SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM lO-KSB

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) 
OF THE SECURITIES EXCHANGE ACT OF 1934

|(Mark One) |  |                                                                                                                                     
|---------- |  | ------------------------------------------------------------------------------------------------------------------------------------
|ý          |  | Annual report pursuant to Section 13 or 15( d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 2003 or
|o          |  | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934                                            

For the transition period from            to

Commission
File No. 33-75236

LONGPORT, INC.(Name of Small Business Issuer in its Charter)

|Delaware                                                       |  | 23-2715528                             
|-------------------------------------------------------------- |  | ---------------------------------------
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification Number)
|740 South Chester Road, Suite A
Swarthmore. Pennsvlvania       |  | 19081                                  
|(Address of principal executive offices)                       |  | (Zip Code)                             

Issuer's
telephone number: (800) 289-6863

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

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

$.001 Par Value Common Common Stock
Common Stock Purchase Warrants(Title of Class)

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

As of December 31, 2003, 20,865,670 shares of the Registrant's $.001 par value Common Stock were outstanding. As of March 29, 2003, the market value of the
Registrant's Common Stock, excluding shares held by affiliates, was $21,561,505 based upon a closing bid price of $1.25 per share of Common Stock on the Over the Counter Electronic Bulletin Board on
March 26, 2004.

Check
if there is no disclosure contained herein of delinquent filers in response to Item 405 of Regulation S-B, and will not be contained, to the best of the Registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. X

The
Registrant's revenue for its most recent fiscal year was $500,479.

The
following documents are incorporated by reference: None.



---



PART I

ITEM 1. DESCRIPTION OF BUSINESS

Forward-Looking Statements

Except for historical information, the matters set forth in this Report include forward-looking statements within the meaning of the "safe harbor" provisions of
the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially. These risks and
uncertainties are detailed throughout the Report and will be further discussed from time to time in our periodic reports filed with the Commission. The forward-looking statements included in the
Report speak only as of the date hereof.

Technology and Products

Longport, Inc. ("Longport" or "we") has developed, patented and obtained in June 1999 FDA permission to market a high- resolution ultrasound scanner ("Scanner")
which produces an image of the skin and underlying tissue. Once visualized on-screen, scans can be printed, stored as bitmap files or e-mailed to an off-site diagnostic center for interpretation or
archiving. The Scanner system is comprised of a desktop PC like housing, which includes a proprietary board, a separate monitor, keyboard and interchangeable hand-held probes. The system will either
be integrated into a small cart or trolley or used as a desktop machine.

We
have patents issued by the United States, Australia and South Africa and have patent applications pending in Europe and Japan. The technology upon which these patents are based, along
with copyright protected software, was assigned to us by United Medical and Dental Schools of Guy's and St. Thomas's Hospitals ("UMDS") located in London, England.

The
Scanner technology has applications in wound detection and assessment, burn assessment, product testing, dermatology and women's health. In the case of wound detection and
assessment, which is an application we currently emphasize for marketing purposes, clinicians can examine the structure of a wound and the development of pressure ulcers prior to visual indications.
The Scanner images can also distinguish between ulcers caused by friction or incontinence and those created by pressure.

Ultrasound
has been used for medical images for many years and has proven to be a safe, effective imaging technique. Using sound waves emitted at frequencies well above the normal human
ear response, echoed signals are converted into graphic images and displayed on a monitor. Computer programs that support ultrasound imaging use algorithms to document dimensions of areas being
scanned. These measurements provide a baseline that the clinician can use to compare to other scans. The Scanner shares those characteristics, which are common to all ultrasound imaging equipment, but
uses high frequency ultrasound at 20 MHz to provide high resolution images at depths of up to three centimeters. This compares to the 3 to 5 MHz ultrasound frequency commonly used to scan fetal
images. Traditional low-frequency ultrasound equipment, which costs $150,000 to $350,000, is generally unable to image thin structures like skin. We believe that the Scanner's ability to produce high-
resolution images of thin structures, such as skin, subcutaneous tissue and superficial tendons, combined with user friendly software, is unique.

The
depth used by the Scanner to produce a useable image depends on the area being scanned and the clinical application. For instance, wounds on the ankle require an image depth of only
2 to 4 millimeters, an area generally too small to resolve using conventional imaging technology, but ideally suited to the use of the Scanner.

From
1999 through 2003, we sold a negligible number of Scanners. However, in February 2004, we entered into an agreement (the "Agreement") with U.S. Medical Systems Corp. ("U.S.
Medical")

2

---

pursuant
to which we appointed U.S. Medical as a non- exclusive distributor of our Scanner in the United States. Upon the effective date of the Agreement, U.S. Medical tendered a $500,000 deposit to
us for the purchase of 100 Scanners. Under the terms of the Agreement:

1.     U.S.
Medical paid $525,000 for the exclusive rights ("Exclusive Rights") to market Scanners in the United States solely in the "wound care market" (as defined in the
Agreement) and subject to existing distribution agreements previously entered into or being negotiated by us. The wound care market is defined as nursing homes, assisted care living facilities,
rehabilitation centers and operating wound care centers.

2.     In
order to maintain its Exclusive Rights, U.S. Medical must purchase at least 25 Scanners per month during the first year, 50 Scanners per month during the second year
and at least 80 Scanners per month (for a total of at least 1,000 Scanners) during the third year.

3.     We
may continue to sell our Scanners in the wound care market to our existing distributors and other firms with which we have been negotiating, subject to the payment to
U.S. Medical of a 1% royalty on gross sales to these firms.

4.     The
Agreement is for a period of three years, subject to renegotiation by the parties of a subsequent agreement. If the parties fail to agree upon renewal terms, they are
required to submit the matter to binding arbitration.

5.     At
the end of each year of the three-year Agreement, we will issue to U.S. Medical between 1 % and 5% of our outstanding common stock on a sliding scale basis if sales to
U.S. Medical represent between 50% and 90% of our total Scanner sales in all market segments.

6.     Should
U.S. Medical fail to meet its purchase requirements as set forth above, it would lose its Exclusive Rights but would still have the opportunity to act as a
distributor of Scanners on a non-exclusive basis, should we allow it to do so.

In
March 2004 we announced the sale of 100 Scanners to Future Scan Corporation ("Future Scan").

We
expect to begin delivering Scanners pursuant to the above orders to U.S. Medical and Future Scan in the second and third quarters of 2004 respectively.

We
also intend to sell products and services that complement our core Scanner business. These offerings will include service and maintenance contracts, disposable products that support
the use of the Longport systems, digital photography equipment and specialized imaging probes. In addition, we are seeking to act as a conduit to independent image interpretation services and are
assessing the requirements for remote data archiving services.

Growth Strategy

To facilitate our ability to pursue multiple opportunities simultaneously and quickly, we have defined a growth strategy that focuses on two core competencies:
technology and business development. We believe this approach will enable us to concentrate on our strengths, while outsourcing other functions and includes:



3

---



Manufacturing

We use SRA Development Ltd. ("SRA"), a United Kingdom-based company, to manufacture the Scanner's probes, to assemble the other Scanner components and to quality
test the Scanner before shipment. SRA is single-source supplier, and our business and financial results would be negatively
affected if we were unable to obtain prompt deliveries from SRA for any Scanners ordered. Moreover, there is a significant risk of quality control problems whenever a new product is being
manufactured. We do not have a long-term agreement with SRA but use purchase orders to obtain Scanners at least four months in advance of our needs.

SRA
inserts our proprietary boards, which are manufactured by another U.K. company, into the Scanner's CPU, incorporates the probe and connects the keyboard and monitor so that the
Scanners can be tested for quality control purposes. Our proprietary board manufacturer is also a single-source supplier. Currently, we believe that SRA has the capacity to manufacture probes and
boards for 50 Scanners per month. Following manufacture, SRA ships the Scanner's components to us, and we complete full assembly at our facilities in Philadelphia, Pennsylvania before delivery to
customers. We are continually evaluating our manufacturing capabilities and are considering adding additional manufacturing sources to meet increased product demand.

We
intend to outsource many operational functions. This approach is in line with our objective to be primarily a medical technology and business development company. This will enable us
to operate efficiently and to focus our resources on creating new medical products and new market opportunities for those products. To this end:



Marketing

We currently offer the Scanners for sale to medical products distributors, as well as end users, primarily in the wound care industry. In the future, we intend to
also focus on dermatological and cosmetic applications. Wound management is an expanding and increasingly important area of concern for the medical profession. The cost of treating chronic wounds has
been estimated at $7 billion annually. With more than 625,000 new wound cases per year, we believe there is value for a device that accelerates diagnosis of diabetic wounds. Having a view of the wound
and surrounding tissue is expected to materially reduce the risks of amputations, thereby increasing survival rates.

According
to industry estimates, the annual worldwide market for ultrasound imaging devices is over $3 billion. In the U.S., 65 million ultrasound procedures are conducted annually. We
are finding customers for our technology in the traditional ultrasound market and believe we can also create new demand because the Scanner enables innovative uses of ultrasound technology in a wide
range of medical specialties not currently served by ultrasound or any other imaging technology. The Scanners are primarily aimed at the point-of-contact market, meaning they will be used directly by
the clinician

4

---

(dermatologist,
plastic surgeon, etc.) who is seeking the imaging data as well as third party service providers such as radiologists.

The
markets for our technology can be divided into two broad categories, emerging market and established markets, as illustrated below.

Emerging Markets

Emerging markets require very high resolution imaging technology, a capability that is not provided by current ultrasound systems. Many emerging markets are
looking for a system solution based around an ultrasound core complemented by other imaging or sensory inputs as well as appropriate data or record entry systems. For example, in the wound care field,
the Scanner system enables digital photographs to be integrated with ultrasound scans and a comprehensive data entry system is being created, with the capability for remote data backup. This system
allows all wound-related data to be entered and stored into a single system resulting in more efficient record keeping and subsequent audit. The emerging markets include:





5

---



Established Markets

As mentioned above, the established market for ultrasound imaging technology is currently $3 billion per year, and is forecast to grow at approximately 6% per
year. In these markets the benefits of ultrasound imaging have already been established, and we aim to offer innovative and higher performance but at a lower cost. Market feedback shows that such
systems may attract established ultrasound users and also broaden the potential customer base by converting many clinicians (e.g. orthopedic surgeons) that currently source ultrasound images through
third party providers such as radiologists into direct users. In the future, we expect to address applications that include:



Marketing Strategy

Since we believe that the Scanner can be adapted for a wide variety of applications, we will seek to sell it to diverse customer groups. To access these markets
rapidly and effectively, we have divided our marketing strategy into three phases:



6

---





We will continue to cultivate the support of clinical and technological opinion leaders and leading medical institutions through the publication and presentation of study results which
will play a pivotal role in our marketing and public relations activities. The centers we are collaborating with include: Harvard/Massachusetts General Hospital, Yale, Wake Forest, University of
Miami, University of Kansas Medical Center, University of Notre Dame and Guy's Hospital, London.

