 10.6 of the Registrants
Annual Report on Form 10-K for fiscal year ended September 30,
2000).10.7
    
    
    Change of Control Agreement dated November 21,
2000, between the Company and Dara Lynn Horner. (Incorporated
by reference to Exhibit 10.7 of the Registrants Annual Report
on Form 10-K for fiscal year ended September 30, 2000).10.8
    
    
    Employment Agreement, dated November 16, 1998
between the Company and Dara Lynn Horner. (Incorporated by
reference to Exhibit 10.8 of Registrants Annual Report on
Form 10-K for fiscal year ended September 30, 1999).10.9
    
    
    Change of Control Agreement dated November 21,
2000, between the Company and Martyn R. Sholtis.
(Incorporated by reference to Exhibit 10.9 of the Registrants
Annual Report on Form 10-K for fiscal year ended September 30,
2000).10.10
    
    
    Change of Control Agreement dated November 21,
2000, between the Company and David A. Jonas. (Incorporated
by reference to Exhibit 10.10 of the Registrants Annual
Report on Form 10-K for fiscal year ended September 30, 2000).10.11
    
    
    The Companys 2001 Stock Incentive Plan.
(Incorporated by reference to Exhibit 4.1 of Registrants
Registration Statement on Form S-8, Registration Number
333-62592).10.12
    
    
    The Companys
Fiscal 2005 Executive Compensation Plan.*23
    
    
    Consent of Ernst & Young LLP.*24
    
    
    Power of Attorney.*31.1
    
    
    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*31.2
    
    
    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*32.1
    
    
    Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*32.2
    
    
    Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*




---

|* |  | Filed herewith.
|- |  | ---------------

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SIGNATURES

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

Rochester Medical CorporationDated:
December 15, 2004
    
    By:
    
    /s/ Anthony J. ConwayAnthony J. ConwayChairman of the Board, President,Chief Executive Officer and Secretary


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

Signature
    
    Title/s/ Anthony J. Conway

Anthony J. Conway
    
    Chairman of the Board, President,
Chief Executive Officer, and Secretary
(principal executive officer)/s/ David A. Jonas

David A. Jonas
    
    Chief Financial Officer and Treasurer
(principal financial and accounting officer)*

Darnell L. Boehm
    
    Director*

Peter R. Conway
    
    Director*

Roger W. Schnobrich
    
    Director*

Benson Smith
    
    Director*By David A. Jonas

David A. Jonas
    
    Dated: December 15, 2004Attorney-in-Fact


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##### Table of Contents



ROCHESTER MEDICAL CORPORATION
SCHEDULE II  VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

COL. A
    
    COL. B
    
    COL. C
    
    COL. D
    
    COL. EAdditionsCharged toBalance at
    
    Charged to
    
    OtherBeginning of
    
    Costs and
    
    Accounts-
    
    Deductions-
    
    Balance atDescription
    
    Period
    
    Expenses
    
    Describe
    
    Describe
    
    End of PeriodYear ended September 30, 2004:Reserves and allowances
deducted from asset accounts:Allowance for doubtful
accounts
    
    $
    69,948
    
    
    $
    18,996
    
    
    
    
    
    
    $
    15,499
    
    
    $
    73,445Allowance for inventory
obsolescence
    
    
    100,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    100,000Allowance for inventory
valuation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Year ended September 30, 2003:Reserves and allowances
deducted from asset accounts:Allowance for doubtful
accounts
    
    $
    64,629
    
    
    $

    6,000
    
    
    
    
    
    
    $

    681
    (1)
    
    $

    69,948Allowance for inventory
obsolescence
    
    
    100,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    100,000Allowance for inventory
valuation
    
    
    61,439
    
    
    
    
    
    
    
    
    
    
    
    61,439
    (2)
    
    
    Year ended September 30, 2002:Reserves and allowances
deducted from asset accounts:Allowance for doubtful
accounts
    
    $
    60,498
    
    
    $
    5,004
    
    
    
    
    
    
    $
    873
    (1)
    
    $
    64,629Allowance for inventory
obsolescence
    
    
    100,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    100,000Allowance for inventory
valuation
    
    
    131,490
    
    
    
    
    
    
    
    
    
    
    
    70,051
    (2)
    
    
    61,439




---

|(1) |  | Uncollectable accounts written off net of recoveries
|--- |  | ----------------------------------------------------
|   
|(2) |  | Valuation of inventory at lower of cost or market   

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##### Table of Contents









INDEX TO EXHIBITS

Exhibit
    
    
    
    Page10.12
    
    The Companys Fiscal 2005 Executive Compensation Plan23
    
    Consent of Ernst & Young LLP24
    
    Power of Attorney31.1
    
    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


-51-