**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-KSB**

 

**ANNUALREPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIESEXCHANGE ACT OF 1934**

 

**(Mark One)**

 

**ý****Annual report pursuant to Section 13 or 15(d) of theSecurities Exchange Act of 1934 For the fiscal year ended December 31,2004 or**

 

**o****Transition report pursuant to Section 13 or 15(d) of theSecurities Exchange Act of 1934**

 

**For the transition period from                                      to                                      **

 

**Commission File No. 33-75236**

 

**LONGPORT, INC.**

(Name of Small Business Issuer in itsCharter)

 
| **Delaware**                                                                    | ** ** | **23-2715528**                           |
|---------------------------------------------------------------------------------|------------|------------------------------------------|
| (State or other jurisdiction of  incorporation or organization)                 |       | (I.R.S. Employer Identification  Number) |
|                                                                            |       |                                     |
| **2 BRAXTON WAY  Suite 111**                                                    | ** ** | ** **                               |
| **Glen Mills, PA**                                                              | ** ** | **19342**                                |
| (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 Stock**                                                |
| **Common Stock Purchase Warrants**                                              |
| (Title of Class)                                                                |

 

Check whether the Registrant (1) filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that the Registrantwas required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.

 

Yes ý                                                             Noo

 

As of December 31, 2004, 23,083,368 shares of the Registrant’s$.001 par value Common Stock were outstanding. As of March 31, 2005, themarket value of the Registrant’s Common Stock, excluding shares held byaffiliates, was $7,845,377 based upon a closing bid price of $.34 per share ofCommon Stock on the Over the Counter Electronic Bulletin Board on March 31,2005.

 

Check if there is no disclosure contained herein of delinquent filersin response to Item 405 of Regulation S-B, and will not be contained, to thebest of the Registrant’s knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-KSBor any amendment to this Form 10-KSB. ý

 

The Registrant’s revenue for its most recent fiscal year was $2,457,677

 

The following documents are incorporated by reference: None.

 

 

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**PART I**

 

**ITEM 1.  DESCRIPTION OF BUSINESS**

 

**Forward-Looking Statements**

 

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

 

**Technology and Products**

 

Longport, Inc. (“Longport,” the “Company” 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 skinand underlying tissue up to three centimeters below the surface.  Once visualized on-screen, scans can be printed,stored as bitmap files or electronically mailed to an off-site diagnosticcenter for interpretation or archiving. The Scanner system is comprised of a desktop PC like housing, whichincludes a proprietary board, a separate monitor, keyboard and interchangeablehand-held probes.  The system may eitherbe integrated into a small cart or trolley or simply located on a desk in amanner in which  a PC is typically used.

 

The Company has patents issued by the United States, Australia andSouth Africa and has patent applications pending in Europe and Japan. UnitedMedical and Dental Schools of Guy’s and St. Thomas’s Hospitals (“UMDS”) locatedin London, England, upon whose research which these patents are based, assignedthe technology along with copyright protected software, to the Company.

 

Ultrasound has been used for medical images for many years and hasproven to be a safe, effective imaging technique. Using sound waves emitted atfrequencies well above the normal human ear response, echoed signals areconverted into graphic images and displayed on a monitor. Computer programsthat support ultrasound imaging use algorithms to document dimensions of areasbeing scanned. These measurements provide a baseline that the clinician can useto compare to other scans. The Scanner shares those characteristics, which arecommon to all ultrasound imaging equipment, but uses high frequency ultrasoundat 20 MHz to provide high-resolution images at depths of up to threecentimeters. This compares to the 3 to 5 MHz ultrasound frequency commonly usedto scan fetal images. Traditional low-frequency ultrasound equipment, whichcosts $75,000 to $350,000, is generally unable to image thin structures likeskin and its images are low resolution and frequently require reading by highlytrained technicians and/or doctors.  Webelieve that the Scanner’s ability to produce high- resolution images of thinstructures, such as skin, subcutaneous tissue and superficial tendons, combinedwith user-friendly software, is unique. The depth used by the Scanner toproduce a useable image

 

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depends on the area being scanned and the clinical application. Forinstance, many wounds require an image depth of only a few millimeters, a depthgenerally too small to resolve using conventional imaging technology, butideally suited to the use of the Scanner.

 

The Company’s Scanner technology has applications in wound detection, assessmentand treatment, burn treatment, product testing, and dermatology.  In the case of wound detection and treatment,which is an application we currently emphasize for marketing purposes,clinicians can examine a wound and the surrounding tissue without having tobiopsy to detect the development of pressure ulcers prior to visualindications.Images captured using the Scanner can also distinguish pressureulcers caused by friction or incontinence.

 

**Manufacture**

 

We use SRA Development Ltd. (“SRA”), a United Kingdom-based company, tomanufacture the Scanner’s probes, and to quality test the Scanner systems beforeshipment to the Company.  SRA is asingle-source supplier, and our business and financial results would benegatively affected if we were unable to obtain prompt deliveries from SRA forany Scanners ordered. Moreover, there is a significant risk of quality controlproblems whenever a new product is being manufactured. We do not have along-term agreement with SRA but use purchase orders to obtain Scanners atleast four months in advance of our needs.

 

Netbox Ltd., a UK based company, assembles the Scanner system unitincluding inserting our proprietary board which is manufactured by another U.K.company. Our proprietary board manufacturer is also a single-source supplier.Currently, our suppliers have the capacity to manufacture 50 Scanners per month,which we believe could be increased to 100 units per month with adequate advancenotice.  Following manufacture andtesting the Scanner’s components are shipped to us, and we complete fullassembly at our facilities in Glen Mills, Pennsylvania before delivery to customers.  We are currently planning to move the finalQuality Control procedures to our own Pennsylvania based facilities to increaseour control over product as well as to achieve some cost savings.

 

We intend to continue to outsource many operational functions.  This approach is in line with our objectiveto be primarily a medical technology and business development company.  This will enable us to operate efficientlyand to focus our resources on creating new medical products and new marketopportunities for those products.  Tothis end:

 

•                  As indicatedabove with SRA, manufacturing will be performed on a contract or licensingbasis.

 

•                  Longport willprimarily utilize strategic partners for sale and distribution.

 

**Growth Strategy**

 

To facilitate our ability to pursue multiple opportunitiessimultaneously and quickly, we have defined a growth strategy that focuses ontwo core competencies:  technology andbusiness development.  We believe thisapproach will enable us to concentrate on our strengths, while outsourcingother functions and includes:

 

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•                  Using a smallmarketing and sales force to gain initial market acceptance of our technologyin each US market sector.  To date thiseffort has been primarily directed at wound assessment and detection,particularly in the U.S. nursing home environment.  Key elements of this work are the developmentof both clinical and financial implementation models for our technology, withservice provision being found to be particularly important to the nursing home industry.  A small number of regional distributionpartners are now promoting our technology into this market and we are actively pursuingboth national and international distribution. To accelerate these activities, we are actively recruiting anexperienced Director of Sales and Marketing to lead this function.

 

•                  InsuranceReimbursement - Reimbursement for ultrasound procedures has long beenestablished.  However, reimbursement forthe use of the Scanner in woundcare and other markets addressed by ourtechnology is at best unclear. Consequently, the Company is embarking on a program to securereimbursement (CPT) codes or clarification that existing codes are appropriateto provide for insurance coverage.

 

•                  Develop in-housecapabilities and accreditations such that Longport can more readily diversifymanufacturing services, and more rapidly integrate product enhancements.

 

•                  We are enhancingour technology so that we can expand into other markets and extend our technologicallead in the sectors we already address. In particular, real-time imaging using electronically steered arrays isbeing developed, enabling us to address a wide range of establishedapplications for ultrasound technology at a higher resolution and at lower costthan currently available.

 

•                  Sponsorship ofand participation in research studies, which lend further validation of ourcurrent technology in the wound care and dermatological markets.  Such studies will be conducted by key thoughtleaders at well renowned facilities.  TheCompany currently has a number of studies underway or in the advance planning stagesincluding studies with Mohs surgeons, multiple long team care facilities, burn centersand aesthetic dermatologists.

 

# **Marketing**

 

 According to industry estimates,the annual worldwide market for ultrasound imaging devices is over $3 billionwith an estimated 65 million ultrasound procedures being conducted annually inthe U.S. The Company believes it can also create new demand because the Scannerenables innovative uses of ultrasound technology in a wide range of medicalspecialties not currently served by ultrasound or any other imaging technology.The Company believes that significant opportunity exists for the provision ofimaging and interpretation services to many of the market sectors identified,thus providing the potential for re-occurring revenue streams. The markets forour technology can therefore be divided into two broad categories, emergingmarket and established markets, as illustrated below.

 

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**Emerging Markets**

 

Emerging markets require very high resolution imaging technology, acapability that is not provided by current ultrasound systems. Many emergingmarkets are looking for a system solution based around an ultrasound corecomplemented by other imaging or sensory inputs as well as appropriate data orrecord entry systems. For example, in the wound care field, the Scanner systemenables digital photographs to be integrated with ultrasound scans and acomprehensive data entry system is being created, with the capability forremote data backup. Our system allows all wound-related data to be entered andstored into a single system resulting in more efficient record keeping and facilitatessubsequent audit.

 

•      Wound Care and Prevention - Woundmanagement is an expanding and increasingly important area of concern for themedical profession. Approximately 10% of patients in acute and extended stayfacilities in the western world develop pressure ulcers. This equates to onemillion people in the U.S. at any time and the annual cost of treating theseand other types of chronic wounds has been estimated at $7 billion. We believethat our technology can cost effectively:

 

•      Enablepatient specific protocols to be developed that lead to a reduction in the timetaken to heal chronic wounds.  One of theCompany’s nursing home customers has reported that they have seen operationalcost savings of approximately $30,000 in the first year after introducing thescanner (MDS Alert Vol3, No4 Page 43, April 2005).

 

•      Enable earlier and more reliable detectionof developing pressure sores, thus allowing earlier targeted intervention thatcan prevent open wounds from developing.

 

•      Provide a cost effective record-keepingtool - Nursing homes are also finding the Scanner to be a valuable audit toolthat is expected to reduce their exposure to pressure ulcer related litigationand as a result diminish the prevailing high insurance premiums that arethreatening the viability of many nursing homes. Federal authorities in theU.S. have targeted a dramatic reduction in the occurrence of pressure ulcers innursing homes from the current level of 11% to less 0.8% by 2010. Such aprominent reduction can only occur as a result of the effective prevention, arole for which the Scanner is ideally suited.

 

•                  *Skin care and aesthetic surgery. *The annual global expenditure on skin care products andprocedures has been estimated at $100 billion. In the U.S., during 2001, there were 8.5 million aesthetic proceduresundertaken by 23,000 clinicians.  Webelieve that the Scanner can impact this rapidly growing market, which despiteits size, is poorly provided for by imaging technology.  The Scanner, through its ability to non-invasivelyimage the structure of the skin and underlying structures, enables cliniciansto maximize and demonstrate the benefit from a wide variety of products andprocedures.  For example, collagenformation, an important aspect

 

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of anti-wrinkle treatments, can be detected at an early stage (prior tovisual indications), fat thickness can be measured quickly and accurately, andbreast implants assessed for encapsulation. These capabilities will allow clinicians to provide an improved serviceto their patients or customers and through follow-up imaging establishlonger-term relationships.

 

•                  *Skin cancer assessment.* 15% to 30% (dependent upon location) of the population of the NorthernHemisphere will contract some form of skin cancer during their lifetime.  Some 20,000 procedures are undertakenannually on skin lesions in the U.S., of which approximately 15% of theexcision sites have to be revisited, primarily because the margins of thelesions were not fully excised.  TheScanner can accurately map skin lesions, including providing data on theirdepth, enabling better surgical planning.

 

•                  *Other applications include:*

 

•                  *Burn assessment.* Studies indicate that the Scanner can quickly and reliably differentiatebetween burns that require surgical intervention and those that do not.

 

•                  *Scar assessment.* Assessment of scars and the impact of treatments.