Research and Development

We continue to conduct research and development in order to validate the Scanner in existing markets and in new markets. We continue to re-engineer Scanner parts
and update off-the-shelf hardware and software used in the Scanner.

Competition

Diagnostic imaging solutions compete primarily on the basis of diagnostic value, imaging performance, reliability, ease of use and price. Our competitors include
MRI producers, ultrasound manufacturers, and X-ray based topography solutions. Any of these competitors could seek to modify their imaging devices to produce higher resolutions at narrower depths. In
fact, one company, Cortex Technology, Inc., marketing under the name Dermascan, offers a scanner which competes directly with our Scanner, although it is generally used as a research tool. Moreover,
current and potential diagnostic imaging modalities such as those described below also pose a significant competitive risk to us.

Low Frequency Ultrasound.Traditional ultrasound technology is used regularly for a number of clinical applications.
Ultrasound is currently used in several medical imaging applications, including pulsed ultrasound, continuous wave "Doppler" ultrasound and real-time ultrasound. Each variation is particularly suited
to certain applications. "Doppler" ultrasound is used to record changes in a fetal heart while pulsed ultrasound can be used to resolve images of the abdomen.

Magnetic Resonance Imaging (MRI).Magnetic resonance imaging produces high quality images inside the body. MRI is based on
the principles of nuclear magnetic resonance (NMR), a technique originally used by chemists and physicists to obtain microscopic chemical and physical information about molecules.

Conventional X-Ray.X-ray systems pass radiation through a patient to a shielded photographic plate. Due to the health risks
associated with exposure to ionizing radiation, operating x-ray equipment requires a controlled environment and trained professionals. Additionally, operating x-ray equipment requires film and in many
cases, board certified radiologists. Despite these barriers, x-ray technologies are effective for a number of applications, including skeletal examinations and mammography. X-rays cannot currently
image thin tissue structures.

Our
anticipated competition can be divided into two categories. One category is the medical status quo. This is particularly relevant to the emerging markets for the Scanner, which have
historically not used sophisticated imaging technology. Additionally, we could face the following categories of competition as we enter the various markets:



7

---



Technology Transfer Agreements

In December 1997, we entered into two Technology Transfer Agreements (the "Agreements") with UMDS and Square Wave Systems, Ltd. ("SWS") pursuant to which UMDS and
SWS assigned all of their rights, title and interest in patent applications (the "Patents") covering certain technology associated with the Scanner. The Agreements provide us with the exclusive and
worldwide rights to the use of the Scanner technology underlying the Patents for medical applications only. UMDS and SWS retained the rights to all other uses for the Patents. However, in the case of
the fractal analysis software, a software component of the Scanner which is used to analyze, determine and graphically display the fractal nature of a reflected image generated from a Scanner, our
rights are limited to the use of software solely in a high frequency ultra sound skin scanner. In consideration of the assignment of the technology pursuant to the Agreements, we agreed to pay to UMDS
and SWS, in the aggregate, 3% of our gross revenues for the five year period commencing in June 1999 when the FDA granted marketing permission to us with respect to the Scanner. We also agreed to pay
all costs associated with maintaining and renewing the Patents, which were approved on June 6, 2000.

There
can be no assurance that the Patents will afford protection against competitors with similar technology, that the Patents will not be infringed upon or designed around by others,
that others will not obtain patents that we will need to license or design around, that the Patents will not inadvertently infringe upon the patents of others, or that others will not manufacture and
distribute similar scanners upon expiration of the Patents. There can also be no assurance that the Patents will not be invalidated or that we will have adequate funds to finance the high cost of
prosecuting or defending patent validity or infringement issues.

Longport International, Ltd.

We formed Longport International, Ltd., a wholly-owned subsidiary, in 1999 to market Scanners outside North America. Longport International began manufacturing
Scanners using SRA in 1999. We received delivery of the first Scanner produced by SRA in August 2000. These Scanners comply with the European Medical Devices Directorate for high-resolution ultrasound
imaging technology. This compliance, together with adherence to the ISO-9001 subset BS-EN-46001 manufacturing quality standard enables a CE mark to be placed on the Scanner for sales outside North
America.

Employees

We currently employ four full-time employees.

Medical Advisory Board

We maintain a Medical Advisory Board of authorities on ultrasound technology, medical imaging and other relevant health-related fields. Our Medical Advisory Board
is comprised of:



8

---



ITEM 2. DESCRIPTION OF PROPERTY

We lease approximately 3,000 square feet of office space at 740 South Chester Road, Suite A, Swarthmore, Pennsylvania on a 36-month lease expiring in November
2004 for $3,500 per month.

ITEM 3. LEGAL PROCEEDINGS

In September 1997, we were notified of a Medicare Hearing Officer's decision that we were liable for repayment of Medicare benefit overpayments of $269,120. The
assessment is related to a home health business conducted by the company prior to 2000 and is unrelated to to our scanner business. The overpayments were from calendar years 1994 and 1995. We appealed
the Hearing Officer's decision and the appeal was heard by an Administrative Law Judge in January 1999 and November 1999. The Judge ruled in favor of us on certain claims and against us on others. We
continue the appeal process and cannot predict the outcome, although we have reserved $100,000 to fund any repayment liability.

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

Not applicable.

PART II

ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES

Our Common Stock has traded on the Over the Counter Electronic Bulletin Board under the symbol "LPTI" since September 7, 1994.

The
following table sets forth for the quarters indicated the range of high and low closing prices of our Common Stock as reported by the Electronic Bulletin Board, but does not include
retail markup, markdown or commissions.

|                   |  | Price
|------------------ |  | -----
|
|By Quarter Ended:  |  |      
|2003               |  |      
|March 31, 2003     |  | $    
|June 30, 2003      |  | $    
|September 30, 2003 |  | $    
|December 31, 2003  |  | $    
|2002               |  |      
|March 31, 2002     |  | $    
|June 30, 2002      |  | $    
|September 30, 2002 |  | $    
|December 31, 2002  |  | $    

As
of March 15, 2004, we had approximately 1,500 record and beneficial stockholders.

9

---

Transfer Agent and Warrant Agent

Corporate Stock Transfer, Inc., 3200 Cherry Creek Drive South, Suite 430, Denver, Colorado 80205, is our transfer agent.

Dividends

We paid a special $.01 dividend on our Common Stock in June 1999. We had not paid dividends previously and do not intend to pay dividends in the future. Earnings,
if any, will be retained to finance growth.

Limitation on Liability

Our Certificate of Incorporation provides that a director shall not be personally liable to Longport or our stockholders for any action taken or any failure to
act to the full extent permitted by the Delaware law. The effect of this provision is to eliminate our rights and our stockholders, through stockholders' derivative suits on behalf of Longport, to
recover monetary damages from a director for breach of the fiduciary duty of care as a director including breaches resulting from negligent or grossly negligent behavior. This provision does not limit
or eliminate the rights of Longport or any stockholder to seek non-monetary relief such as an injunction or rescission in the event of a breach of a director's duty of care or to seek monetary damages
for (i) a violation of criminal law, (ii) unlawful payment of dividends
or other distribution under Delaware law, (iii) a transaction in which a director derived an improper personal benefit, (iv) willful misconduct, or (v) reckless, malicious or wanton acts.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATION

Results of Operations

Year Ended December 31, 2003 Compared to Year Ended December 31, 2002

Revenues for 2003 were $500,479 compared to $444,449 for 2002, which include scanner sales of $251,000 and $142,000 in 2003 and 2002 respectively. We believe the
majority of our future revenues will be from Scanner sales.

Total
expenses increased from $1,271,708 in 2002 to $1,372,225 in 2003. A significant portion of our expenses resulted from general and administrative expenses, research and development
expenses and costs associated with the issuance of stock options. We reduced our general and administrative expenses from $1,002,783 in 2002 to $719,412 in 2003. Research and development expenses were
$269,461 in 2003, compared to $173,656 in 2002. We currently expect to incur additional research and development costs as we begin to develop a new system based on a linear array probe that will
provide real-time images. We believe there will be additional costs associated with clinical research studies utilizing the Scanner for specific medical disciplines in 2004.

We
experienced a net loss of $927,962 in 2003, compared to net loss of $826,062 in 2002.

Year Ended December 31, 2002 Compared to Year Ended December 31, 2001

Revenues for 2002 were $444,449 compared to $252,050 for 2001.

Total
expenses decreased from $2,076,786 in 2001 to $1,271,708 in 2002. The main component of the decrease is the reduction of costs associated with the issuance of stock options to
outside consultants, and the reduction of bad debts.

We
significantly reduced our general and administrative expenses from $1,683,681 in 2001 to $1,002,783 in 2002.

10

---

Research
and Development expenses were $173,656 in 2002, compared to $36,066 in 2001. We expect to incur additional research and development costs as we begin to develop a new system
based on a linear array probe that will provide real-time images. We also incurred expenses associated with two clinical studies on the Scanner in 2001. We believe there will be additional costs
associated with future studies utilizing the Scanner for specific medical disciplines.

We
experienced a net loss of $826,062 in 2002, compared to net loss of $1,160,829 for 2001. The improved performance is the direct result of increased contract revenue arising from
research services and the reduction of costs associated with the issuance of stock options.

Liquidity and Capital Resources

As of December 31, 2003, we had $155,714 in cash and cash equivalents and no long-term debt. Our working capital increased from $68,805 at December 31, 2002 to
$155,714 at December 31, 2003. We experienced an increase in cash from operating activities of $86,909 due primarily to increased Scanner sales in the fourth quarter of 2003, non-cash expenses for
depreciation of $238,732 and stock issued for services of $194,286. We expect that additional cash will be needed to produce and market the Scanners.

Cash
flows from investing activities provided $15,850 from the sale of $30,000 in property and equipment, which was offset by capital expenditures of $14,150. Cash flows from financing
activities provided $420,000, $40,000 received from the sale of our common stock and $440,000 from the issuance of notes payable reduced by $60,000 in payments on prior loans.

Critical Accounting Policies and Estimates

Our consolidated financial statements and accompanying notes have been prepared in accordance with generally accepted accounting principles and rules prescribed
by the Securities and Exchange Commission. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, 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 periods.

We
continually evaluate the accounting policies and estimates we use to prepare the consolidated financial statements. In general, management's estimates are based on historical
experience, on information from third party professionals and on various other assumptions that are believed to be reasonable under the facts and circumstances. Actual results could differ from those
estimates made by management.

Asset impairment.All long-lived assets, including goodwill and other intangible assets are evaluated for impairment on the
basis of undiscounted cash flows whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impaired asset is written down to its estimated
fair market value based on the best information available. Estimated fair market value is generally measured by discounting estimated future cash flows. Considerable judgment by management is
necessary to estimate discounted future cash flows. Assumptions used in these cash flows are consistent with internal forecasts.

11

---



Commitments and contingencies.In September 1997, we were notified of a Medicare Hearing Officer's decision that Longport is
liable for repayment of Medicare Benefit Overpayments of $269,120.The overpayments are from calendar years 1994 and 1995. We appealed the Hearing
Officer's decision. The Appeal was heard by an Administrative Law Judge on January 5,1999 and again on November 2,1999. The Administrative Law Judge reviewed approximately forty out of approximately
410 cases. The Administrative Law Judge dismissed some cases, ruled in favor of Longport on certain cases and ruled against Longport on other cases. We continue to be in the Appeals process. We are
unable to predict the outcome of the Appeal. We have accrued $100,000 as a result of these proceedings based on our estimate of the cases ruled against us and applying the relationship across all of
our Medicare billings prior to 1995. The $100,000 accrual is our best estimate of the potential liability based on all of the facts and circumstances presently known.

Accounting for income taxes.Significant judgment by management is required in developing our provision for income taxes,
including the determination of deferred tax assets and liabilities and any valuation allowances that might be required against the deferred tax assets. We have recorded a valuation allowance for the
entire amount of the deferred tax assets as of December 31, 2002 and 2003 based on our belief that operating income will not, more likely than not, be sufficient to realize the benefit of these assets
over time. In the event that actual results differ from these estimates or if our historical trend of operating losses changes, we may be required to reduce the valuation allowance on deferred tax
assets, which could have a material effect on our financial condition and results of operations.

Other Matters

Longport was assigned a U.S. Patent in June 2000 for the Scanner. The final areas of concern for commercialization are "peer acceptance" and production and
distribution.

The
"peer acceptance", primarily from practicing physicians, hospitals and labs, can occur in many different ways and this is an ongoing process. We have initiated several United
States-based studies in various disciplines, which we believe will lead to articles being published about the Scanner and its advantages. It is these so-called "white papers" which the medical
community requires prior to purchasing new products. We believe that one of the primary advantages to our Scanner is that it has numerous applications in the field of medicine. It is the different
medical "disciplines" or "specialties" that allow us to offer one product, but have several different markets and applications for the product.

ITEM 7. FINANCIAL STATEMENTS

12

---



LONGPORT, INC. AND SUBSIDIARIES        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

|Financial Statements                                                                                                |  | Page
|------------------------------------------------------------------------------------------------------------------- |  | ----
|Independent Auditors' Report                                                                                        |  | 14  
|Consolidated Balance Sheet as of December 31, 2003                                                                  |  | 15  
|Consolidated Statements of Operations for the years ended December 31, 2003 and 2002                                |  | 17  
|Consolidated Statements of Changes in Stockholders' Equity (Deficit) for the years ended December 31, 2003 and 2002 |  | 18  
|Consolidated Statements of Cash Flows for the years ended December 31, 2003 and 2002                                |  | 19  
|Notes To Consolidated Financial Statements                                                                          |  | 20  

13

---



INDEPENDENT AUDITORS' REPORT

To
the Board of Directors and Shareholders of
Longport, Inc.

We
have audited the accompanying consolidated balance sheet of Longport, Inc. and Subsidiaries as of December 31, 2003, and the related consolidated statements of operations, changes in
stockholders' equity (deficit) and cash flows for the years ended December 31, 2003 and 2002. These financial statements are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.

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

In
our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Longport, Inc. and Subsidiaries as of December 31, 2003 and
the results of their operations and their cash flows for the years ended December 31, 2003 and 2002, in conformity with accounting principles generally accepted in the United States of America.

The
accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As shown in the financial statements, the Company incurred a net loss
of $927,962 and $826,062 during the years ended December 31, 2003 and 2002, respectively. As discussed in Note 1 to the financial statements, the Company's significant operating losses raise
substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also discussed in Note 1. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.

|                                                                                                              |  | Mayer Hoffman McCann P.C.
Certified Public Accountants
|------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------
|Greenwood Village, Colorado
February 11, 2004
(except for Note 13, as to which
the date is February 16, 2004) |  |                                                       

14

---



LONGPORT, INC. AND SUBSIDIARIES        CONSOLIDATED BALANCE SHEET        DECEMBER 31, 2003

ASSETS

|Current Assets:                  |                                          |                                                         |                            |           
|-------------------------------- | ---------------------------------------- | ------------------------------------------------------- | -------------------------- | ----------
|                                 | Cash and cash equivalents                |                                                         | $                          | 155,714   
|                                 | Accounts receivable:                     |                                                         |                            |           
|                                 |                                          | Trade, net of allowance for doubtful accounts of $1,000 |                            |           
|                                 | Inventories                              |                                                         |                            | 204,427   
|                                 | Marketable securities available for sale |                                                         |                            | 21,177    
|                                 | Deposits and other current assets        |                                                         |                            | 119,732   
|                                 |                                          |                                                         |                           
|                                 |                                          |                                                         | Total Current Assets       |           
|                                 |                                          |                                                         |                           
|Property and Equipment, at cost: |                                          |                                                         |                            |           
|                                 | Medical equipment                        |                                                         |                            | 1,192,737 
|                                 | Production equipment                     |                                                         |                            | 50,243    
|                                 | Computer equipment                       |                                                         |                            | 58,865    
|                                 | Office furniture and equipment           |                                                         |                            | 36,548    
|                                 |                                          |                                                         |                           
|                                 |                                          |                                                         | 1,338,393                  |           
|                                 | Less accumulated depreciation            |                                                         |                            | (1,242,442
|                                 |                                          |                                                         |                           
|                                 |                                          |                                                         | Net Property and Equipment |           
|                                 |                                          |                                                         |                           
|Other Assets:                    |                                          |                                                         |                            |           
|                                 | Deposits                                 |                                                         |                            | 3,161     
|                                 |                                          |                                                         |                           
|                                 |                                          |                                                         | Total Assets               |           
|                                 |                                          |                                                         |                           

The
accompanying notes are an integral part of these consolidated financial statements.

15

---

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

|Current Liabilities:                                 |                                                                                                      |                |                                      |           
|---------------------------------------------------- | ---------------------------------------------------------------------------------------------------- | -------------- | ------------------------------------ | ----------
|                                                     | Accounts Payable:                                                                                    |                |                                      |           
|                                                     |                                                                                                      | Trade          |                                      | $         
|                                                     |                                                                                                      | Related entity |                                      |           
|                                                     | Accrued expenses                                                                                     |                |                                      | 182,358   
|                                                     | Customer deposits                                                                                    |                |                                      | 44,400    
|                                                     | Accrued Medicare obligation                                                                          |                |                                      | 100,000   
|                                                     | Notes payablerelated entities                                                                       |                |                                      | 307,607   
|                                                     |                                                                                                      |                |                                     
|                                                     |                                                                                                      |                | Total Current Liabilities            |           
|                                                     |                                                                                                      |                |                                     
|Commitments and Contingencies                        |                                                                                                      |                |                                      |           
|Stockholders' Equity (Deficit):                      |                                                                                                      |                |                                      |           
|                                                     | Preferred stock: $.001 par value, 1,000,000 shares authorized none issued or outstanding             |                |                                      |          
|                                                     | Common stock: $.001 par value, 25,000,000 shares authorized 20,865,670 shares issued and outstanding |                |                                      | 20,866    
|                                                     | Paid in capital                                                                                      |                |                                      | 9,405,488 
|                                                     | Accumulated deficit                                                                                  |                |                                      | (9,343,300
|                                                     | Accumulated other comprehensive loss                                                                 |                |                                      | (213,883  
|                                                     | Unearned compensation                                                                                |                |                                      | (7,500    
|                                                     |                                                                                                      |                |                                     
|                                                     |                                                                                                      |                | Total Stockholders' Equity (Deficit) |           
|                                                     |                                                                                                      |                |                                     
|Total Liabilities and Stockholders' Equity (Deficit) |                                                                                                      | $              | 603,075                              |           
|                                                     |                                                                                                      |                |                                     

The
accompanying notes are an integral part of these consolidated financial statements.

16

---



LONGPORT, INC. AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF OPERATIONS        FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002

|                                                                       |                                  | 2003                         |            | 2002     |          
|---------------------------------------------------------------------- | -------------------------------- | ---------------------------- | ---------- | -------- | ---------
|Net Revenues:                                                          |                                  |                              |            |          |          
|                                                                       | Scanner sales                    |                              | $          | 251,000  |          
|                                                                       | Scanner rentals                  |                              |            | 1,750    |          
|                                                                       | Wound clinic management fees     |                              |            |         |          
|                                                                       | Contract revenue                 |                              |            | 247,681  |          
|                                                                       | Other                            |                              |            | 48       |          
|                                                                       |                                  |                              |            |          |          
|                                                                       |                                  | Total Revenues               |            |          | 500,479  
|                                                                       |                                  |                              |            |          |          
|Operating Expenses:                                                    |                                  |                              |            |          |          
|                                                                       | Cost of sales                    |                              |            | 225,066  |          
|                                                                       | General and administrative       |                              |            | 719,412  |          
|                                                                       | Stock compensation expense       |                              |            | 158,286  |          
|                                                                       | Research and development expense |                              |            | 269,461  |          
|                                                                       |                                  |                              |            |          |          
|                                                                       |                                  | Total Operating Expenses     |            |          | 1,372,225
|                                                                       |                                  |                              |            |          |          
|Operating Income (Loss)                                                |                                  |                              | (871,746   | )        |          
|                                                                       |                                  |                              |            |          |          
|Other Income (Expense):                                                |                                  |                              |            |          |          
|                                                                       | Interest and other income        |                              |            | 80,679   |          
|                                                                       | Interest expense                 |                              |            | (129,826 | )        
|                                                                       |                                  |                              |            |          |          
|                                                                       |                                  | Total Other Income (Expense) |            |          | (49,147  
|                                                                       |                                  |                              |            |          |          
|Income (Loss) Before Provision for Income Taxes                        |                                  |                              | (920,893   | )        |          
|Provision for income taxes                                             |                                  |                              | 7,069      |          |          
|                                                                       |                                  |                              |            |          |          
|Net Income (Loss)                                                      |                                  | $                            | (927,962   | )        | $        
|                                                                       |                                  |                              |            |          |          
|Net Income (Loss) Per Basic and Diluted Share of Common Stock          |                                  | $                            | (0.05      | )        | $        
|Weighted Average Number of Basic and Diluted Common Shares Outstanding |                                  |                              | 20,612,560 |          |          

The
accompanying notes are an integral part of these consolidated financial statements.