 

Established Markets

 

As mentioned above, the established market for ultrasound imagingtechnology is currently $3 billion per year, and is forecast to grow atapproximately 6% per year.  In thesemarkets the benefits of ultrasound imaging have already been established, andwe aim to offer innovative and higher performance but at a lower cost.  Market feedback shows that such systems mayattract established ultrasound users and also broaden the potential customerbase by converting many clinicians (e.g. orthopedic surgeons) that currentlysource ultrasound images through third party providers such as radiologists intodirect users.   In the future, we expectto address applications that include:

 

•                  Breastassessment

•                  Musculoskeletalimaging, including sports medicine

•                  Vascular imaging

•                  Large organassessment

 

**Marketing Strategy**

 

Since we believe that the Scanner can be adapted for a wide variety ofapplications, we are seeking to sell it to diverse customer groups.  To access these markets rapidly andeffectively, we have divided our marketing strategy into three phases:

 

•                  *Phase 1,* which is under way, is targeting the applicationsthat the existing Scanner can address. Currently, we are marketing into four applications:

 

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•                  Wound preventionand care

•                  Interactive useof the Scanner with a variety of equipment and processes used in the skin careand aesthetics markets, including lasers and dermal abrasion systems tooptimize the benefit from these treatments.

•                  Validation ofother companies’ pharmaceutical and medical research particularly in the skincare field.

•                  Facilitatingappropriate research studies, such as work funded

by government grants and industrial sponsorship.

 

We also intend to sell products and services thatcomplement our core Scanner business. These offerings will include service and maintenance contracts,disposable products that support the use of the Longport systems, digitalphotography equipment and specialized imaging probes.  In addition, we are looking to participate inimaging and image interpretation services and are assessing the requirementsfor remote data archiving services.

 

In 2004 we entered into two distribution agreements with U.S. companiesfocused on the wound care market place:

 

**U.S. Medical Systems**– In February 2004 the Company entered into a three-year agreement (the“Agreement”) with U.S. Medical Systems Corp. (“U.S. Medical”) pursuant to whichwe appointed U.S. Medical as a non- exclusive distributor of our Scanner in theUnited States. Upon the effective date of the Agreement, U.S. Medical tendereda $500,000 deposit to us for the purchase of 100 Scanners.  Under the terms of the Agreement:

 

•                  U.S. Medicalpaid an additional $525,000 for the exclusive rights (“Exclusive Rights”) tomarket Scanners in the United States solely in the “wound care market” (asdefined in the Agreement) and subject to existing distribution agreementspreviously entered into or being negotiated by us.  The wound care market is defined as nursinghomes, assisted care living facilities, rehabilitation centers and operatingwound care centers.

 

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

 

•                  The Company could continue to sell ourScanners in the wound care market to our existing distributors and other firmswith which we have been negotiating, subject to the payment to U.S. Medical ofa 1% royalty on gross sales to these firms.

 

•                  US Medicalcommitted in the Agreement to “fund a study during the course of the Agreement,starting in the first year, with the aim of establishing CPT codes for the useof the” Scanner.

 

•                  At the end ofeach 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 toU.S. Medical represent between 50% and 90% of our total Scanner sales.

 

The Company began shipping scanners to U.S. Medical in August 2004subsequent to the receipt by the Company of UL approval for its Scanner.  Shipment of 75 units took place through December 31,2004.

 

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U.S. Medical was not able to maintain its purchase obligation describedabove.  In addition, it was unable topromptly pay for its purchases nor adequately report upon its activities in theCPT study.  Consequently, the Companyterminated its agreement with U.S. Medical in March 2005.  The Company is currently in discussion withU.S. Medical with respect to the possibility of the creation of a non-exclusivedistributorship.

 

The termination of the distribution agreement has resulted in arepositioning of the Company’s marketing activities in the wound care andprevention market.  The Company is nowpro-actively marketing into this sector by seeking additional regional and nationaldistributors and service providers and responding directly to customerinquiries.

 

**FUTURESCAN** – In March 2004,we announced the sale of 100 scanners to this distributor for which the Companyreceived a deposit of $350,000.  Tenunits were shipped in 2004 and Futurescan recently announced its intention toplace 78 units with INFINITY, a Ohio based wound care service firm serving thenursing home industry.

 

In addition the Company had some direct sales to another customer inthe esthetics markets (approximately $230,000) as well as with anotherorganization operating in the wound care marketplace.  This customer is focusing on producing a fullservice program to long-term care facilities, including scanning and interpretationof scans.

 

•                  During *Phase II,*which we expect to enter within two to threeyears, we will seek to expand into applications that require systemenhancements or additional clinical study data before they can be marketedeffectively (e.g. some of the established array markets starting initially withmusculoskeletal imaging, including sports medicine and vascular imaging andemerging markets such as burn and skin lesion assessment).

 

•                  In *Phase III,*which we expect to enter within three to fouryears, we will explore further array applications including those based uponphased array technology and other potential applications of the technology(e.g. cancer mapping, 3-dimensional representation, and inter-operativeimaging).  These applications requirelonger-term development and clinical validation.

 

We will continue to cultivate the support of clinical and technologicalopinion leaders and leading medical institutions through the publication andpresentation of study results, which will play a pivotal role in our marketingand public relations activities.  Thecenters we are collaborating with include: Harvard/Massachusetts General Hospital, University of Pennsylvania,Mount Sinai Hospital, University of Virgina, Wake Forest University, Universityof Miami, University of Kansas Medical Center, University of Notre Dame and Guy’sHospital, London.

 

**Competition**

 

Diagnostic imaging solutions compete primarily on the basis ofdiagnostic value, imaging performance, reliability, ease of use and price. Ourcompetitors include MRI producers, ultrasound manufacturers, and X-ray basedtopography solutions. Any of these competitors could seek to modify theirimaging devices to produce higher resolutions at narrower depths. In fact, onecompany, Cortex Technology, Inc., marketing under the name Dermascan,offers a scanner,

 

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which competes directly with our Scanner, although it is generally usedas a research tool. Moreover, current and potential diagnostic imagingmodalities such as those described below also pose a significant competitiverisk to us.  In addition, many of thesecompetitors are significant larger than the Company and possess greaterfinancial resources.

 

*Low Frequency Ultrasound.*Traditionalultrasound technology is used regularly for a number of clinical applications.Ultrasound is currently used in several medical imaging applications, includingpulsed ultrasound, continuous wave “Doppler” ultrasound and real-timeultrasound. Each variation is particularly suited to certain applications.“Doppler” ultrasound is used to record changes in a fetal heart while pulsedultrasound can be used to resolve images of the abdomen.

 

*Magnetic Resonance Imaging (MRI).*Magneticresonance imaging produces high quality images inside the body. MRI is based onthe principles of nuclear magnetic resonance (NMR), a technique originally usedby chemists and physicists to obtain microscopic chemical and physicalinformation about molecules.

 

*Conventional X-Ray.*X-raysystems pass radiation through a patient to a shielded photographic plate. Dueto the health risks associated with exposure to ionizing radiation, operatingx-ray equipment requires a controlled environment and trained professionals.Additionally, operating x-ray equipment requires film and in many cases, boardcertified radiologists. Despite these barriers, x-ray technologies areeffective for a number of applications, including skeletal examinations andmammography. 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 emergingmarkets for the Scanner, which have historically not used sophisticated imagingtechnology.  Additionally, we could facethe following categories of competition as we enter the various markets:

 

•                  Indirectcompetition from other soft tissue assessment modalities, such as MRI

•                  Potentialcompetition in established markets from niche players that make portableultrasound machines for traditional diagnostic ultrasound applications.

•                  Large ultrasoundcompanies that currently concentrate on traditional applications, but withlarger and much more expensive machines.

•                  Potentialcompetition in emerging markets from academic groups and small specialistcompanies now researching high-resolution ultrasound imaging that they mayattempt to commercialize.

 

**Research and Development**

 

We continue to conduct research and development in order to validatethe Scanner in existing markets and in new markets. In addition, we continue toevolve the established Scanner technology and software.

 

During 2004,Longport launched a new scanner model (EPISCAN-I-200) based upon our previouslyestablished ultrasound technology and incorporating the most up-to-datecomputing, data communications capabilities and display technologies. Thismodel has been designed for use on either a small cart or office desk top. Inadditional to the technological benefits of this new unit the design is readilyscalable allowing for the potential for high volume production. A new versionof our scanner software was launched to coincide with the introduction of theEPISCAN-I-200 unit.  This software has morea powerful user interface and offers more comprehensive image analysis tools.

 

The firstprototype laptop sized scanner was also fabricated in 2004, with the aim ofintroducing this unit into the market in 2005.

 

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**Technology Transfer Agreements**

 

In December 1997, we entered into two Technology TransferAgreements (the “Agreements”) with UMDS and Square Wave Systems, Ltd. (“SWS”)pursuant to which UMDS and SWS assigned all of their rights, title and interestin patent applications (the “Patents”) covering certain technology associatedwith the Scanner. The Agreements provide us with the exclusive and worldwiderights to the use of the Scanner technology underlying the Patents for medicalapplications only. UMDS and SWS retained the rights to all other uses for thePatents. However, in the case of the fractal analysis software, a softwarecomponent of the Scanner, which is used to analyze, determine and graphicallydisplay the fractal nature of a reflected image generated from a Scanner, ourrights are limited to the use of software solely in a high frequency ultrasound skin scanner. In consideration of the assignment of the technologypursuant 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 1999when the FDA granted marketing permission to us with respect to the Scanner. Wealso agreed to pay all costs associated with maintaining and renewing thePatents, which were approved on June 6, 2000.

 

There can be no assurance that the Patents will afford protectionagainst competitors with similar technology, that the Patents will not beinfringed upon or designed around by others, that others will not obtainpatents that we will need to license or design around, that the Patents willnot inadvertently infringe upon the patents of others, or that others will notmanufacture and distribute similar scanners upon expiration of the Patents.There can also be no assurance that the Patents will not be invalidated or thatwe will have adequate funds to finance the high cost of prosecuting ordefending patent validity or infringement issues.

 

**Longport International, Ltd.**

 

We formed Longport International, Ltd., a wholly-owned subsidiary, in1999 to market Scanners outside North America. Longport International beganmanufacturing Scanners using SRA in 1999. We received delivery of the firstScanner produced by SRA in August 2000. These Scanners comply with theEuropean Medical Devices Directorate for high-resolution ultrasound imagingtechnology. This compliance, together with adherence to the ISO-9001 subsetBS-EN-46001 manufacturing quality standard enables a CE mark to be placed onthe Scanner for sales outside North America.

 

**Employees**

 

We currently employ eight (8) full-time employees.

 

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**ITEM 2.  DESCRIPTION OF PROPERTY**

 

We lease approximately 7,700 square feet of office space at 2 BraxtonWay, Suite 111, Glen Mills, Pennsylvania on a 5 year lease expiring in November 2009currently at $7,700 per month plus a ratable share of occupancy costs

 

**ITEM 3. LEGAL PROCEEDINGS**

 

In September 1997, we were notified of a Medicare Hearing Officer’sdecision that we were liable for repayment of Medicare benefit overpayments of$269,120. The overpayments were from calendar years 1994 and 1995. We appealedthe Hearing Officer’s decision and the appeal was heard by an AdministrativeLaw Judge in January 1999 and November 1999. The Judge ruled in favorof us on certain claims and against us on others. We continue the appealprocess and cannot predict the outcome, although we have reserved $100,000 tofund any repayment liability.

 

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

 

Not applicable.

 

**PART II**

 

**ITEM 5.  MARKET FOR COMMONEQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASES OFEQUITY SECURITIES**

 

Our Common Stock has traded on the Over the Counter Electronic BulletinBoard under the symbol “LPTI” since September 7, 1994.