17

---



LONGPORT, INC. AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)        FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002

|                                                               |                                                 | Common Stock |   |   |        |   |   |           |   |  |          | Accumulated
Other
Comprehensive
Income (Loss) |  
|-------------------------------------------------------------- | ----------------------------------------------- | ------------ | - | - | ------ | - | - | --------- | - |  | -------- | --------------------------------------------- | -
|
|
|Balance at December 31, 2001                                   |                                                 | 19,235,670   |   | $ | 19,236 |   | $ | 8,755,908 |   |  |          |                                               | $
|Issuance of common stock upon exercise of stock options        |                                                 | 640,000      |   |   | 640    |   |   | 159,360   |   |  |          |                                               |  
|Issuance of common stock for services                          |                                                 | 120,000      |   |   | 120    |   |   | 27,280    |   |  |          |                                               |  
|Issuance of common stock for purchase of equipment             |                                                 | 225,000      |   |   | 225    |   |   | 53,775    |   |  |          |                                               |  
|Issuance of common stock for payment of liabilities            |                                                 | 100,000      |   |   | 100    |   |   | 22,900    |   |  |          |                                               |  
|Amortization of unearned compensation                          |                                                 |             |   |   |       |   |   |          |   |  |          |                                               |  
|Other comprehensive income (loss), net of tax:                 |                                                 |              |   |   |        |   |   |           |   |  |          |                                               |  
|                                                               | Unrealized gain (loss) on marketable securities |              |  |   |        |  |   |           |  |  | $        | (49,412                                       | )
|                                                               | Translation adjustment                          |              |  |   |        |  |   |           |  |  |          | 2,821                                         |  
|Net loss                                                       |                                                 |             |   |   |       |   |   |          |   |  | (826,062 | )                                             |  
|                                                               |                                                 |              |   |   |        |   |   |           |   |  |          |                                               |  
|                                                               | Total Comprehensive Income (Loss)               |              |  |   |        |  |   |           |  |  | $        | (872,653                                      | )
|                                                               |                                                 |              |   |   |        |   |   |           |   |  |          |                                               |  
|Balance at December 31, 2002                                   |                                                 | 20,320,670   |   |   | 20,321 |   |   | 9,019,223 |   |  |          |                                               |  
|Issuance of common stock upon exercise of stock options        |                                                 | 40,000       |   |   | 40     |   |   | 9,960     |   |  |          |                                               |  
|Issuance of common stock for services                          |                                                 | 15,000       |   |   | 15     |   |   | 2,535     |   |  |          |                                               |  
|Issuance of common stock in connection with a sale of scanners |                                                 | 240,000      |   |   | 240    |   |   | 35,760    |   |  |          |                                               |  
|Sale of common stock                                           |                                                 | 50,000       |   |   | 50     |   |   | 29,950    |   |  |          |                                               |  
|Issuance of common stock in connection with a loan             |                                                 | 200,000      |   |   | 200    |   |   | 55,800    |   |  |          |                                               |  
|Issuance of stock options for services                         |                                                 |             |   |   |       |   |   | 155,736   |   |  |          |                                               |  
|Issuance of warrants in connection with a loan                 |                                                 |             |   |   |       |   |   | 96,524    |   |  |          |                                               |  
|Amortization of unearned compensation                          |                                                 |             |   |   |       |   |   |          |   |  |          |                                               |  
|Other comprehensive income (loss), net of tax:                 |                                                 |              |   |   |        |   |   |           |   |  |          |                                               |  
|                                                               | Unrealized gain (loss) on marketable securities |              |  |   |        |  |   |           |  |  | $        | 11,765                                        |  
|                                                               | Translation adjustment                          |              |  |   |        |  |   |           |  |  |          | (968                                          | )
|Net loss                                                       |                                                 |             |   |   |       |   |   |          |   |  | (927,962 | )                                             |  
|                                                               |                                                 |              |   |   |        |   |   |           |   |  |          |                                               |  
|                                                               | Total Comprehensive Income (Loss)               |              |  |   |        |  |   |           |  |  | $        | (917,165                                      | )
|                                                               |                                                 |              |   |   |        |   |   |           |   |  |          |                                               |  
|Balance at December 31, 2003                                   |                                                 | 20,865,670   |   | $ | 20,866 |   | $ | 9,405,488 |   |  |          |                                               | $
|                                                               |                                                 |              |   |   |        |   |   |           |   |  |          |                                               |  

The accompanying notes are an integral part of these consolidated financial statements.

18

---



LONGPORT, INC. AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF CASH FLOWS        FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002

|                                                             |                                                                                        | 2003                                                    |                                                      | 2002                                    |        
|------------------------------------------------------------ | -------------------------------------------------------------------------------------- | ------------------------------------------------------- | ---------------------------------------------------- | --------------------------------------- | -------
|Cash Flows From Operating Activities:                        |                                                                                        |                                                         |                                                      |                                         |        
|                                                             | Net income (loss)                                                                      |                                                         | $                                                    | (927,962                                | )      
|                                                             | Adjustments to reconcile net income (loss) to net cash (used) by operating activities: |                                                         |                                                      |                                         |        
|                                                             |                                                                                        | Depreciation and amortization                           |                                                      |                                         | 262,863
|                                                             |                                                                                        | Impairment loss                                         |                                                      |                                         |       
|                                                             |                                                                                        | Common stock and stock options issued for services      |                                                      |                                         | 158,286
|                                                             |                                                                                        | Common stock issued in connection with sale of scanners |                                                      |                                         | 36,000 
|                                                             |                                                                                        | Common stock issued for interest expense                |                                                      |                                         | 56,000 
|                                                             |                                                                                        | Gain on sale of property and equipment                  |                                                      |                                         | (24,293
|                                                             |                                                                                        | Changes in assets and liabilities:                      |                                                      |                                         |        
|                                                             |                                                                                        |                                                         | Accounts receivable                                  |                                         |        
|                                                             |                                                                                        |                                                         | Other receivables                                    |                                         |        
|                                                             |                                                                                        |                                                         | Prepaid expenses and other                           |                                         |        
|                                                             |                                                                                        |                                                         | Inventories                                          |                                         |        
|                                                             |                                                                                        |                                                         | Accounts payable and accrued liabilities             |                                         |        
|                                                             |                                                                                        |                                                         | Customer deposits                                    |                                         |        
|                                                             |                                                                                        |                                                         |                                                      |                                         |        
|                                                             |                                                                                        |                                                         |                                                      | Net Cash (Used) By Operating Activities |        
|                                                             |                                                                                        |                                                         |                                                      |                                         |        
|Cash Flows From Investing Activities:                        |                                                                                        |                                                         |                                                      |                                         |        
|                                                             | Capital expenditures                                                                   |                                                         |                                                      | (14,150                                 | )      
|                                                             | Proceeds from sale of property and equipment                                           |                                                         |                                                      | 30,000                                  |        
|                                                             |                                                                                        |                                                         |                                                      |                                         |        
|                                                             |                                                                                        |                                                         | Net Cash Provided By Investing Activities            |                                         |        
|                                                             |                                                                                        |                                                         |                                                      |                                         |        
|Cash Flows From Financing Activities:                        |                                                                                        |                                                         |                                                      |                                         |        
|                                                             | Proceeds from notes payable to related entity                                          |                                                         |                                                      | 440,000                                 |        
|                                                             | Proceeds (payments) on notes payable to related entity                                 |                                                         |                                                      | (60,000                                 | )      
|                                                             | Issuance of common stock                                                               |                                                         |                                                      | 40,000                                  |        
|                                                             |                                                                                        |                                                         |                                                      |                                         |        
|                                                             |                                                                                        |                                                         | Net Cash Provided By Financing Activities            |                                         |        
|                                                             |                                                                                        |                                                         |                                                      |                                         |        
|Effect of exchange rate changes on cash and cash equivalents |                                                                                        |                                                         | (968                                                 | )                                       |        
|                                                             |                                                                                        |                                                         |                                                      |                                         |        
|                                                             |                                                                                        |                                                         | Net Increase (Decrease) in Cash and Cash Equivalents |                                         |        
|Cash and Cash Equivalents at Beginning of Year               |                                                                                        |                                                         | 60,690                                               |                                         |        
|                                                             |                                                                                        |                                                         |                                                      |                                         |        
|Cash and Cash Equivalents at End of Year                     |                                                                                        | $                                                       | 155,714                                              |                                         | $      
|                                                             |                                                                                        |                                                         |                                                      |                                         |        
|Supplemental Disclosure of Cash Flow Information:            |                                                                                        |                                                         |                                                      |                                         |        
|                                                             | Cash paid during the year for:                                                         |                                                         |                                                      |                                         |        
|                                                             |                                                                                        | Interest                                                |                                                      | $                                       | 15,000 
|                                                             |                                                                                        | Income taxes                                            |                                                      |                                         | 7,069  
|Supplemental Disclosure of Noncash Investing and             |                                                                                        |                                                         |                                                      |                                         |        
|                                                             | Financing Activities:                                                                  |                                                         |                                                      |                                         |        
|                                                             |                                                                                        | Unrealized gain (loss) on marketable securities         |                                                      |                                         | 11,765 
|                                                             |                                                                                        | Warrants issued in connection with the issuance of debt |                                                      |                                         | (96,524
|                                                             |                                                                                        | Inventories transferred to property and equipment       |                                                      |                                         |       
|                                                             |                                                                                        | Purchase of equipment for common stock                  |                                                      |                                         |       
|                                                             |                                                                                        | Issuance of common stock for payment of liabilities     |                                                      |                                         |       

The
accompanying notes are an integral part of these consolidated financial statements.