 

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

 

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| ** **              | ** ** | **Price** | ** ** |
|-------------------------|------------|-----------|------------|
| ** **              | ** ** | **High**  | ** ** | **Low** | ** ** |
|                    |       |      |       |   |   |
| By Quarter Ended:       |       |      |       |   |   |
|                    |       |      |       |   |   |
| 2004                    |       |      |       |   |   |
|                    |       |      |       |   |   |
| March 31, 2004     |       | $         | 1.52       |   | $ | .17 |   |
| June 30, 2004      |       | $         | 1.16       |   | $ | .55 |   |
| September 30, 2004 |       | $         | 1.73       |   | $ | 1.00 |   |
| December 31, 2004  |       | $         | 1.41       |   | $ | .86 |   |
|                    |       |      |       |   |   |
| 2003                    |       |      |       |   |   |
|                    |       |      |       |   |   |
| March 31, 2003     |       | $         | .35        |   | $ | .18 |   |
| June 30, 2003      |       | $         | .26        |   | $ | .15 |   |
| September 30, 2003 |       | $         | .21        |   | $ | .14 |   |
| December 31, 2003  |       | $         | .45        |   | $ | .14 |   |

 

As of March 31, 2005, we had approximately 1,500 record andbeneficial stockholders.

 

**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 per share dividend on our Common Stock in June 1999.We have not paid dividends since and do not intend to pay dividends in thefuture. Earnings, if any, will be retained to finance growth.

 

**Limitation on Liability**

 

Our Certificate of Incorporation provides that a director shall not bepersonally liable to Longport or our stockholders for any action taken or anyfailure to act to the full extent permitted by the Delaware law. The effect ofthis provision is to eliminate our rights and our stockholders, throughstockholders’ derivative suits on behalf of Longport, to recover monetarydamages from a director for breach of the fiduciary duty of care as a directorincluding breaches resulting from negligent or grossly negligent behavior. Thisprovision does not limit or eliminate the rights of Longport or any stockholderto seek non-monetary relief such as an injunction or rescission in the event ofa breach of a director’s duty of care or to seek monetary damages for (i) aviolation of criminal law, (ii) unlawful payment of dividends or otherdistribution under Delaware law, (iii) a transaction in which a directorderived an improper personal benefit, (iv) willful misconduct, or (v) reckless,malicious or wanton acts.

 

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**ITEM 6.  MANAGEMENT’S DISCUSSIONAND ANALYSIS OF PLAN OF OPERATION**

 

**Results of Operations**

 

**Year Ended December 31, 2004 Compared to Year Ended December 31,2003**

 

Revenues for 2004 were $2,457,677 compared to $500,479 for 2003.  This increase is primarily due to theincrease in sales of the Company’s scanner device of $2,037,380, income fromthe sale of exclusive marketing rights of $153,124 as well as an absence ofcontract revenue of $247,681 from a state research grant which ceased in mid2003.

 

Total operating expenses for 2004 were $2,745,576 compared to$1,372,225 for 2003. This increase is primarily due to additional costsassociated with the increased sales activity (cost of sales increased byapproximately $880,000) as well as an increase of approximately $756,000 ingeneral and administrative costs associated with the additional activitiesbeing conducted by the Company in 2004. We believe that there will beadditional costs in 2005 associated with clinical research studies utilizingthe Scanner for specific medical applications.

 

During 2004, the Company recorded an impairment loss of $164,707related to an investment made in 2000.

 

Interest expense for 2004 was $177,573 as compared to $129,826 for2003. During the third quarter of 2004 the Company repaid all of its long termdebt.  The increase in expense is due toan increase in the amount of average monthly borrowings outstanding in 2004 ascompared to 2003.

 

The Company had a net loss of $633,532 for 2004 compared to a net lossof $927,962 for 2003.

 

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

 

Revenues for 2003 were $500,479 compared to $444,449 for 2002 and werecomprised of both Scanner sales and contract revenue.

 

Total expenses increased from $1,271,708 in 2002 to $1,372,225 in2003.  A significant portion of our expensesresulted from general and administrative expenses, research and developmentexpenses and costs associated with the issuance of stock options.  We reduced our general and administrativeexpenses 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 experienced a net loss of $927,962 in****2003,compared to net****loss of $826,062 in 2002.

 

**Liquidity and Capital Resources**

 

As of December 31, 2004, we had $938,822 in cash and cashequivalents and no long-term debt. Our working capital increased from $(237,441)at December 31, 2003 to $677,534 at

 

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December 31, 2004. However, during 2004 we experienced a use ofcash from operating activities of $142,331. This is an improvement of approximately $197,000 as compared to cashused in operating activities in 2003. The current year was the first year ofsignificant sales activity for the Company and as such considerable cash wasused to fund accounts receivable (approximately $497,000) and build inventory(approximately $575,000).  These uses ofcash were funded by the receipt of customer deposits related to sales orders($805,600) as well as the receipt of $500,000 from the sale of exclusivemarketing rights.  We fully expect thatadditional cash will be needed to produce and market the Scanners in 2005.

 

During 2004, the Company utilized $270,182 in cash for investing activitiesprincipally related to the purchase of additional production related equipment,computer equipment and furniture and fixtures. Cash flows from financingactivities provided $1,155,421 which was comprised of $1,463,028 from the saleof common stock and warrants offset by repayments of debt of $307,607.

 

In March 2005 we terminated our distribution agreement with US MedicalSystems for a variety of contractual breeches. US Medical was the Company’s largest distributor and had an exclusivedistributorship in the woundcare marketplace. This agreement called for, among many provisions, the production anddelivery of a minimum of 25 Scanners per month (revenue of $550,000 per month)through July 2005 and subsequent to that date, 50 Scanners per month (revenueof $1,100,000 per month) through July 2006. We recognized net revenue of $1,600,000 from sales to this distributorin 2004, all of which occurred in the five months ended December 31, 2004.  The loss of this customer has had asignificant adverse impact on both our revenue and cash flow.  Unless this customer is replaced, sales in2005 will be substantially less than 2004 sales.

 

Our other distributors are small and newly formed organizations andhave yet to deliver a consistent flow of Scanner orders.   Furthermore, in an attempt to satisfy USMedical Systems’ production requirements we increased our inventorysubstantially during the last quarter of 2004 to 85 finished units at year-endwith another 60 units in the later stages of production.  Consequently, our cash balance declined substantiallythrough March 31, 2005.  Cash flow willpresent significant challenges for us unless significant and consistent salesare achieved and/or new orders received with accompanying deposits.  We currently can provide no assurances inthis regard.

 

As a result, the Company has adopted a short-term plan that includes:

 

•      Hiring of a National Sales and MarketingDirector with significant sales distribution experience in an effort to furtherstimulate sales activities

•      Attendance at national conferences focusedon the woundcare market

•      Pursuit of direct sales opportunities thatdo not conflict with existing distributors

•      Entering into short term leases of theScanner with new customers

•      Continue discussions with US MedicalSystems with respect to creation of a new distribution agreement

 

In addition, the Company's longer term plans include the following:

 

•      Efficient production and delivery of theCompany's product pursuant to existing sales orders.

•      Sponsorship of research studies thatfurther substantiate the efficacy of the Company's product and service.

•      Continued expansion of the Company'sproduct into additional market sectors and geographic territories via theexecution of additional long term sales and licensing agreements.

•      Further development of the Company'stechnology resulting in additional marketable products and services.

•      Obtaining additional equity capitalthrough the sale of common and or preferred stock as well as through thepotential exercise of outstanding common stock purchase warrants and options.

 

If we are unable to increase our revenue and cash flow in the nearfuture we may be required to significantly limit our operations, while seekingadditional debt or equity financing.

 

**Critical Accounting Policies and Estimates**

 

Our consolidated financial statements and accompanying notes have beenprepared in accordance with generally accepted accounting principles and rules prescribedby the Securities and Exchange Commission. The preparation of financialstatements in conformity with generally accepted accounting principles requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities, the disclosure of contingent assets and liabilitiesat the date of the financial statements and the reported amounts of revenues andexpenses during the reporting periods.

 

We continually evaluate the accounting policies and estimates we use toprepare the consolidated financial statements. In****general,management’s estimates are based on historical experience, on information fromthird party professionals and on various other assumptions that are believed tobe reasonable under the facts and circumstances. Actual results could differfrom those estimates made by management.

 

*Asset impairment.*Alllong-lived assets, including goodwill and other intangible assets are evaluatedfor impairment on the basis of undiscounted cash flows whenever events orchanges in circumstances indicate that the carrying amount of an asset may notbe recoverable. An impaired asset is written down to its estimated fair marketvalue based on the best information available. Estimated fair market value isgenerally measured by discounting estimated future cash flows. Considerablejudgment by management is necessary to estimate discounted future cash flows.Assumptions used in these cash flows are consistent with internal forecasts.

 

*Commitments and contingencies.*InSeptember 1997, we were notified of a Medicare Hearing Officer’s decisionthat Longport is liable for repayment of Medicare Benefit Overpayments of $269,120*.*The overpayments are from calendar years 1994 and 1995. Weappealed the Hearing Officer’s decision. The Appeal was heard by anAdministrative Law Judge on January 5,1999 and again on November 2,1999.The Administrative Law Judge reviewed approximately forty out of approximately410 cases. The Administrative Law Judge dismissed some cases, ruled in favor ofLongport on certain cases and ruled against Longport on other cases. Wecontinue to be in the Appeals process. We are unable to predict the outcome ofthe Appeal. We have accrued $100,000**as a result ofthese proceedings based on our estimate of the

 

14

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cases ruled against us and applying the relationship across all of ourMedicare billings prior to 1995. The $100,000**accrualis our best estimate of the potential liability based on all of the facts andcircumstances presently known.

 

*Accounting for income taxes.*Significantjudgment by management is required in developing our provision for income taxes,including the determination of deferred tax assets and liabilities and anyvaluation allowances that might be required against the deferred tax assets. Wehave recorded a valuation allowance for the entire amount of the deferred taxassets as of December 31, 2004 and 2003 based on our belief that operatingincome will not, more likely than not, be sufficient to realize the benefit ofthese assets over time. In the event that actual results differ from theseestimates or if our historical trend of operating losses changes, we may berequired to reduce the valuation allowance on deferred tax assets, which couldhave a material effect on our financial condition and results of operations.

 

**Other Matters**

 

Our licensor was assigned a U.S. Patent in June 2000 for theScanner. The final areas of concern for commercialization are “peer acceptance”and production and distribution.

 

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

 

**ITEM 7.  FINANCIAL STATEMENTS**

 

 

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

 

 

To the Board of Directors

 

**Longport, Inc.**

 

We have audited theaccompanying consolidated balance sheet of Longport, Inc. and Subsidiaries asof December 31, 2004 and the related consolidated statements of operations,changes in stockholders’ equity, and cash flows for each of the years endedDecember 31, 2004 and 2003. These financial statements are the responsibilityof the Company’s management. Our responsibility is to express an opinion onthese financial statements based on our audits.

 

We conducted our audits inaccordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit toobtain reasonable assurance about whether the financial statements are free ofmaterial misstatement. The Company is not required to have, nor were we engagedto perform, an audit of its internal control over financial reporting.  Our audit included consideration of internalcontrol over financial reporting as a basis for designing audit procedures thatare appropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the Company’s internal control over financialreporting.   An audit also includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation. We believe that ouraudits provide a reasonable basis for our opinion.

 

In our opinion, the financialstatements referred to above present fairly, in all material respects, thefinancial position of Longport, Inc. and Subsidiaries as of December 31, 2004,and the results of its operations and its cash flows for each for each of theyears ended December 31, 2004 and 2003, in conformity with U.S. generallyaccepted accounting principles.

 

The accompanying financial statements havebeen prepared assuming the Company will continue as a going concern. As shownin the financial statements, the Company incurred a net loss of $633,532 and$927,962 during the years ended December 31, 2004 and 2003, respectively.  As discussed in Note 1 to the financialstatements, the Company’s significant operating losses raise substantial doubtabout its ability to continue as a going concern.  Management’s plans in regard to these mattersare also discussed in Note 1. The financial statements do not include anyadjustments that might result from the outcome of this uncertainty.

 

 

 

 

Plymouth Meeting, Pennsylvania

January 26, 2005, except for Note 13,

as to which the date is March 4, 2005

 

15

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Longport, Inc. and Subsidiaries

Consolidated Balance Sheet

December 31,2004

 
| ASSETS                                                    |   |      |      |
|-----------------------------------------------------------|--------|-----------|-----------|
|                                                      |   |      |      |
| Current Assets:                                           |   |      |      |
| Cash and cash equivalents                                 |   | $         | 938,822   |   |
| Accounts receivable:                                      |   |      |      |
| Trade, net of allowance for doubtful  accounts of $50,000 |   | 500,000   |      |
| Inventories                                               |   | 779,843   |      |
| Marketable securities available for sale                  |   | 16,471    |      |
| Deposits and other current assets                         |   | 210,290   |      |
|                                                      |   |      |      |
| Total Current Assets                                      |   | 2,445,426 |      |
|                                                      |   |      |      |
| Property and Equipment, at cost:                          |   |      |      |
| Medical equipment                                         |   | 36,449    |      |
| Production equipment                                      |   | 216,611   |      |
| Computer equipment                                        |   | 79,424    |      |
| Office furniture and equipment                            |   | 121,490   |      |
|                                                      |   | 453,974   |      |
| Less accumulated depreciation                             |   | (213,781  | )         |
|                                                      |   |      |      |
| Net Property and Equipment                                |   | 240,193   |      |
|                                                      |   |      |      |
| Other Assets:                                             |   |      |      |
| Deposits                                                  |   | 11,437    |      |
|                                                      |   |      |      |
| Total Assets                                              |   | $         | 2,697,056 |   |

 

The accompanying notes are an integral partof these consolidated financial statements.

 

16

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Longport, Inc. and Subsidiaries

Consolidated Balance Sheet

December 31, 2004

 
| LIABILITIES  AND STOCKHOLDERS’ EQUITY                                                     |   |       |      |
|------------------------------------------------------------------------------------------------|--------|------------|-----------|
|                                                                                           |   |       |      |
| Current Liabilities:                                                                           |   |       |      |
| Accounts Payable - trade                                                                       |   | $          | 282,075   |   |
| Accounts Payable - related party                                                               |   |       | 9,000     |   |
| Accrued expenses                                                                               |   | 180,232    |      |
| Customer deposits                                                                              |   | 850,000    |      |
| Accrued Medicare obligation                                                                    |   | 100,000    |      |
| Deferred revenue                                                                               |   | 371,876    |      |
|                                                                                           |   |       |      |
| Total Current Liabilities                                                                      |   | 1,793,183  |      |
|                                                                                           |   |       |      |
| Commitments and Contingencies                                                                  |   |       |      |
|                                                                                           |   |       |      |
| Stockholders’ Equity                                                                      |   |       |      |
| Preferred stock: $.001 par value, 1,000,000  shares authorized none issued or outstanding      |   | —     |      |
| Common stock: $.001 par value, 50,000,000  shares authorized 23,083,368 issued and outstanding |   | 23,084     |      |
| Paid in capital                                                                                |   | 10,874,100 |      |
| Accumulated deficit                                                                            |   | (9,976,832 | )         |
| Accumulated other comprehensive loss                                                           |   | (16,479    | )         |
|                                                                                           |   |       |      |
| Total Stockholders’ Equity                                                                |   | 903,873    |      |
|                                                                                           |   |       |      |
| Total Liabilities and Stockholders’ Equity                                                |   | $          | 2,697,056 |   |

 

The accompanying notes are an integral partof these consolidated financial statements.

 

17

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Longport, Inc. and Subsidiaries

Consolidated Statements of Operations

For the years ended December 31, 2004and 2003

 
| ** **                                                              | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|-------------------------------------------------------------------------|------------|------------|------------|------------|------------|
|                                                                    |       |       |       |       |       |
| Net Revenues:                                                           |       |       |       |       |       |
| Scanner sales - new units                                               |       | $          | 2,148,380  |       | $          | 251,000 |   |
| Scanner sales - used units                                              |       | 140,000    |       | —     |       |
| Scanner rentals                                                         |       | 8,000      |       | 1,750      |       |
| Contract revenue                                                        |       | —     |       | 247,681    |       |
| Other, principally sale of distribution  rights                         |       | 161,297    |       | 48         |       |
| Total Revenues                                                          |       | 2,457,677  |       | 500,479    |       |
|                                                                    |       |       |       |       |       |
| Operating Expenses:                                                     |       |       |       |       |       |
| Cost of sales - new units                                               |       | 1,104,822  |       | 225,066    |       |
| Cost of sales - used units                                              |       | —     |       | —     |       |
| General and administrative                                              |       | 1,475,102  |       | 719,412    |       |
| Stock compensation expense                                              |       | 7,800      |       | 158,286    |       |
| Research and development expense                                        |       | 157,852    |       | 269,461    |       |
| Total Operating Expenses                                                |       | 2,745,576  |       | 1,372,225  |       |
| Operating Income (Loss)                                                 |       | (287,899   | )          | (871,746   | )          |
|                                                                    |       |       |       |       |       |
| Other Income (Expense):                                                 |       |       |       |       |       |
| Interest and other income                                               |       | —     |       | 80,679     |       |
| Interest expense                                                        |       | (177,573   | )          | (129,826   | )          |
| Impairment loss                                                         |       | (164,707   | )          | —     |       |
| Other expense                                                           |       | (3,353     | )     | —     |       |
| Total Other Income (Expense)                                            |       | (345,633   | )          | (49,147    | )          |
|                                                                    |       |       |       |       |       |
| Income (Loss) Before Provision for Income  Taxes                        |       | (633,532   | )          | (920,893   | )          |
| Provision for income taxes                                              |       | —     |       | 7,069      |       |
|                                                                    |       |       |       |       |       |
| Net Income (Loss)                                                       |       | $          | (633,532   | )          | $          | (927,962 | ) |
|                                                                    |       |       |       |       |       |
| Net Income (Loss) Per Basic and Diluted Share  of Common Stock          |       | $          | (0.03      | )          | $          | (0.05 | ) |
|                                                                    |       |       |       |       |       |
| Weighted Average Number of Basic and  Diluted Common Shares Outstanding |       | 21,744,399 |       | 20,612,560 |       |

 

The accompanying notes are an integral partof these consolidated financial statements.

 

18

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Longport, Inc. and Subsidiaries

Consolidated Statements of Changes inStockholders’ Equity

For the Years Ended December 31, 2004 and2003

 
| ** **                                                                 | ** ** | ** **        | ** ** | ** **  | ** ** | ** **        | ** ** | ** **         | ** ** | ** **   | ** ** | ** **        | ** ** | **Accumulated**    | ** ** |
|----------------------------------------------------------------------------|------------|-------------------|------------|-------------|------------|-------------------|------------|--------------------|------------|--------------|------------|-------------------|------------|--------------------|------------|
| ** **                                                                 | ** ** | ** **        | ** ** | ** **  | ** ** | ** **        | ** ** | **Current  Years** | ** ** | ** **   | ** ** | ** **        | ** ** | **Other**          | ** ** |
| ** **                                                                 | ** ** | **Common  Stock** | ** ** | **Paid In** | ** ** | **Comprehensive** | ** ** | **Accumulated**    | ** ** | **Unearned** | ** ** | **Comprehensive** | ** ** |
| ** **                                                                 | ** ** | **Shares**        | ** ** | **Amount**  | ** ** | **Capital**       | ** ** | **Income  (Loss)** | ** ** | **Deficit**  | ** ** | **Compensation**  | ** ** | **Income  (Loss)** | ** ** |
| **Year Ended December 31, 2004:**                                     |       |              |       |        |       |              |       |               |       |         |       |              |       |               |       |
| Balance  at December 31, 2003                                         |       | 20,865,670        |       | $           | 20,866     |              | $          | 9,405,488          |       |         |       | $                 | (9,343,300 | )                  | $          | (7,500 | ) | $ | (213,883 | ) |
| Issuance  of common stock upon exercise of stock options                   |       | 520,000           |       | 520         |       |              | 159,480    |               |       |         |       |              |       |               |       |   |
| Repurchase  of common stock                                                |       | (127,008          | )          | (127        | )          |              | (159,871   | )                  |       |         |       |              |       |               |       |   |
| Sale  of common stock at $.85 per share net of cost of issuance of $36,972 |       | 1,814,706         |       | 1,815       |       |              | 1,461,213  |               |       |         |       |              |       |               |       |   |
| Issuance  of common stock for prior services                               |       | 10,000            |       | 10          |       |              | 7,790      |               |       |         |       |              |       |               |       |   |
| Amortization  of unearned compensation                                     |       |              |       |        |       |              |       |               |       |         |       | 7,500             |       |               |       |
| Other  comprehensive income (loss), net of tax:                            |       |              |       |        |       |              |       |               |       |         |       |              |       |               |       |
| Unrealized  gain (loss) on marketable securities                           |       |              |       |        |       |              |       | $                  | (18,822    | )            |       |              |       |               |       | (18,822 | ) |
| Impairment  of marketable securities recognized                            |       |              |       |        |       |              |       | 164,707            |       |         |       |              |       | 164,707            |       |
| Translation  adjustment                                                    |       |              |       |        |       |              |       | 51,519             |       |         |       |              |       | 51,519             |       |
| Net  loss                                                                  |       |              |       |        |       |              |       | (633,532           | )          | (633,532     | )          |              |       |               |       |
| Total  Comprehensive Income (Loss)                                         |       |              |       |        |       |              |       | $                  | (436,128   | )            |       |              |       |               |       |   |
|                                                                       |       |              |       |        |       |              |       |               |       |         |       |              |       |               |       |
| Balance  at December 31, 2004                                         |       | 23,083,368        |       | $           | 23,084     |              | $          | 10,874,100         |       |         |       | $                 | (9,976,832 | )                  | $          | — |   | $ | (16,479 | ) |
| **Year Ended December 31, 2003:**                                     |       |              |       |        |       |              |       |               |       |         |       |              |       |               |       |
| Balance  at December 31, 2002                                         |       | 20,320,670        |       | $           | 20,321     |              | $          | 9,019,223          |       |         |       | $                 | (8,415,338 | )                  | $          | (16,500 | ) | $ | (224,680 | ) |
| 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 sale of scanners              |       | 240,000           |       | 240         |       | 35,760            |       |               |       |         |       |              |       |               |       |
| Issuance  of common stock in connection with a loan                        |       | 200,000           |       | 200         |       | 55,800            |       |               |       |         |       |              |       |               |       |
| Sale  of common stock                                                      |       | 50,000            |       | 50          |       | 29,950            |       |               |       |         |       |              |       |               |       |
| Issuance  of stock options for services                                    |       |              |       |        |       | 155,736           |       |               |       |         |       |              |       |               |       |
| Issuance  of warrants in connection with a loan                            |       |              |       |        |       | 96,524            |       |               |       |         |       |              |       |               |       |
| Amortization  of unearned compensation                                     |       |              |       |        |       |              |       |               |       |         |       | 9,000             |       |               |       |
| Other  comprehensive income (loss), net of tax:                            |       |              |       |        |       |              |       |               |       |         |       |              |       |               |       |
| Unrealized  gain (loss) on marketable securities                           |       |              |       |        |       |              |       | $                  | 11,765     |         |       |              |       |               | 11,765     |   |
| Translation  adjustment                                                    |       |              |       |        |       |              |       | (968               | )          |         |       |              |       | (968               | )          |
| Net  loss                                                                  |       |              |       |        |       |              |       | (927,962           | )          | (927,962     | )          |              |       |               |       |
| Total  Comprehensive Income (Loss)                                         |       |              |       |        |       |              |       | $                  | (917,165   | )            |       |              |       |               |       |   |
|                                                                       |       |              |       |        |       |              |       |               |       |         |       |              |       |               |       |
| Balance  at December 31, 2003                                         |       | 20,865,670        |       | $           | 20,866     |              | $          | 9,405,488          |       |         |       | $                 | (9,343,300 | )                  | $          | (7,500 | ) | $ | (213,883 | ) |
|                                                                            |            |                   |            |             |            |                   |            |                    |            |              |            |                   |            |                    |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

The accompanying notes are an integral partof these consolidated financial statements.