19

---



LONGPORT, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Summary of Significant Accounting Policies

Description of Business

Longport, Inc. (the "Company") was incorporated January 22, 1993. The Company was formed to market and distribute wound care products. In 1995, the Company began
managing wound healing centers under management services contracts and ceased operations under such contracts in early 2003. The Company has developed a soft tissue ultrasound scanner (the "Scanner").
The Scanner is used in numerous wound care and other medical applications.

Basis of Presentation

The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amount and
classification of liabilities that might be necessary should the Company be unable to continue as a going concern. The Company's continuation as a going concern is dependent upon its ability to
generate sufficient cash flow to meet its obligations on a timely basis, to obtain additional financing as may be required, and to increase sales to a level where the Company becomes profitable.
Additionally, the Company has experienced extreme cash liquidity shortfalls from operations.

The
Company's continued existence is dependent upon its ability to achieve its operating plan. Management's plan includes the following:



If
management cannot achieve its operating plan because of sales shortfalls or other unfavorable events, the Company may find it necessary to dispose of assets, or undertake other
actions as may be appropriate.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.

Cash and Cash Equivalents

For purposes of the statements of cash flows, the Company considers all highly liquid investments with a maturity of three months or less at the date of purchase
to be cash equivalents.

Accounts Receivable

The Company grants credit to all qualified customers. Accounts receivable are carried at cost less an allowance for doubtful accounts, if an allowance is deemed
necessary. The Company does not accrue finance or interest charges. On a periodic basis, the Company evaluates its accounts receivable and determines the requirement for an allowance for doubtful
accounts, based on history of past write-

20

---

offs,
collections and current credit conditions. A receivable is written off when it is determined that all collection efforts have been exhausted.

Inventories

Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out pricing method. Inventories consist of $204,427 of
finished goods at December 31, 2003.

Comprehensive Income

Comprehensive income consists of net income (loss) and other gains and losses affecting stockholders' equity that, under accounting principles generally accepted
in the United States of America are excluded from net income (loss). Such items consist primarily of unrealized gains and losses on marketable equity securities and foreign translation gains and
losses.

Marketable Securities

Marketable securities consist of common stock. Marketable securities are stated at market value as determined by the most recently traded price of each security
at the balance sheet date. All marketable securities are defined as trading securities or available-for-sale securities under the provisions of Statement of Financial Accounting Standards ("SFAS") No.
115, "Accounting for Certain Investments in Debt and Equity Securities."

Management
determines the appropriate classification of its investments in marketable securities at the time of each purchase and re-evaluates such determination at each balance sheet
date. Securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and unrealized holding gains and losses are included in
earnings. Debt securities for which the Company does not have the intent or ability to hold to maturity and equity securities are classified as available-for-sale. Available-for-sale securities are
carried at fair value, with the unrealized gains and losses, net of tax, reported as a separate component of stockholders' equity. The cost of investments sold is determined on the specific
identification or the first-in, first-out method.

Property and Equipment

Depreciation of the primary asset classifications is calculated based on the following estimated useful lives using the straight-line method.

Classification

Useful Life In YearsMedical equipment

3-5Production equipment

5Computer equipment

3-5Office furniture and equipment

4-7


Depreciation
of property and equipment charged to operations is $229,732 and $374,067 for the years ended December 31, 2003 and 2002, respectively.

21

---

Intangible Assets

The Company had an intangible asset for purchased licensing rights, with an indefinite life. In accordance with SFAS
No.142, the asset was recorded at cost, net of any amortization recorded prior to the adoption of SFAS No. 142, and is evaluated for impairment
annually, or more frequently if events or changes in circumstances indicate that the asset might be impaired. During the year ended December 31, 2002 management determined that the value of these
licensing rights was nominal and therefore impaired. This determination is based on the fact that the Company has not received any economic benefit from these rights from the date of their purchase,
nor does management expect to receive any future economic benefit. The impairment loss of $66,697 is included in general and administrative expenses for the year ended December 31, 2002.

Unearned Compensation

The Company issued shares of restricted common stock to certain officers of the Company in connection with their employment agreements. The common stock was
issued as compensation for future services to be performed over the three year term of the employment agreements. The fair value of the shares issued has been recorded as unearned compensation and is
shown as a separate component of stockholders' equity. Unearned compensation is amortized to expense over the life of the employment agreements.

Revenue Recognition

The Company recognizes revenue from product sales when earned, that is, when the risks and rewards of ownership have transferred to the customer, which is
considered to have occurred upon shipment of the finished product. Sales incentives and returns are estimated and recognized at the date of shipment based upon historical activity and current
agreements with customers. The Company evaluates these estimates on a regular basis and revises them as necessary. Revenue from medical services are recognized as the Company performs the services.

Contract Revenue

The Company was a subcontractor to a grant between Lackawanna Junior College and the Pennsylvania Department of Health to perform certain research services for a
cancer assessment system. The grant was entered into in June 2002 and covered the period from July 1, 2001 through
June 30, 2003. The total grant was for $500,000 and the Company's portion was approximately $475,000 and was recognized as income as the services were performed and billed to Lackawanna Junior
College. Contract revenue and the related research and development costs recognized during the year ended December 31, 2002 were $227,319 and $164,906, respectively and $247,681 and $228,055,
respectively during the year ended December 31, 2003.

Research and Development

Research and development costs are expensed as incurred. Research and development costs were $269,461 and $173,656 for the years ended December 31, 2003, and
2002, respectively.

22

---

Advertising

The Company advertises primarily through print media and on the Internet. The Company's policy is to expense advertising costs, including production costs, as
incurred. Advertising expense was $448 and $18,112 for the years ended December 31, 2003 and 2002, respectively.

Stock-Based Compensation

The Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation". The Company will continue to measure compensation expense for its stock-based
employee compensation plans using the intrinsic value method prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations in accounting for its plans and
does not recognize compensation expense for its stock-based compensation plans other than for options granted to non-employees. If the Company had elected to recognize compensation expense based upon
the fair value at the grant date for awards under its stock-based compensation plans consistent with the methodology prescribed by SFAS No. 123, the Company's net loss and loss per share would be
adjusted as follows:

2003

2002Net income (loss), as reported

$
(927,962
)
$
(826,062
)Less stock based employee compensation expense determined under fair value based methods for all awards, net of related tax effects


34,510


46,832Pro forma net income (loss)

$
(962,472
)
$
(872,894
)Net income (loss) per basic and diluted share of common stock:As reported

$
(.05
)
$
(.04
)Pro forma

$
(.05
)
$
(.04
)


The
Company did not grant any employee stock options during 2003 or 2002.

Long-Lived Assets

When facts and circumstances indicate that the cost of long-lived assets may be impaired, an evaluation of the recoverability is performed by comparing the
carrying value of the assets to the estimated undiscounted future cash flows.

Upon
indication that the carrying value of such assets may not be recoverable, the Company recognizes an impairment loss by a charge against current operations. If there is an
impairment, an impairment charge would be determined by comparing the carrying amount of the assets to the applicable estimated future cash flows, discounted at a risk-adjusted rate or market
appraisals. In addition, the remaining amortization period for the impaired asset would be reassessed and revised if necessary.

Shipping and Handling Costs

The Company includes shipping and handling costs in cost of sales.

23

---

Foreign Currency Translation

The Company's international operations use their local currency as their functional currency. Assets and liabilities are translated at exchange rates in effect at
the balance sheet date and income and expense accounts at the average exchange rates during the year. Resulting translation adjustments are recorded as a separate component of accumulated other
comprehensive income.

Income Taxes

Deferred income taxes are provided for temporary differences between the financial reporting and tax basis of assets and liabilities using enacted tax laws and
rates for the years when the differences are expected to reverse.

Net Income (Loss) Per Basic and Diluted Share of Common Stock

Basic earnings per share is calculated by dividing net income (loss) for the year by the weighted average number of common shares outstanding during the period.
Diluted earnings per share is calculated by dividing net income (loss) for the year by the weighted average number of common shares outstanding during the period, increased by the dilutive potential
common shares ("dilutive securities") that were outstanding during the period. Dilutive securities include outstanding stock options and warrants. Dilutive securities relating to stock options and
warrants are included in the calculation of diluted earnings per share using the treasury stock method. A reconciliation of the numerators and denominators of the basic and diluted earnings per share
calculations for the years ended December 31, 2003 and 2002 is presented in Note 5.

Estimates

The preparation of the Company's financial statements in conformity with accounting principles generally accepted in the United States of America requires the
Company's management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Recently Issued Accounting Standards

In July 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, which
replaces Emerging Issues Task Force ("EITF") Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a
Restructuring). The new standard requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal
plan. The statement is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. The Company adopted SFAS No. 146 on January 1, 2003, which did not result in any
impact on the Company's financial position or results of operations.

In
November 2002, the FASB issued Financial Interpretation No. (FIN) 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness
of Others. Among other things, the Interpretation requires guarantors to recognize, at

24

---

fair
value, their obligations to stand ready to perform under certain guarantees. FIN 45 became effective for guarantees issued or modified on or after January 1, 2003 and had no effect on the
Company's financial position or results of operations.

In
January 2003, the FASB issued FIN 46, Consolidation of Variable Interest Entities. In general a variable entity is a corporation, partnership, trust, or any other legal structure used
for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its
activities. FIN 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or
entitled to receive a majority of the entity's residual returns or both. The consolidation requirements of FIN 46 apply immediately to variable interest entities created after January 31, 2003. The
consolidation requirements apply to transactions entered into prior to February 1, 2003 in the first fiscal year or interim period beginning after June 15, 2003, which was subsequently delayed until
the fourth quarter of 2003. Certain of the
disclosure requirements apply in all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. The adoption of the interpretation did not
have any impact on the Company's financial statements.

In
April 2003, the FASB issued SFAS No.149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities, which amends and clarifies accounting for derivative instruments,
including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No.133. The Statement is effective (with certain exceptions) for contracts entered into or
modified after June 30, 2003. The adoption of this Statement had no effect on the Company's financial position or results of operations.

In
May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. It requires that an issuer classify a
financial instrument that is within its scope as a liability (or an asset in some circumstances). It is effective for financial instruments entered into or modified after May 31, 2003, and otherwise
is effective at the beginning of the first interim period after June 15, 2003. The adoption of SFAS No. 150 on July 1, 2003 had no effect on the Company's financial position or results of operations.