 

19

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Longport,Inc. and Subsidiaries

ConsolidatedStatements of Cash Flows

Forthe Years Ended December 31, 2004 and 2003

 
| ** **                                                                                       | ** ** | **2004**  | ** ** | **2003** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|-----------|------------|----------|------------|
| Cash Flows From Operating Activities:                                                            |       |      |       |     |       |
| Net income (loss)                                                                                |       | $         | (633,532   | )        | $          | (927,962 | ) |
| Adjustments to reconcile net income (loss)  to net cash provided (used) by operating activities: |       |      |       |     |       |
| Depreciation and amortization                                                                    |       | 114,310   |       | 262,863  |       |
| Common stock issued in connection with sale  of scanners                                         |       | —    |       | 36,000   |       |
| Common stock and stock options issued for  services                                              |       | 7,800     |       | 158,286  |       |
| Common stock issued for interest expense                                                         |       | —    |       | 56,000   |       |
| (Gain) or loss on sale of property and  equipment                                                |       | 3,353     |       | (24,293  | )          |
| Impairment loss                                                                                  |       | 164,707   |       |     |       |
| Changes in assets and liabilities:                                                               |       |      |       |     |       |
| Accounts receivable trade                                                                        |       | (497,087  | )          | 33,785   |       |
| Other receivables                                                                                |       | —    |       | 2,128    |       |
| Marketable securities                                                                            |       | 4,706     |       |     |       |
| Deposits and other current assets                                                                |       | (90,558   | )          | (119,732 | )          |
| Inventories                                                                                      |       | (575,416  | )          | 200,830  |       |
| Accounts payable and accrued expenses                                                            |       | 181,910   |       | (62,163  | )          |
| Deferred revenue                                                                                 |       | 371,876   |       | —   |       |
| Customer deposits                                                                                |       | 805,600   |       | 44,400   |       |
|                                                                                             |       |      |       |     |       |
| Net Cash Provided (Used) By Operating  Activities                                                |       | (142,331  | )          | (339,858 | )          |
|                                                                                             |       |      |       |     |       |
| Cash Flows From Investing Activities:                                                            |       |      |       |     |       |
| Proceeds from sale of property and  equipment                                                    |       | —    |       | 30,000   |       |
| Long term deposits                                                                               |       | (8,276    | )          | —   |       |
| Capital expenditures                                                                             |       | (261,906  | )          | (14,150  | )          |
|                                                                                             |       |      |       |     |       |
| Net Cash Provided (Used) By Investing  Activities                                                |       | (270,182  | )          | 15,850   |       |
|                                                                                             |       |      |       |     |       |
| Cash Flows From Financing Activities:                                                            |       |      |       |     |       |
| Proceeds from notes payable - related  entity                                                    |       | —    |       | 440,000  |       |
| Issuance of common stock net of related  expenses                                                |       | 1,463,028 |       | 40,000   |       |
| Payments on notes payable - related entity                                                       |       | (307,607  | )          | (60,000  | )          |
|                                                                                             |       |      |       |     |       |
| Net Cash Provided (Used) By Financing  Activities                                                |       | 1,155,421 |       | 420,000  |       |
|                                                                                             |       |      |       |     |       |
| Effect of exchange rate changes on cash and  cash equivalents                                    |       | 40,200    |       | (968     | )          |
|                                                                                             |       |      |       |     |       |
| Net Increase in Cash and Cash Equivalents                                                        |       | 783,108   |       | 95,024   |       |
|                                                                                             |       |      |       |     |       |
| Cash and Cash Equivalents at Beginning of  Year                                                  |       | 155,714   |       | 60,690   |       |
|                                                                                             |       |      |       |     |       |
| Cash and Cash Equivalents at End of Year                                                         |       | $         | 938,822    |     | $          | 155,714 |   |
|                                                                                             |       |      |       |     |       |
| Supplemental Disclosure of Cash Flow  Information:                                               |       |      |       |     |       |
| Cash paid during the year for:                                                                   |       |      |       |     |       |
| Interest                                                                                         |       | $         | 154,016    |     | $          | 15,000 |   |
| Income taxes                                                                                     |       | —    |       | 7,069    |       |
|                                                                                             |       |      |       |     |       |
| Supplemental Disclosure of Noncash  Investing and Financing Activities:                          |       |      |       |     |       |
| Unrealized gain (loss) on marketable  securities                                                 |       | (18,822   | )          | 11,765   |       |
| Warrants issued in connection with issuance  of debt                                             |       |      |       | (96,524  | )          |
| Investment impairment loss                                                                       |       | (164,707  | )          | —   |       |
| Amortization of unearned compensation                                                            |       | 7,500     |       | 9,000    |       |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

19

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LONGPORT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1.                                       Summaryof Significant Accounting Policies

 Description of Business

Longport, Inc. (the “Company”) was incorporated January 22,1993 and initially marketed and distributed wound care products.  In 1995, the Company began managingwound-healing centers under management services contracts and ceased operationsunder such contracts in early 2003.  TheCompany has developed a soft tissue ultrasound scanner (the “Scanner”) that isused in numerous wound care and other medical applications.

 

 Basis of Presentation

The accompanying consolidated financial statements have been preparedon a going concern basis, which contemplates the realization of assets and thesatisfaction of liabilities in the normal course of business.  The financial statements do not include anyadjustments relating to the recoverability and classification of recorded assetamounts or the amount and classification of liabilities that might be necessaryshould the Company be unable to continue as a going concern.  The Company’s continuation as a going concernis dependent upon its ability to generate sufficient cash flow to meet itsobligations on a timely basis, to obtain additional financing as may berequired, and to increase sales to a level where the Company becomesconsistently profitable.  Additionally,the Company has in the past experienced extreme cash liquidity shortfalls fromoperations.

 

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

 

•                  Efficientproduction and delivery of the Company’s product pursuant to existing salesorders.

•                  Sponsorshipof research studies that further substantiate the efficacy of the Company’sproduct and service.

•                  Continuedexpansion of the Company’s product into additional market sectors and geographicterritories via the execution of additional long term sales and licensingagreements.

•                  Furtherdevelopment of the Company’s technology resulting in additional marketableproducts and services.

•                  Obtainingadditional equity capital through the sale of common and or preferred stock aswell as through the potential exercise of outstanding common stock purchasewarrants and options.

 

If management cannot achieve its operating planbecause of sales shortfalls or other unfavorable events, the Company may findit necessary to dispose of assets, or undertake other actions as may beappropriate.

 

 Principles of Consolidation

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

 

 Cash and Cash Equivalents

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

 

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 Accounts Receivable

The Company grants credit to all qualified customers.  Accounts receivable are carried at cost lessan allowance for doubtful accounts, if an allowance is deemed necessary.  The Company does not accrue finance orinterest charges.  On a periodic basis,the Company evaluates its accounts receivable and determines the requirementfor an allowance for doubtful accounts, based on history of past write-offs,collections and current credit conditions. A receivable is written off when it is determined that all collectionefforts 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.  Inventoriesconsist of $561,409 of finished goods and $218,434 of work in process at December 31,2004.

 

Comprehensive Income

 

Comprehensive income consists of net income (loss) and other gains andlosses affecting stockholders’ equity that, under accounting principlesgenerally accepted in the United States of America are excluded from net income(loss).  Such items consist primarily ofunrealized gains and losses on marketable equity securities and foreigntranslation gains and losses.

 

 Marketable Securities

Marketable securitiesconsist of common stock.  Marketablesecurities are stated at market value as determined by the most recently tradedprice of each security at the balance sheet date.  All marketable securities are defined astrading securities or available-for-sale securities under the provisions ofStatement of Financial Accounting Standards (“SFAS”) No. 115, “Accountingfor Certain Investments in Debt and Equity Securities.”

 

Management determines the appropriate classification of its investmentsin marketable securities at the time of each purchase and re-evaluates suchdetermination at each balance sheet date. Securities that are bought and held principally for the purpose ofselling them in the near term are classified as trading securities andunrealized holding gains and losses are included in earnings.  Debt securities for which the Company doesnot have the intent or ability to hold to maturity and equity securities areclassified as available-for-sale. Available-for-sale securities are carried at fair value, with theunrealized gains and losses, net of tax, reported as a separate component ofstockholders’ equity.  The cost ofinvestments 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 basedon the following estimated useful lives using the straight-line method.

 
| **Classification**             | ** ** | **Useful Life In Years** | ** ** |
|--------------------------------|------------|--------------------------|------------|
| Medical equipment              |       | 3-5                      |       |
| Production equipment           |       | 5                        |       |
| Computer equipment             |       | 3-5                      |       |
| Office furniture and equipment |       | 4-7                      |       |

 

Depreciation of property and equipment charged to operations is $114,310and $262,863 for the years ended December 31, 2004 and 2003, respectively.

 

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 Unearned Compensation

The Company issued shares of restricted common stock to certainofficers of the Company in connection with their employment agreements.  The common stock was issued as compensationfor future services to be performed over the three year term of the employmentagreements.  The fair value of the sharesissued has been recorded as unearned compensation and is shown as a separatecomponent of stockholders’ equity. Unearned compensation is amortized to expense over the life of theemployment 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, whichis considered to have occurred upon shipment of the finished product.  Sales incentives and returns are estimatedand recognized at the date of shipment based upon historical activity andcurrent agreements with customers.  TheCompany evaluates these estimates on a regular basis and revises them asnecessary.

 

The Company recognizes revenue from the sale of product distribution rightsover the length of period for which the rights are conveyed.

 

 Contract Revenue

The Company was a subcontractor to a grant between Lackawanna JuniorCollege and the Pennsylvania Department of Health to perform certain researchservices for a cancer assessment system. The grant was entered into in June 2002 and covered the period fromJuly 1, 2001 through June 30, 2003. The total grant was for $500,000 and the Company’s portion wasapproximately $475,000 and was recognized as income as the services wereperformed and billed to Lackawanna Junior College.  Contract revenue and the related research anddevelopment costs recognized during the year ended December 31, 2003 was$247,681 and $228,055, respectively.

 

Research and Development

Research and development costs are expensed as incurred.  Research and development costs were $157,852 forthe year ended December 31, 2004 and $269,461 (expended principally withrespect to a contract with Pennsylvania Department of Health) for the yearended December 31, 2003.

 

 Stock-Based Compensation

The Company adopted SFAS No. 123, “Accounting for Stock-BasedCompensation”.  The Company will continueto measure compensation expense for its stock-based employee compensation plansusing the intrinsic value method prescribed by APB Opinion No. 25, “Accountingfor Stock Issued to Employees” and related interpretations in accounting forits plans and does not recognize compensation expense for its stock-based  compensation plans other  than for options granted  tonon-employees.  If the Company hadelected to recognize

 

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compensation expense based upon the fair value at the grant date forawards under its stock-based compensation plans consistent with the methodologyprescribed by SFAS No. 123, the Company’s net loss and loss per sharewould be adjusted as follows:

 
| ** **                                                                                                                            | ** ** | **2004** | ** ** | **2003** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Net income (loss), as reported                                                                                                        |       | $        | (633,532   | )        | $          | (927,962 | ) |
| Less stock based employee compensation  expense determined under fair value based methods for all awards, net of  related tax effects |       | 193,525  |       | 34,510   |       |
| Pro forma net income (loss)                                                                                                           |       | $        | (837,057   | )        | $          | (962,472 | ) |
| Net income (loss) per basic and diluted  share of common stock:                                                                       |       |     |       |     |       |
| As reported - Basic and diluted                                                                                                       |       | $        | (.03       | )        | $          | (.05 | ) |
| Pro forma - Basic and diluted                                                                                                         |       | $        | (.04       | )        | $          | (.05 | ) |

 

The Company granted stock options of3,935,000 during 2004 of which 935,000 are contingent upon the approval of theCompany’s shareholders.  The Company did notgrant any employee stock options during 2003.

 

 Long-Lived Assets

When facts and circumstances indicate that the cost of long-livedassets may be impaired, an evaluation of the recoverability is performed bycomparing the carrying value of the assets to the estimated undiscounted futurecash flows.

 

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

 

During 2004 the Company retired its fleet of first generation Scannerswhich were fully depreciated.

 

Shipping and Handling Costs

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

 

 

Rent Expense

During 2004, the Company moved office locations and entered into a newlease for the office space beginning in mid-November.  The new lease contains escalating rentpayments over the term of five years.  Inaccordance with U.S. generally accepted accounting principles, the Company willrecognize rent expense on a straight-line basis over the five year term of thelease.

 

 

 Foreign Currency Translation

The Company’s international operations use their local currency astheir functional currency.  Assets andliabilities are translated at exchange rates in effect at the balance sheetdate and             incomeand expense accounts at the average exchange rates during the year.  Resulting translation adjustments arerecorded as a separate component of accumulated other comprehensive income(loss).

 

 Income Taxes

Deferred income taxes are provided for temporary differences betweenthe financial reporting and tax basis of assets and liabilities using enactedtax laws and rates for the years when the

 

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differences are expected to reverse.

 

 Net Income (Loss) Per Basicand 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 duringthe period. Diluted earnings per share is calculated by dividing net income(loss) for the year by the weighted average number of common shares outstandingduring the period, increased by the dilutive potential common shares (“dilutivesecurities”) that were outstanding during the period.  Dilutive securities include outstanding stockoptions and warrants.  Dilutivesecurities relating to stock options and warrants are included in thecalculation of diluted earnings per share using the treasury stock method.  A reconciliation of the numerators anddenominators of the basic and diluted earnings per share calculations for theyears ended December 31, 2004 and 2003 is presented in Note 5.

 

 Estimates

The preparation of the Company’s financial statements in conformitywith accounting principles generally accepted in the United States of Americarequires the Company’s management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosure of contingent assetsand liabilities at the date of the financial statements and the reported amountof revenues and expenses during the reporting period.  Actual results could differ from thoseestimates.

 

 Recently Issued AccountingStandards

In April 2003, theFASB issued SFAS No.149, Amendment of Statement 133 on Derivative Instrumentsand Hedging Activities, which amends and clarifies accounting for derivativeinstruments, including certain derivative instruments embedded in othercontracts, and for hedging activities under SFAS No.133. The Statement iseffective (with certain exceptions)

 

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for contracts enteredinto or modified after June 30, 2003. The adoption of this Statement hadno effect on the Company’s financial position or results of operations.

 

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

 

In December 2003, the Securities and Exchange Commission (“SEC”)released Staff Accounting Bulletin (“SAB”) No. 104, RevenueRecognition.  SAB No. 104 revises orrescinds portions of the interpretive guidance related to revenue recognitionincluded in Topic 13 of the codification of the staff accountingbulletins.  SAB No. 104 becameeffective when issued, and adoption by the Company did not have a materialimpact on its financial position or results of operations.

 

In January2003, the FASB issued FIN 46, Consolidation of Variable Interest Entities whichwas subsequently amended in December 2003 and Accounting Research Bulletin(“ARB”) No. 51, Consolidated Financial Statements was issued. In general avariable interest entity is a corporation, partnership, trust, or any otherlegal structure used for business purposes that either (a) does not have equityinvestors with voting rights or (b) has equity investors that do not providesufficient financial resources for the entity to support its activities. FIN 46requires a variable interest entity to be consolidated by a company if thatcompany is subject to a majority of the risk of loss from the variable interestentity’s activities or entitled to receive a majority of the entity’s residualreturns or both. Special provisions apply to enterprises that have fully orpartially applied Interpretation 46 (“Interpretation”) prior to issuance ofthis Interpretation. Otherwise, application of  this  Interpretation is required in financialstatements of public entities that have interests in variable interest entitiesor potential variable interest entities commonly referred to as  special-purpose  entities for periods  ending  after December 15, 2003. Application by smallbusiness issuers, to entities other than special-purpose entities and bynonpublic entities and all other types of entities is required at various datesin 2004 and 2005. In some instances, enterprises have the option of applying orcontinuing to apply Interpretation 46 for a short period of time beforeapplying this Interpretation. The adoption of the Interpretation did not haveany impact on the Company’s financial statements.

 

In November2004, the FASB issued SFAS No. 151, Inventory Costs.  SFAS No. 151 amends the guidance in ARB No.43, Chapter 4, Inventory Pricing, to clarify the accounting for abnormalamounts of idle facility expense, freight, handling costs, and wasted material(spoilage). ARB 43 previously stated that “. . . under some circumstances,items such as idle facility expense, excessive spoilage, double freight, andre-handling costs may be so abnormal as to require treatment as current periodcharges . . .”. This Statement requires that those items be recognized ascurrent-period charges regardless of whether they meet the criterion of “soabnormal”. In addition, this Statement requires that allocation of fixedproduction overhead to the costs of conversion be based on the normal capacityof the production facilities.  Theprovisions of this Statement shall be effective for inventory costs incurredduring fiscal years beginning after June 15, 2005. Earlier application ispermitted for inventory costs incurred during fiscal years beginning after thedate this Statement is issued. The provisions of this Statement shall beapplied prospectively.  The Company hasnot yet evaluated the impact of the adoption of SFAS No. 151 and has notdetermined the impact on the Company's financial position or results ofoperations.

 

In December2004, the FASB issued SFAS No. 153, Exchange of Nonmonetary Assets, whichamended  APB  Opinion No. 29,  Accounting  for Nonmonetary  Transactions. This Statement amends Opinion 29 to eliminate the exception fornonmonetary exchanges of similar productive assets  and replaces it with a general exception forexchanges of nonmonetary assets that do not have commercial substance. Anonmonetary exchange has commercial substance if the future cash  flows of  the  entity are expected to change significantly as a result of the exchange.  The provisions of this Statement shall beeffective for nonmonetary asset exchanges occurring in fiscal periods beginningafter June 15, 2005. Earlier application is permitted for nonmonetary assetexchanges occurring in fiscal periods beginning after the date this Statementis issued. The provisions of this Statement shall be applied prospectively.  The Company has not yet evaluated the impactof the adoption of SFAS No. 153 and has not determined the impact on theCompany's financial position or results of operations.

 

In December2004, the FASB issued SFAS No.123 (revised 2004), Share – Based Payment.Statement 123(R) will provide investors and other users of financial statementswith more complete and neutral financial information by requiring that thecompensation cost relating to share – based payment transactions be recognizedin financial statements.  That cost willbe measured based upon the fair value of the equity or liability instrumentsissued. Statement 123 (R) covers a wide range of share – based compensationarrangements including share options, restricted share plans, performance –based awards, share appreciation rights, and employee share purchase plans.  Statement 123(R)  replaces FASB Statement No. 123, Accountingfor Stock – Based Compensation, and supersedes APB Opinion No. 25, Accountingfor Stock Issued to Employees.  Statement123, as originally issued in 1995, established as preferable a fair – value –based method of accounting for share – based payment transactions withemployees.  However, that Statementpermitted entities the option of continuing to apply the guidance in Opinion25, as long as the footnotes to financial statements disclosed what net incomewould have been had the preferable fair – value – based method been used.  Public entities that file as small businessissuers will be required to apply Statement 123(R)  as of the first interim or annual reportingperiod that begins after December 15, 2005. The Company has not yet evaluated the impact of the adoption of SFAS123(R) and has not determined the impact on the Company’s financial position orresults of operations.

 

2.                                       MarketableSecurities

Marketable securities are carried on the balance sheet at their marketvalue.

 
| ** **                     | ** ** | **Cost** | ** ** | **Unrealized  Gain (Loss)** | ** ** | **Market  Value** | ** ** |
|--------------------------------|------------|----------|------------|-----------------------------|------------|-------------------|------------|
| As of December 31, 2004:  |       |     |       |                        |       |              |       |
| Available-for-sale securities: |       |     |       |                        |       |              |       |
| Equity securities              |       | $        | 35,293     |                        | $          | (18,822           | )          | $ | 16,471 |   |
|                                |            |          |            |                             |            |                   |            |  |  |  |

 

During 2004 the Company recognized an impairment loss of $164,707associated with an investment in marketable securities that was initiated in2000.

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**3.**                                       Exclusive DistributorRights and Purchase Agreement

** **

On February 12, 2004, theCompany signed a distribution agreement with U.S. Medical Systems, Inc, to sellits Scanner through U.S. Medical Systems Inc.’s distribution network. Thecontract provides for U.S. Medical Systems, Inc. to purchase 300 LDS unitsin the first year, 600 LDS units in year two, and 1,000 LDS units in yearthree.

 

An initial order, with a$500,000 deposit, was received in February 2004 for the first 100Scanners. Delivery of such units commenced in August 2004. The deposit isincluded in customer deposits in the accompanying financial statements at December 31,2004.

 

The Company also received a payment of $525,000 in March 2004 fromU.S. Medical Systems, Inc. to convert the above mentioned distributionagreement between the two companies for the Scanner into a three year exclusivearrangement in the wound care market. This amount is being recognized over thethree year period of the contract and income of $153,124 was recorded for theyear ended December 31, 2004. The amount remaining to be recognized of$371,876 is presented as deferred revenue on the accompanying balance sheet.

 

This exclusive distribution agreement was terminated in March 2005. SeeFootnote 13 for additional information with respect to the termination. 

 

4.                                       Income Taxes

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

 
| ** **                       | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|----------------------------------|------------|------------|------------|------------|------------|
| **Current:**                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Federal                          |       | $          | —     |       | $          | — |   |
| State                            |       | —     |       | 7,609      |       |
| Total                            |       | —     |       | 7,609      |       |
|                             |       |       |       |       |       |
| **Deferred:**                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Federal                          |       | —     |       | —     |       |
| State                            |       | —     |       | —     |       |
| Total                            |       | —     |       | —     |       |
|                             |       |       |       |       |       |
| Total Provision For Income Taxes |       | $          | —     |       | $          | 7,609 |   |

 

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

 
| ** **                                  | ** ** | **2004** | ** ** | **2003** | ** ** |
|---------------------------------------------|------------|----------|------------|----------|------------|
| Federal statutory rate                      |       | (34      | )%         | (34      | )%         |
| State income taxes, net of federal benefits |       | (6       | )          | (6       | )          |
| Valuation allowance                         |       | 40       |       | 40       |       |
|                                        |       |     |       |     |       |
| Total                                       |       | —   | %          | —   | %          |

 

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Significant components of deferred income taxes as of December 31,2004 are as follows:

 
| Net operating loss carryover |   | $          | 3,381,000 |   |
|------------------------------|--------|------------|-----------|--------|
| Accounts Receivable          |   |       | 20,000    |   |
| Property and equipment       |   | 50,000     |      |
| Intangible assets            |   | 20,000     |      |
| Other                        |   | 1,000      |      |
| Total Deferred Tax Asset     |   | 3,472,000  |      |
|                         |   |       |      |
| Stock option compensation    |   | (66,000    | )         |
|                         |   |       |      |
| Total Deferred Tax Liability |   | (66,000    | )         |
|                         |   |       |      |
| Less valuation allowance     |   | (3,406,000 | )         |
|                         |   |       |      |
| Net Deferred Tax Asset       |   | $          | —    |   |

 

The Company has assessed its past earnings history and trends, salesbacklog, budgeted sales, and expiration dates of carryforwards and hasdetermined that it is more likely than not that no deferred tax assets will berealized.  The valuation allowance of $3,406,000is maintained on deferred tax assets which the Company has not determined to bemore likely than not realizable at this time. The net change in the valuation allowance for deferred tax assets was anincrease of $130,000.  The Company willcontinue to review this valuation on a quarterly basis and make adjustments asappropriate.

 

At December 31, 2004, the Company had federal and state netoperating loss carryforwards of approximately $8,634,000 and $6,750,000,respectively.  Such carryforwards expirein the years 2008 through 2025 and 2006 through 2024 for federal and statepurposes, respectively.