In
December 2003, the Securities and Exchange Commission ("SEC") released Staff Accounting Bulletin ("SAB") No. 104, Revenue Recognition. SAB No. 104 revises or rescinds portions of the
interpretive guidance related to revenue recognition included in Topic 13 of the codification of the staff accounting bulletins. SAB No. 104 became effective when issued, and adoption by the Company
did not have a material impact on its financial position or results of operations.

25

---

2. Marketable Securities

Marketable
securities are carried on the balance sheet at their market value.

Cost

Unrealized
Gain (Loss)

Market
ValueAs of December 31, 2003:Available-for-sale securities:Equity securities

$
200,000

$
(178,823
)
$
21,177Total

$
200,000

$
(178,823
)
$
21,177


3. Current Notes PayableRelated Entities

In March of 2003, the Company entered into a note payable agreement with a related entity. Under the terms of the agreement, the Company received $200,000 to be
paid in full within sixteen months of the date of the agreement. The payment terms are that for each of forty scanners sold over the sixteen-month period following the date of the agreement, the
Company will pay $6,250, until a total of $250,000 has been paid. The agreement further stipulates that a non-performance penalty will be assessed in the event that the Company is unable to repay the
note under the terms set forth above. The penalty is the issuance of 1,800,000 shares of restricted common stock of the Company to be received by the lender, in addition to full payment. In connection
with the issuance of the debt, the Company issued 200,000 shares of its restricted common stock on the date of the agreement to the lender. The note is collateralized by all of the Company's assets.

In
October of 2003, the Company entered into another note payable agreement with a related entity whereby the Company received $240,000 explicitly for the production of twenty of the
Company's scanners for subsequent resale. The terms of the agreement are such that for each scanner sold, the Company will pay $12,000 plus 50% of the difference between the per-unit sales price and
$12,000, the latter representing an interest payment. In connection with the issuance of the debt, the Company issued 1,000,000 warrants for the purchase of an equal number of shares of the Company's
restricted common stock at $0.60 per share for a period of up to five years from the date of issuance. The Company determined the fair value of the warrants and the debt independently and recorded a
discount on the note payable, which is being accreted to the value of the debt based on each scanner sold, which approximates the effective interest rate.

26

---

4. Income Taxes

The
components of the provision for income taxes are as follows:

|                                 |         | 2003 |       | 2002 
|-------------------------------- | ------- | ---- | ----- | -----
|Current:                         |         |      |       |      
|                                 | Federal |      | $     |     
|                                 | State   |      |       | 7,069
|                                 |         |      |       |      
|                                 | Total   |      |       | 7,069
|                                 |         |      |       |      
|Deferred:                        |         |      |       |      
|                                 | Federal |      |       |     
|                                 | State   |      |       |     
|                                 |         |      |       |      
|                                 | Total   |      |       |     
|                                 |         |      |       |      
|Total Provision For Income Taxes |         | $    | 7,069 |      
|                                 |         |      |       |      

The
provision (benefit) for income taxes reconciles to the amount computed by applying the federal statutory rate to income before the provision (benefit) for income taxes as follows:

2003

2002Federal statutory rate

(34
)%
(34
)%State income taxes, net of federal benefits

(6
)
(6
)Valuation allowance

40

40Total


%

%


Significant
components of deferred income taxes as of December 31, 2003 are as follows:

|Net operating loss carryover |  | $ | 3,267,000  |  
|---------------------------- |  | - | ---------- | -
|Property and equipment       |  |   | 54,000     |  
|Intangible assets            |  |   | 20,000     |  
|Other                        |  |   | 1,000      |  
|                             |  |   |           
|Total Deferred Tax Asset     |  |   | 3,342,000  |  
|                             |  |   |           
|Stock option compensation    |  |   | (66,000    | )
|                             |  |   |           
|Total Deferred Tax Liability |  |   | (66,000    | )
|                             |  |   |           
|Less valuation allowance     |  |   | (3,276,000 | )
|                             |  |   |           
|Net Deferred Tax Asset       |  | $ |           |  
|                             |  |   |           

The
Company has assessed its past earnings history and trends, sales backlog, budgeted sales, and expiration dates of carryforwards and has determined that it is more likely than not
that no deferred tax assets will be realized. The valuation allowance of $3,276,000 is maintained on deferred tax assets which the Company has not determined to be more likely than not realizable at
this time. The net change in the valuation allowance for deferred tax assets was an increase of $180,000. The Company will continue to review this valuation on a quarterly basis and make adjustments
as appropriate.

At
December 31, 2003, the Company had federal and state net operating loss carryforwards of approximately $8,354,000 and $6,472,000, respectively. Such carryforwards expire in the years
2008 through 2023 and 2006 through 2023 for federal and state purposes, respectively.

27

---

5. Net Income (Loss) Per Share of Common Stock

The
schedule below summarizes the elements included in the calculation of basic and diluted net income (loss) per share for the years ended December 31, 2003 and 2002. For the years
ended December 2003 and 2002 options and warrants to purchase 3,755,714 and 2,445,714 common shares, respectively, were excluded from the calculations of diluted net (loss) per share, as their effect
would have been antidilutive.

|                                                              |                                                  | 2003 |            | 2002       |  
|------------------------------------------------------------- | ------------------------------------------------ | ---- | ---------- | ---------- | -
|Net income (loss)                                             |                                                  | $    | (927,962   | )          | $
|                                                              |                                                  |      |            |            |  
|Weighted-average common shares outstanding:                   |                                                  |      |            |            |  
|                                                              | Weighted average common shares outstandingBasic |      |            | 20,612,560 |  
|Dilutive securities                                           |                                                  |      |           |            |  
|                                                              |                                                  |      |            |            |  
|Weighted-average common shares outstandingDiluted            |                                                  |      | 20,612,560 |            |  
|                                                              |                                                  |      |            |            |  
|Net income (loss) per basic and diluted share of common stock |                                                  | $    | (.05       | )          | $

6. Stock Options and Warrants

Stock Option Plan

The Company adopted a stock option plan (the "Plan"), effective as of November 15, 1999 which provides for the grant of non-qualified stock options. A total of
3,000,000 shares of common stock have been reserved for issuance under the Plan.

Options
under the Company's Plan are issuable only to eligible officers, directors, key employees and consultants of the Company. The Plan is administered by a committee selected by the
Board of Directors, which determines those individuals who shall receive options, the time period during which the options may be exercised, the number of shares of common stock that may be purchased
under each option, and the option price. Unless sooner terminated, the Plan shall remain in effect until December 31, 2009.

The
per share exercise price of the common stock may not be less than the fair market value of the common stock on the date the option is granted. The stock options are subject to
anti-dilution provisions in the event of stock splits, stock dividends and the like.

No
stock options are transferable by an optionee other than by will or the laws of descent and distribution, and during the lifetime of an optionee, the option is only exercisable by the
optionee. The exercise date of an option granted under the Plan must not be later than ten years from the date of grant. Any options that expire unexercised or that terminate upon an optionee's
ceasing to be employed by the Company will become available once again for issuance.

28

---

The
following table contains information on the stock options under the Company's Plan for the years ended December 31, 2003 and 2002.

|                                         |           | Number of
Shares |          | Weighted Average
Exercise Price
|---------------------------------------- | --------- | ---------------- | -------- | -------------------------------
|Options outstanding at December 31, 2001 |           | 200,000          |          | $                              
|                                         | Granted   |                  |         |                                
|                                         | Exercised |                  |         |                                
|                                         | Cancelled |                  | (200,000 | )                              
|                                         |           |                  |          |                                
|Options outstanding at December 31, 2002 |           |                 |          |                                
|                                         | Granted   |                  |         |                                
|                                         | Exercised |                  |         |                                
|                                         | Cancelled |                  |         |                                
|                                         |           |                  |          |                                
|Options outstanding at December 31, 2003 |           |                 |          | $                              
|                                         |           |                  |          |                                

Other Stock Options

The Company has granted stock options to employees, consultants and other individuals. The outstanding options expire from August 2004 through May 2009. The
following table contains information on all of the Company's Non Plan stock options for the years ended December 31, 2003 and 2002.

|                                         |                                          | Number of
Shares |           | Weighted Average
Exercise Price
|---------------------------------------- | ---------------------------------------- | ---------------- | --------- | -------------------------------
|                                         | Options outstanding at December 31, 2001 |                  | 2,650,000 |                                
|                                         | Granted                                  |                  |          |                                
|                                         | Exercised                                |                  | (640,000  | )                              
|                                         | Cancelled                                |                  | (750,000  | )                              
|                                         |                                          |                  |           |                                
|Options outstanding at December 31, 2002 |                                          | 1,260,000        |           |                                
|                                         | Granted                                  |                  | 1,000,000 |                                
|                                         | Exercised                                |                  | (40,000   | )                              
|                                         | Cancelled                                |                  | (700,000  | )                              
|                                         |                                          |                  |           |                                
|Options outstanding at December 31, 2003 |                                          | 1,520,000        |           | $                              
|                                         |                                          |                  |           |                                

Warrants

In November 1993, the Company sold 1,185,714 "Units" consisting of one share of the Company's common stock and one common stock purchase warrant for $.35 per
unit. The Warrants entitle the holder to purchase one share of the Company's common stock for $1.00 at anytime until June 30, 2006. All 1,185,714 warrants are outstanding as of December 31, 2003.

In
August and November 2001 the Company sold 625,000 Units of the Company's securities. Each unit consists of one share of the Company's common stock and one common stock purchase
warrant for $.40 per unit. The Warrants entitle the holder to purchase one share of the Company's common stock for $.40 for one year from the date of the Units. All 625,000 warrants expired during
2002.

In
June 2003 the Company sold 50,000 Units of the Company's securities. Each unit consists of one share of the Company's common stock and one common stock purchase warrant for $.60 per
unit. The Warrants entitle the holder to purchase one share of the Company's common stock for $.60 for a

29

---

period
of five years from the date of the Units. All 50,000 warrants are outstanding as of December 31, 2003.

In
October of 2003, the Company issued 1,000,000 warrants in connection with a note agreement described in Note 3 above. The warrants are exercisable into an equal number of shares of
the Company's common stock, at a price of $.60 per share, and are exercisable for five years from the date of issuance. All 1,000,000 warrants are outstanding as of December 31, 2003.

Other Stock Option Information

The weighted average fair value price of options granted in 2003 was $.16.

The
following table summarizes information about the Company's stock based compensation plans at December 31, 2003.

Options
Outstanding and Exercisable by Price Range as of December 31, 2003:

Options OutstandingOptions ExercisableWeighted
Average
Remaining
Contractual
Life In YearsRange of
Exercise
Prices

Number
Outstanding

Weighted
Average
Exercise
Price

Number
Exercisable

Weighted
Average
Exercise
Price$
.25-$.40

1,520,000

3.80

$
.27

1,520,000

$
.27


Compensation Expense

The Company recorded compensation expense of $155,736 for the year ended December 31, 2003, for the value of options granted to a current board member, prior to
him becoming a board member of the Company. The valuation of the options granted to employees is based on the difference between the exercise price and the market value of the stock on the measurement
date. The valuation of the options granted to non-employees is estimated using the Black-Scholes option pricing model.

The
Company also recorded compensation expense of $2,550 and $27,400 for the years ended December 31, 2003 and 2002, respectively for the value of common stock issued to consultants for
services provided to the Company.

7. Accumulated Other Comprehensive Income

The
Company has adopted SFAS No. 130, "Reporting Comprehensive Income". This statement requires that all components of comprehensive income be reported in the financial statements in the
period in which they are recognized. The components of comprehensive income for the Company include net income, unrealized gain (loss) on marketable securities and foreign currency translation
adjustments.

30

---

Components
of other comprehensive income consist of the following:

Unrealized
Gain (loss)
on Marketable
Securities

Foreign
Currency
Translation

Accumulated
Other
Comprehensive
Income (Loss)Balance at December 31, 2001

$
(141,176
)
$
(36,913
)
$
(178,089
)2002 change


(49,412
)

2,821


(46,591
)Balance at December 31, 2002


(190,588
)

(34,092
)

(224,680
)2003 change


11,765


(968
)

10,797Balance at December 31, 2003

$
(178,823
)
$
(35,060
)
$
(213,883
)


8. Preferred Stock

The
authorized preferred stock of the Company consists of 1,000,000 shares, $.001 par value. The preferred stock may be issued in series from time to time with such designation, rights,
preferences and limitations as the Board of Directors of the Company may determine by resolution. The rights, preferences and limitations of separate series of preferred stock may differ with respect
to such matters as may be determined by the Board of Directors, including without limitation, the rate of dividends, method and nature of payment of dividends, terms of redemption, amounts payable on
liquidation, sinking fund provisions (if any), conversion rights (if any), and voting rights. Unless the nature of a
particular transaction and applicable statutes require approval, the Board of Directors has the authority to issue these shares without shareholder approval.

9. Related Entity Transactions

In
May of 2003, the Company entered into an agreement with Michie Proctor, a related entity, in which Mr. Proctor was elected to Chairman of the Board of the Company and the details of
the consulting arrangement between the Company and Mr. Proctor were defined.

In
connection with this agreement, the Company awarded one million options to purchase common stock of the Company for $0.25 per share, which are vested immediately. The Company recorded
stock option compensation expense, related to these options of $155,736.

In
August of 2003, the amount owed to James McGonigle, a related entity, of $5,000 relating to services provided during the year, was factored by Mr. McGonigle to Michie Proctor. As a
result of this transaction, the Company now owes Mr. Proctor $3,500, due in its entirety on June 13, 2004.

10. Commitments and Contingencies

Leases

The Company leases office equipment and office facilities under long-term leasing arrangements. The Company's office facilities lease contains a one-year renewal
option. The future minimum lease payments at December 31, 2003 under the Company's operating leases which have an initial or remaining noncancellable lease term in excess of one year is $38,941, due
during the year ending December 31, 2004.

31

---

Rental expense charged to operations was $43,299 and $54,728 for the years ended December 31, 2003 and 2002, respectively.

Medicare Hearings

In September 1997, the Company was notified of a Medicare Hearing Officer's decision that the Company is liable for repayment of Medicare Benefit Overpayments of
$269,120. The Overpayments are from calendar years 1994 and 1995. The Company appealed the Hearing Officer's decision. The Appeal was heard by an Administrative Law Judge on January 5, 1999 and again
on November 2, 1999. The Administrative Law Judge reviewed approximately forty out of approximately 410 cases. The Administrative Law Judge dismissed some cases, ruled in favor of the Company on
certain cases and ruled against the Company on other cases. The Company continues to be in the Appeals process. The Company is unable to predict the outcome of the Appeal.

As
of December 31, 2003, the Company has an accrued liability of $100,000 as a result of the above proceedings. The $100,000 accrual is the Company's best estimate of the potential
liability based on all of the facts and circumstances currently known.

Officer Indemnification

Under the organizational documents, the Company's officers, employees, and directors are indemnified against certain liability arising out of the performance of
their duties to the Company. The Company also has an insurance policy for its directors and officers to insure them against liabilities arising from the performance of their duties required by their
positions with the Company. The Company's maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Company that have not yet occurred.
However, based on experience, the Company expects the risk of loss to be remote.

11. Concentration of Credit Risk and Major Customers

Financial
instruments which potentially subject the Company to concentrations of credit risk consist principally of temporary cash investments and accounts receivable. The Company places
its cash equivalents and short term investments with high credit quality financial institutions and limits its credit exposure with any one financial institution. The Company's cash in its banks
exceeded the federally insured limits at certain points during the year.

The
Company provides credit, in the normal course of business, to hospitals, distributors, and others in the health care industry. The Company's customers are located primarily in the
eastern United States. The Company performs periodic credit evaluations of its customers' financial condition and generally requires no collateral. The Company maintains reserves for potential credit
losses. The Company's revenue is generated primarily from a single product, the Scanner, which subjects the Company to significant financial exposure. If future sales do not occur the Company's
operations could be materially adversely affected.

Total
assets were $166,235 in foreign countries at December 31, 2003 which were all located in the United Kingdom.

32

---

Revenues
from major customers, as a percentage of total revenue, for the years ended December 31, 2003 and 2002 were as follows:

|           |  | 2003 |   | 2002 |  
|---------- |  | ---- | - | ---- | -
|Customer A |  | *    | % | 23.  | %
|Customer B |  | 47   | % | *    | %
|Customer C |  | 46   | % | 51   | %

---

12. Fair Value of Financial Instruments

Disclosures
about Fair Value of Financial Instruments for the Company's financial instruments are presented in the table below. These calculations are subjective in nature and involve
uncertainties and significant matters of judgment and do not include income tax considerations. Therefore, the results cannot be determined with precision and cannot be substantiated by comparison to
independent market values and may not be realized in actual sale or settlement of the instruments. There may be inherent weaknesses in any calculation technique, and changes in the underlying
assumptions used could significantly affect the results. The following table presents a summary of the Company's financial instruments as of December 31, 2003:

Carrying
Amount

Estimated
Fair ValueFinancial Assets:Cash and cash equivalents

$
155,714

$
155,714Marketable securities


21,177


21,177Current notes payablerelated entities


307,607


307,607


The
carrying amounts for cash and cash equivalents, receivables, accounts payable and accrued expenses approximate fair value because of the short maturities of these instruments. The
fair value of marketable securities is determined by the most recently traded price of each security at the balance sheet date.

13. Subsequent Events

On
February 12, 2004, the Company signed a distribution agreement with U.S. Medical Systems, Inc, to sell its Longport Digital Scanner through the U.S. Medical Systems distribution
network. The contract calls for the purchase of 300 machines in the first year, 600 machines in year two, and 1,000 machines in year three.

An
initial order, with a $500,000 deposit, has been placed for the first 100 machines with delivery starting in April 2004. This Agreement calls for LDS units to be delivered at a rate
of not less than 25 scanners per month in year 1, 50 units per month in year 2 and 80 units per month in year 3.

The
Company also received a payment of $525,000 from U.S. Medical Systems, Inc. to convert the above mentioned distribution agreement between the two companies for the Longport Digital
Scanner into an exclusive arrangement in the wound care market for the next three years.

33

---



ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

We
have had no disagreements with our independent accountants with respect to accounting and financial disclosure. On January 15, 2003, we filed a Current Report on Form 8-K with the
Securities and Exchange Commission regarding a change of our independent auditor and certifying accountant from Angell & Deering, Certified Public Accountants to Mayer Hoffman McCann P .C.

PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

The name, age and position of each of our executive officers and directors are set forth below:

|Name                    |  | Age |  | Officer/
Office                                 |  | Director Since
|----------------------- |  | --- |  | ----------------------------------------------- |  | --------------
|Dr. Michie Proctor      |  | 69  |  | Chairman of the Board of Directors              |  | 2003          
|Michael C. Boyd         |  | 62  |  | Chief Executive Officer and Director            |  | 2001          
|Paul D. Wilson          |  | 47  |  | President, Chief Financial Officer and Director |  | 2001          
|Paul R. Quintavalle DPM |  | 53  |  | Director                                        |  | 2001          
|Brian W. Clymer         |  | 56  |  | Director                                        |  | 2001          

Directors
hold office for a period of one year from their election at the annual meeting of shareholders and until their successors are duly elected and qualified. Our officers are
elected by, and serve at the discretion of, the Board of Directors. None of the above individuals has any family relationship with any other. The Board of Directors has no audit, nominating or
compensation committee. No director receives compensation for services as a director. We have adopted a Code of Ethics, a copy of which has been filed as an exhibit to this report.

Background

The following is a summary of the business experience of each of our officers and directors:

Dr. Michie Proctorjoined the Board of Directors in June, 2003 upon the resignation of its previous chairman and was immediately selected
as its new Chairman. Dr. Proctor, is Longport's largest shareholder. His business experience spans more than 40 years, where he has served as CEO, President, and Board Member of both public and
private companies. These companies have included companies in the medical device industry and the nutraceutical industry. His education has been in the fields of Business, Aeronautics, Estate Planning
and Theology. He has earned a B.Th, M.Th., D.D., Ph.D. In addition to his broad business experience, Dr. Proctor serves as the Sr. Pastor of the First Baptist Church of Southwest Broward, in
Hollywood, Florida, a position he has held for more than 30 years.

Michael C. Boydwas a business consultant from January 1998 until he joined us in October 2001. From April 1996 to January 1998, he was
founder, President and a director of TeleSpectrum Worldwide, Inc., a rollup of six direct marketing companies that reached annual revenue of approximately $200 million. From 1986 to 1995, he was
co-founder, President and a director of QVC Network, Inc., a cable television retailer with over 6,000 employees whose sales rose during his employment to over $1.3 billion annually. Mr. Boyd has
significant experience in the direct response industry, having held senior positions at Franklin Mint and Lillian Vernon Corporation. He is a member of the governing boards of Penn Mutual Insurance
Company, the Greentree Perpetual Assurance Company, Altura International, TCIM Services and Smoke Stoppers, Inc. Mr. Boyd earned a Bachelor of Arts degree from the University of Delaware.