 

5.                                       NetIncome (Loss) Per Share of Common Stock

The schedule below summarizes the elements included in thecalculation of basic and diluted net income (loss) per share for the yearsended December 31, 2004 and 2003. For the years ended December 2004 and 2003 options and warrants topurchase 10,750,126 and 3,755,714 common shares, respectively, were excludedfrom the calculations of diluted net (loss) per share, as their effect wouldhave been antidilutive.

 
| ** **                                                       | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|------------------------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                                                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income (loss)                                                |       | $          | (633,532   | )          | $          | (927,962 | ) |
|                                                             |       |       |       |       |       |
| Weighted-average common shares outstanding:                      |       |       |       |       |       |
| Weighted average common shares outstanding  - Basic and Diluted  |       | 21,744,399 |       | 20,612,560 |       |
|                                                             |       |       |       |       |       |
| Net income (loss) per share of common stock  - Basic and Diluted |       | $          | (.03       | )          | $          | (.05 | ) |

 

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6.                                       Issuance ofCommon Stock, Warrants and Stock Options 

 

Common Stock Issuance

 

On July 26, 2004 the Company closed a private placementtransaction wherein it sold 1,764,706 shares of restricted common stock tocertain investors in exchange for $1,500,000. In addition, warrants to purchase an additional 1,764,706, 882,353 and882,353 shares of restricted common stock for $1.20, $1.70 and $3.40 per sharerespectively were issued along with the common stock.  These warrants expire on July 25,2006.  An additional 50,000 shares wereissued to one of the investors for consulting services associated with thetransaction.

 

Other Warrants

 

In November 1993, the Company sold 1,185,714 “Units” consisting ofone share of the Company’s common stock and one common stock purchase warrantfor $.35 per unit.  The Warrants entitlethe holder to purchase one share of the Company’s common stock for $1.00 atanytime until June 30, 2006.  All1,185,714 warrants are outstanding as of December 31, 2004.

 

In June 2003 the Company sold 50,000 Units of the Company’ssecurities.  Each unit consists of oneshare of the Company’s common stock and one common stock purchase warrant for$.60 per unit.  The Warrants entitle theholder to purchase one share of the Company’s common stock for $.60 for a periodof five years from the date of the Units. All 50,000 warrants are outstanding as of December 31, 2004.

 

In October of 2003, the Company issued 1,000,000 warrants inconnection with a note agreement described in Note 9.  The warrants are exercisable into an equalnumber 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 31,2004.

 

 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 stockhave been reserved for issuance under the Plan.

 

Options under the Company’s Plan are issuable only to eligibleofficers, directors, key employees and consultants of the Company.  The Plan is administered by a committeeselected by the Board of Directors, which determines those individuals whoshall receive options, the time period during which the options may beexercised, the number of shares of common stock that may be purchased undereach 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 thanthe fair market value of the common stock on the date the option isgranted.  The stock options are subjectto anti-dilution provisions in the event of stock splits, stock dividends andthe like.

 

No stock options are transferable by an optionee other than by will orthe laws of descent and distribution, and during the lifetime of an optionee,the option is only exercisable by the

 

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optionee.  The exercise date ofan option granted under the Plan must not be later than ten years from the dateof grant.  Any options that expireunexercised or that terminate upon an optionee’s ceasing to be employed by theCompany will become available once again for issuance.

 

The following table contains information on the stock options under theCompany’s Plan for the years ended December 31, 2004 and 2003.

 
| ** **                                     | ** ** | **Number of  Shares** | ** ** | **Weighted Average  Exercise Price** | ** ** |
|------------------------------------------------|------------|-----------------------|------------|--------------------------------------|------------|
| Options outstanding at December 31,  2002 |       | —                |       | —                               |       |
| Granted                                        |       | —                |       | —                               |       |
| Exercised                                      |       | —                |       | —                               |       |
| Cancelled                                      |       | —                |       | —                               |       |
|                                           |       |                  |       |                                 |       |
| Options outstanding at December 31,  2003 |       | —                |       | —                               |       |
| Granted                                        |       | 3,535,000             |       | $                                    | .90        |   |
| Exercised                                      |       | —                |       | —                               |       |
| Cancelled                                      |       | —                |       | —                               |       |
|                                           |       |                  |       |                                 |       |
| Options outstanding at December 31,  2004 |       | 3,535,000             |       | $                                    | .90        |   |

 

The Company granted options for an additional535,000 shares which are contingent upon shareholder approval at the nextannual meeting.

 

 Other Stock Options

The Company has granted stock options to employees, consultants andother individuals.  The outstandingoptions expire at various dates through May 2009.  The following table contains information onall of the Company’s Non Plan stock options for the years ended December 31,2004 and 2003.

 
| ** **                                     | ** ** | **Number of  Shares** | ** ** | **Weighted Average  Exercise Price** | ** ** |
|------------------------------------------------|------------|-----------------------|------------|--------------------------------------|------------|
| Options outstanding at December 31,  2002 |       | 1,260,000             |       | $                                    | .38        |   |
| Granted                                        |       | 1,000,000             |       | 25                                   |       |
| Exercised                                      |       | (40,000               | )          | .25                                  |       |
| Cancelled                                      |       | (700,000              | )          | .44                                  |       |
|                                           |       |                  |       |                                 |       |
| Options outstanding at December 31,  2003 |       | 1,520,000             |       | .27                                  |       |
| Granted                                        |       | 400,000               |       | 1.81                                 |       |
| Exercised                                      |       | (520,000              | )          | .31                                  |       |
| Cancelled                                      |       | —                |       | .—                              |       |
|                                           |       |                  |       |                                 |       |
| Options outstanding at December 31,  2004 |       | 1,400,000             |       | $                                    | .70        |   |

 

The 400,000 options granted in 2004 are subject to approval byshareholders at the next annual meeting.

 

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 Other Stock OptionInformation

 

The weighted average fair value price of all options granted in 2004was $.76.

 

The following table summarizes information about the Company’s stockbased compensation plans at December 31, 2004.

 

Options Outstanding and Exercisable by Price Range as of December 31,2004:

 
| ** **      | ** ** | **Options Outstanding** | ** ** | **Options Exercisable** | ** ** |
|-----------------|------------|-------------------------|------------|-------------------------|------------|
| ** **      | ** ** | ** **              | ** ** | **Weighted**            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **      | ** ** | ** **              | ** ** | **Average**             | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| **Range  of**   | ** ** | ** **              | ** ** | **Remaining**           | ** ** | **Average** | ** ** | ** ** | ** ** | **Average** | ** ** |
| **Exercise**    | ** ** | **Number**              | ** ** | **Contractual**         | ** ** | **Exercise** | ** ** | **Number** | ** ** | **Exercise** | ** ** |
| **Prices**      | ** ** | **Outstanding**         | ** ** | **Life In Years**       | ** ** | **Price** | ** ** | **Exercisable** | ** ** | **Price** | ** ** |
|            |       |                    |       |                    |       |   |   |   |   |   |   |
| **1999  Plan**  |       |                    |       |                    |       |   |   |   |   |   |   |
| $.25-$1.20      |       | 3,535,000               |       | 4.87                    |       | $ | .90 |   | 1,300,000 |   | $ | .36 |   |
|            |       |                    |       |                    |       |   |   |   |   |   |   |
| **Other  Plan** | ** ** | ** **              | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| $.25-$3.40      |       | 1,400,000               |       | 4.52                    |       | $ | .70. |   | 1,400,000 |   | $ | .70 |   |

 

The number of options outstanding and exercisable includes 535,000 and400,000 for the 1999 Plan and the other plan, respectively, which arecontingent upon the approval of the shareholders at the next annual meeting.

 

 Compensation Expense

The Company recorded compensation expense of $155,736 for the year December 31,2003 for the value of options granted to a current board member, prior to himbecoming a board member of the Company. The valuation of the options granted to employees is based on thedifference between the exercise price and the market value of the stock on themeasurement date.  The valuation of theoptions granted to non-employees is estimated using the Black-Scholes optionpricing model.

 

The Company also recorded compensation expense of $7,800 and $2,550 forthe years ended December 31, 2004 and 2003, respectively, for the value ofcommon stock issued to consultants for services provided to the Company.

 

7.                                       AccumulatedOther Comprehensive Income

The Company has adopted SFAS No. 130, “Reporting ComprehensiveIncome”.  This statement requires thatall components of comprehensive income be reported in the financial statementsin the period in which they are recognized. The components of comprehensive income for the Company include netincome (loss), unrealized gain (loss) on marketable securities and foreigncurrency translation adjustments.

 

30

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Components of other comprehensive income consist of the following:

 
| ** **                        | ** ** | **Unrealized**    | ** ** | ** **      | ** ** | **Accumulated**   | ** ** |
|-----------------------------------|------------|-------------------|------------|-----------------|------------|-------------------|------------|
| ** **                        | ** ** | **Gain (loss)**   | ** ** | **Foreign**     | ** ** | **Other**         | ** ** |
| ** **                        | ** ** | **on Marketable** | ** ** | **Currency**    | ** ** | **Comprehensive** | ** ** |
| ** **                        | ** ** | **Securities**    | ** ** | **Translation** | ** ** | **Income (Loss)** | ** ** |
|                              |       |              |       |            |       |              |       |
| Balance at December 31, 2002 |       | $                 | (190,588   | )               | $          | (34,092           | )          | $ | (224,680 | ) |
| ** **                        | ** ** | ** **        | ** ** | ** **      | ** ** | ** **        | ** ** |
| 2003 change                       |       | 11,765            |       | (968            | )          | 10,797            |       |
|                              |       |              |       |            |       |              |       |
| Balance at December 31, 2003 |       | (178,823          | )          | (35,060         | )          | (213,883          | )          |
| 2004 change                       |       | 145,885           |       | 51,519          |       | 197,404           |       |
|                              |       |              |       |            |       |              |       |
| Balance at December 31, 2004 |       | $                 | (32,938    | )               | $          | 16,459            |       | $ | (16,479 | ) |
|                                   |            |                   |            |                 |            |                   |            |  |  |  |  |  |

 

8.                                       PreferredStock

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

 

9.                                       RelatedEntity Transactions

 

In March of 2003, the Company entered into a note payableagreement with a related entity.  Underthe terms of the agreement, the Company received $200,000 to be paid in fullwithin sixteen months of the date of the agreement.  The payment terms are that for each of fortyscanners sold over the sixteen-month period following the date of theagreement, the Company will pay $6,250, until a total of $250,000 has beenpaid.  The agreement further stipulatesthat a non-performance penalty will be assessed in the event that the Companyis unable to repay the note under the terms set forth above.  The penalty is the issuance of 1,800,000shares of restricted common stock of the Company to be received by the lender,in addition to full payment.  Inconnection with the issuance of the debt, the Company issued 200,000 shares ofits restricted common stock on the date of the agreement to the lender.  In addition, the note is collateralized byall of the Company’s assets.  Interestexpense of $15,625 and $34,375 was recorded with respect to this note in 2004and 2003 respectively.  The note wasrepaid in full in May 2004.

 

In October of 2003, the Company enteredinto another note payable agreement with a related entity whereby the Companyreceived $240,000 explicitly for the production of twenty of the Company’sscanners for subsequent resale.  Theterms of the agreement are such that for each scanner sold, the Company willpay $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 ofshares of the Company’s restricted common stock at $0.60 per share for a periodof up to five years from the date of issuance. The Company determined the fair value of the warrants and the debtindependently and recorded a discount on the note payable, which is being accretedto the value of the debt based on each scanner sold, which approximates theeffective interest rate.  Interestexpense of $137,130 and $34,375 was recorded with respect to this note in

 

31

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2004 and 2003 respectively.  Thenote was repaid in full in October 2004.

 

In May of 2003, the Company entered into an agreement with MichieProctor, a related entity, in which Mr. Proctor was elected to Chairman ofthe Board of the Company and the details of the consulting arrangement betweenthe Company and Mr. Proctor were defined. In connection with thisagreement, the Company awarded one million options to purchase common stock ofthe Company for $0.25 per share, which are vested immediately.  The Company recorded stock optioncompensation expense, related to these options of $155,736.