34

---

Paul D. Wilsonhas been a principal of Quality Medical Instruments, Ltd., a UK-based medical consulting firm he co-founded, since 1995.
Since 1999, he has also been Managing Director of Longport International, our UK-based technology marketing subsidiary. He was employed by Fulmer Research, a UK-based technology and engineering
company, from 1976 to 1992 as a Division Manager. He has also been involved in the application and development of high-resolution ultrasound for over 20 years. Mr. Wilson earned a degree in Applied
Physics from Thomas Valley University in the UK.

Paul R. Quintavalle, DPM, has been engaged in the private practice of podiatric medicine for more than five years and is the Director of
the West Jersey Podiatric Surgical Residency Program. He earned a DPM degree in podiatric medicine from the Pennsylvania College of Podiatric Medicine. He is a former member of the surgical faculty
and board of the Temple School of Podiatric Medicine. Dr. Quintavalle is a past President of the American Board of Podiatric Surgery.

Brian W. Clymerhas been Vice President of External Affairs for Prudential Insurance Company of America since July 1997. From January 1994
until June 1997, he was the New Jersey State Treasurer, appointed by Governor Whitman and confirmed by the New Jersey Senate. Prior to his appointment as the State Treasurer, he was President and
Chief Executive Officer of Railway System Design, Inc. and Vice President of Gannett Fleming, Inc., an engineering firm. He also served under President George H. W. Bush as Administrator of the
Federal Transit Administration of the United States Department of Transportation. Mr. Clymer has served on numerous boards, including the New Jersey Sports and Exposition Authority, the Casino
Reinvestment Development Authority, the New Jersey Performing Arts Center, the American Public Transit Association, Motor Coach Industries International and the Southeastern Pennsylvania
Transportation Authority. He currently serves on the New Jersey Alliance for Action Board and the Prosperity New Jersey Board of Trustees. Mr. Clymer earned a Bachelor of Science degree in Business
and Economics from Lehigh University and is a Certified Public Accountant.

ITEM 10. EXECUTIVE COMPENSATION

The following table discloses all compensation paid to our Chief Executive Officer for the years ended December 31, 2003 and 2002. No executive officer's annual
compensation exceeded $100,000 in either year.

|(a)                     |  | (b)  |  | (c) |  | (d) |  | (e) |  | (f) |  | (g)
|----------------------- |  | ---- |  | --- |  | --- |  | --- |  | --- |  | ---
|
|Michael C. Boyd         |  | 2003 |  | -0- |  | -0- |  | -0- |  | -0- |  | -0-
|Chief Executive Officer |  | 2002 |  | -0- |  | -0- |  | -0- |  | -0- |  | -0-

---

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The following table sets forth certain information with respect to the ownership of our Common Stock on the record date by (i) each person who is known by us to
own of record or beneficially more than 10% of our Common Stock, (ii) each of our directors and (iii) all directors and officers as a group. All shares are owned beneficially and of record and the
shareholders listed in the table have sole voting and investment powers with respect to the shares of Common Stock. The addresses of all

35

---

shareholders
listed in the table are in care of us. The table includes common stock purchase warrants and stock options exercisable by the holder within 60 days from the date hereof.

|Name                                                 |  | Number of Shares Owned |  | Percent
of Class |  
|---------------------------------------------------- |  | ---------------------- |  | ---------------- | -
|Michie and Joyce Proctor (1)                         |  | 3,566,466              |  | 16.2             | %
|Michael C. Boyd (2)                                  |  | 1,100,000              |  | 5.2              | %
|Paul R. Quintavalle (3)                              |  | 320,000                |  | 1.5              | %
|Paul D. Wilson (4)                                   |  | 350,000                |  | 1.7              | %
|Church of Southwest Broward                          |  | 2,385,477              |  | 10.6             | %
|All officers and directors as a group (five persons) |  | 5,336,466              |  | 23.6             | %

---

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

In 2002 and 2003 we had a consulting agreement with Wound Healing Systems, Inc, Inc., a company owned and controlled by James R. McGonigle, our former Chairman,
pursuant to which Wound Healing Systems, Inc. provided services to us for an agreed upon monthly fee of $5,000 per month.

In
March of 2003, the Company entered into a note payable agreement with a related identity. Under the terms of the agreement, the Company received $200,000 to be paid in full within
sixteen months of the date of the agreement. The payment terms are that for each of forty scanners sold over the sixteen-month period following the date of the agreement, the Company will pay $6,250,
until a total of $250,000 has been paid. The agreement further stipulates that a non-performance penalty will be assessed in the event that the Company is unable to repay the note under the terms set
forth above. The penalty is the issuance of 1,800,000 shares of restricted common stock of the Company to be received by the lender, in addition to full payment. In connection with the issuance of the
debt, the Company issued 200,000 shares of its restricted common stock on the date of the agreement to the lender. The note is collateralized by all of the Company's assets.

In
October of 2003, the Company entered into another note payable agreement with a related entity whereby the Company received $240,000 explicitly for the production of twenty of the
Company's scanners for subsequent resale. The terms of the agreement are such that for each scanner sold, the Company will pay $12,000 plus 50% of the difference between the per-unit sales price and
$12,000, the latter representing an interest payment. In connection with the issuance of the debt, the Company issued 1,000,000 warrants for the purchase of an equal number of shares of the Company's
restricted common stock at $0.60 per share for a period of up to five years from the date of issuance. The Company determined the fair value of the warrants and the debt independently and recorded a
discount on the note payable, which is being accreted to the value of the debt based on each scanner sold, which approximates the effective interest rate. All 1,000,000 warrants are outstanding as of
December 31, 2003.

36

---



In May of 2003, the Company entered into an agreement with Michie Proctor, a related entity, in which Mr. Proctor was elected to Chairman of the Board of the Company and the details of
the consulting arrangement between the Company and Mr. Proctor were defined.

In
connection with this agreement, the Company awarded one million options to purchase common stock of the Company for $0.25 per share, which are vested immediately. The Company recorded
stock option compensation expense, related to these options of $155,736.

In
August of 2003, the amount owed to James McGonigle, a related entity, of $5,000 relating to services provided during the year, was factored by Mr. McGonigle to Michie Proctor. As a
result of this transaction, the Company now owes Mr. Proctor $3,500, due in its entirety on June 13, 2004.

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

Exhibit No.

Title3.1

Certificate of Incorporation of Registrant (1)3.2

Bylaws of Registrant (1)4.1

Form of Common Stock Purchase Warrant (1)10.25

Research and Licensing Agreement (UMDS) (1)10.30

Services Agreement (West Jersey Health System) (2)10.32

Agreement with R.D. Bowers Associates (1)10.33

Agreement with Professional Home Care Services (1)10.34

Agreement with Austin Medical, Inc. (1)10.35

Letter of Understanding with GWR Medical, LLP (1)10.36

Technology Transfer Agreement (VMOS) (1)10.37

Technology Transfer Agreement (SWS) (1)10.37

Newtown Square Office Lease (3)14.1

Code of Ethics21.1

Subsidiaries of Registrant31.1

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 pursuant to U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2

Certification pursuant to U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


---

37

---

ITEM 14. CONTROLS AND PROCEDURES

As
of the end of the reporting period for filing this annual report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based upon that
evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that our disclosure controls and procedures are effective and timely, alerting them to material information relating
to the Company (including our consolidated subsidiaries) required to be included in our periodic SEC filings. There were no significant changes in our internal controls or other factors that could
significantly affect these controls subsequent to the date of their evaluation and there were no corrective actions with regard to significant deficiencies or material weaknesses.

ITEM 15. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The following table shows the fees paid or accrued by Longport for the audit and other services provided by the Company's accountants for the fiscal year ended
December 31, 2002 and 2003:

|                                                                                                                                       |  | 2003 |        | 2002
|-------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------ | ----
|Audit fees for the years ended December 31 and fees for the review of financial statements included in quarterly reports on Form 10-Q: |  | $    | 68,310 |     
|Audit-related fees:                                                                                                                    |  | $    |       |     
|Tax fees (1):                                                                                                                          |  | $    | 5,840  |     
|Other service fees(2):                                                                                                                 |  | $    | 7,385  |     
|                                                                                                                                       |  |      |        |     
|Total:                                                                                                                                 |  | $    | 81,535 |     
|                                                                                                                                       |  |      |        |     

---

All
services described above were approved by the Board of Directors, as Longport does not have an audit committee.

The
Board of Directors has considered and decided that the provisions of the non-audit services referred to in the "Other Service Fees" Portion of the above table (including the footnote
thereto) are compatible with maintaining the independence of the Company's auditors.

Policy on Audit Committee Pre-Approval

The Board of Directors is responsible for reviewing and pre-approving both audit and permissible non-audit service to be provided by the independent accountant.
This pre-approval duty may be delegated to one or more designated members of the Board of Directors, provided that any pre-approval given by such delegate(s) must be reported to the Board of Directors
at its next regularly scheduled meeting.

38

---



SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as amended, the Registrant has duly caused the Report to be signed on its behalf by the undersigned,
thereunto duly authorized, in Swarthmore, Pennsylvania, on April 8, 2004.

| |  | LONGPORT, INC.
| |  | --------------
| |  | By:           

Pursuant
to the requirements of the Securities Exchange Act of 1933, as amended, this Registration Statement has been signed by the following persons on the dates indicated.

|Signature                                |  | Title                                                                          |  | Date         
|---------------------------------------- |  | ------------------------------------------------------------------------------ |  | -------------
|/s/ Michie ProctorMichie Proctor         |  | Chairman of the Board of Directors                                             |  | April 8, 2004
|/s/ Michael C. BoydMichael C. Boyd       |  | Chief Executive Officer and Director                                           |  | April 8, 2004
|/s/ Paul D. WilsonPaul D. Wilson         |  | President, Chief Financial Officer (Principal Accounting Officer) and Director |  | April 8, 2004
|/s/ Paul R QuintavallePaul R Quintavalle |  | Director                                                                       |  | April 8, 2004
|/s/ Brian W. ClymerBrian W. Clymer       |  | Director                                                                       |  | April 8, 2004

39

---

QuickLinks