 

In August of 2003, the amount owed to James McGonigle, a relatedentity, of $5,000 relating to services provided during the year, was factoredby Mr. McGonigle to Michie Proctor.  As a result of this transaction, the Company owedMr. Proctor $3,500, which was paid in 2004.

 

The Companyincurred $46,500 of consulting services in 2004 provided by one of itsdirectors of which $9,000 was owed to that individual at December 31, 2004.

 

10.         Commitments andContingencies

 

 Inventory

The Company had a purchase obligation to acquireinventory at December 31, 2004 for delivery in 2005 of $67,515.

 

 Leases

The Company leases office facilities under a long-term leasingarrangement.  The Company’s officefacilities lease contains a five-year renewal option.  The future minimum lease payments at December 31,2004 under the Company’s operating leases which have an initial or remainingnoncancellable lease term in excess of one year is as follows:

 
| 2005                |   | $       | 87,324 |   |
|---------------------|--------|---------|--------|--------|
| 2006                |   | 90,963  |   |
| 2007                |   | 107,336 |   |
| 2008                |   | 110,368 |   |
| 2009 and thereafter |   | 113,400 |   |

 

Rental expense charged to operations was $46,988 and $43,299 for theyears ended December 31, 2004 and 2003, respectively.

 

 Medicare Hearings

In September 1997, the Company was notified of a Medicare HearingOfficer’s decision that the Company is liable for repayment of Medicare BenefitOverpayments of $269,120.  TheOverpayments are from calendar years 1994 and 1995.  The Company appealed the Hearing Officer’sdecision.  The Appeal was heard by anAdministrative Law Judge on January 5, 1999 and again on November 2,1999.  The Administrative Law Judgereviewed approximately forty out of approximately 410 cases.  The Administrative Law Judge dismissed somecases, ruled in favor of the Company on certain cases and ruled against theCompany on other cases.  The Companycontinues to be in the Appeal process. The Company is unable to predict the outcome of the Appeal.

 

As of December 31, 2004, the Company has an accrued liability of$100,000 as a result of the above proceedings. This amount is the Company’s best estimate of the potential liabilitybased on all of the facts and circumstances currently known.  There have been no new developments withrespect to this matter during the year ended December 31, 2004.

 

32

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 Officer Indemnification

Under the organizational documents, the Company’s officers, employees,and directors are indemnified against certain liabilities arising out of theperformance of their duties to the Company. The Company also has an insurance policy for its directors and officersto insure them against liabilities arising from the performance of their dutiesrequired by their positions with the Company. The Company’s maximum exposure under these arrangements is unknown asthis would involve future claims that may be made against the Company that havenot yet occurred.  However, based onexperience, the Company expects the risk of loss to be remote.

 

11.                                 Concentration ofCredit Risk and Major Customers

Financial instruments which potentially subject the Company toconcentrations of credit risk consist principally of temporary cash investmentsand accounts receivable.  The Companyplaces its cash equivalents and short term investments with high credit qualityfinancial institutions.  The Company’scash in its banks exceeded the federally insured limits at certain pointsduring the year.

 

The Company provides credit, in the normal course of business, tohospitals, distributors, and others in the health care industry.  The Company’s customers are located primarilyin the eastern United States.  TheCompany performs periodic credit evaluations of its customers’ financialcondition and generally requires no collateral. The Company maintains reserves for potential credit losses.  The Company’s revenue is generated primarilyfrom a single product, the Scanner, which subjects the Company to significantfinancial exposure.  If future sales donot occur the Company’s operations could be materially adversely affected.

 

Total assets were $444,798 in foreign countries at December 31,2004 which were all located in the United Kingdom.

 

Revenues from major customers, as a percentage of total revenue, forthe years ended December 31, 2004 and 2003 were as follows:

 
| ** ** | ** ** | **2004** | ** ** | **2003** | ** ** |
|------------|------------|----------|------------|----------|------------|
| Customer A |       | 78       | %          | *.       | %          |
| Customer B |       | 10       | %          | 47       | %          |
| Customer C |       | —   |       | 46       | %          |

 

----

* Less than 10%

 

12.                                 Fair Value ofFinancial Instruments and related Impairment Loss

 

All marketable securities are defined as trading securities oravailable-for-sale Securities under the provisions of Statement of FinancialAccounting Standards (“SFAS”) No. 115, “Accounting for Certain Investmentsin Debt and Equity Securities.” During the first quarter of 2004, management ofthe Company determined that the impairment of the investment in SeychelleEnvironmental Technologies, Inc. (“Seychelle”), initially purchased in2000 for $200,000, is other-than-temporary. Therefore, the loss of $164,707,originally reflected as an unrealized loss on investment within othercomprehensive income, has been recognized in the statement of operations forthe year ended December 31, 2004.

 

33

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Disclosures about Fair Value of Financial Instruments for the Company’sfinancial instruments are presented in the table below.  These calculations are subjective in natureand involve uncertainties and significant matters of judgment and do notinclude income tax considerations. Therefore, the results cannot be determined with precision and cannot besubstantiated by comparison to independent market values and may not berealized in actual sale or settlement of the instruments.  There may be inherent weaknesses in anycalculation technique, and changes in the underlying assumptions used couldsignificantly affect the results. The following table presents a summary of theCompany’s financial instruments as of December 31, 2004:

 
| ** **                | ** ** | **Carrying  Amount** | ** ** | **Estimated  Fair Value** | ** ** |
|---------------------------|------------|----------------------|------------|---------------------------|------------|
| Financial Assets:         |       |                 |       |                      |       |
| Cash and cash equivalents |       | $                    | 938,822    |                      | $          | 938,822 |   |
| Marketable securities     |       | 16,471               |       | 16,471                    |       |
|                           |            |                      |            |                           |            |  |  |

 

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

 

13.         Subsequent Events

 

On March 4, 2005, the Company terminated its distributionagreement with U.S. Medical Systems, Inc, (“US MedSys”) to sell the Scannerthrough the US MedSys distribution network due to unresolved breeches of thatagreement by US MedSys.

 

US MedSys was granted an exclusive distributorship of the Scanner inthe United States wound care market provided it purchased not less than 25Scanners per month during the first year of the Agreement, not less than 50Scanners per month during the second year of the Agreement and not less than1,000 Scanners during the third year of the Agreement.

 

At December 31, 2004 the Company had accounts receivable from USMedSys of $550,000 for prior Scanner deliveries.  In addition, the Company held a deposit of$500,000 for existing purchase orders made by US MedSys.  As provided by the agreement, the Company asof the termination date offset the outstanding receivable with thedeposit.  Consequently, as of March 4,2005 the Company has a receivable of $50,000 from US MedSys.

 

During the First Quarter of 2005, as a consequence of the termination, theCompany will recognize the deferred revenue associated with the sale ofdistribution rights of $371,876 

 

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

 

We have had no disagreements with our independent accountants withrespect to accounting and financial disclosure. On January 15, 2003, wefiled a Current Report on Form 8-K with the Securities and ExchangeCommission regarding a change of our independent auditor and certifyingaccountant from Angell & Deering, Certified Public Accountants toMayer Hoffman McCann P .C.

 

34

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**ITEM 8A.  CONTROLS AND PROCEDURES**

 

Within the 90 days prior to the date of filing this annual report, wecarried out an evaluation, under the supervision and with the participation ofour management, including our Chief Executive Officer and Chief FinancialOfficer, of the effectiveness of the design and operation of our disclosurecontrols and procedures pursuant to Exchange Act Rule 13a-15. Based uponthat evaluation, the Chief Executive Officer and the Chief Financial Officerconcluded that our disclosure controls and procedures are effective and timely,alerting them to material information relating to the Company (including ourconsolidated subsidiaries) required to be included in our periodic SEC filings.There were no significant changes in our internal controls or other factorsthat could significantly affect these controls subsequent to the date of theirevaluation and there were no corrective actions with regard to significantdeficiencies or material weaknesses.

 

**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 directorsare set forth below:

 
| **Name**                | ** ** | **Age** | ** ** | **Office**                                      | ** ** | **Officer/  Director Since** |
|-------------------------|------------|---------|------------|-------------------------------------------------|------------|------------------------------|
|                    |       |    |       |                                            |       |                         |
| Dr. Michie Proctor |       | 70      |       | Chairman of the Board of Directors              |       | 2003                         |
|                    |       |    |       |                                            |       |                         |
| Michael C. Boyd         |       | 63      |       | Chief Executive Officer and Director            |       | 2001                         |
|                    |       |    |       |                                            |       |                         |
| Paul D. Wilson          |       | 48      |       | President, Chief Financial Officer and Director |       | 2001                         |
|                    |       |    |       |                                            |       |                         |
| Paul R. Quintavalle DPM |       | 54      |       | Director                                        |       | 2001                         |
|                    |       |    |       |                                            |       |                         |
| Brian W. Clymer         |       | 57      |       | Director                                        |       | 2001                         |

 

Directors hold office for a period of one year from their election atthe annual meeting of shareholders and until their successors are duly electedand qualified. Our officers are elected by, and serve at the discretion of, theBoard of Directors. None of the above individuals has any family relationshipwith any other. The Board of Directors has no nominating or compensationcommittee. No director receives compensation for services as a director. MessrsProctor, Quintavalle and Clymer serve on the Audit Committee. 

 

35

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**Background**

 

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

 

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

 

*Michael C. Boyd* wasa business consultant from January 1998 until he joined us in October 2001.From April 1996 to January 1998, he was founder, President and adirector of TeleSpectrum Worldwide, Inc., a rollup of six direct marketingcompanies that reached annual revenue of approximately $200 million. From 1986to 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 duringhis employment to over $1.3 billion annually. Mr. Boyd has significantexperience in the direct response industry, having held senior positions atFranklin Mint and Lillian Vernon Corporation. He is a member of the governingboards of Penn Mutual Insurance Company, the Greentree Perpetual AssuranceCompany, Altura International, TCIM Services and Smoke Stoppers, Inc. Mr. Boydearned a Bachelor of Arts degree from the University of Delaware.

 

*Paul D. Wilson* hasbeen a principal of Quality Medical Instruments, Ltd., a UK-based medicalconsulting firm he co-founded, since 1995. Since 1999, he has also beenManaging Director of Longport International, our UK-based technology marketingsubsidiary. He was employed by Fulmer Research, a UK-based technology andengineering company, from 1976 to 1992 as a Division Manager. He has also beeninvolved in the application and development of high-resolution ultrasound forover 20 years. Mr. Wilson earned a degree in Applied Physics from ThamasValley University in the UK.

 

*Paul R. Quintavalle, DPM*,has been engaged in the private practice of podiatric medicine for more thanfive years and is the Director of the West Jersey Podiatric Surgical ResidencyProgram. He earned a DPM degree in podiatric medicine from the PennsylvaniaCollege of Podiatric Medicine. He is a former member of the surgical facultyand board of the Temple School of Podiatric Medicine. Dr. Quintavalle is apast President of the American Board of Podiatric Surgery.

 

*Brian W. Clymer* hasbeen Vice President of External Affairs for Prudential Insurance Company ofAmerica since July 1997. From January 1994 until June 1997, hewas the New Jersey State Treasurer, appointed by Governor Whitman and confirmedby the New Jersey Senate. Prior to his appointment as the State Treasurer, hewas President and Chief Executive Officer of Railway System Design, Inc.and Vice President of Gannett Fleming, Inc., an engineering firm. He alsoserved under President George H. W. Bush as Administrator of the FederalTransit Administration of the United States Department of Transportation. Mr. Clymerhas served on numerous boards, including the New Jersey Sports and ExpositionAuthority, the Casino Reinvestment Development Authority, the New JerseyPerforming Arts Center, the American Public Transit Association, Motor CoachIndustries International and the Southeastern

 

36

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Pennsylvania Transportation Authority. He currently serves on the NewJersey Alliance for Action Board and the Prosperity New Jersey Board ofTrustees. Mr. Clymer earned a Bachelor of Science degree in Business andEconomics from Lehigh University and is a Certified Public Accountant.

 

**ITEM 10. EXECUTIVE COMPENSATION**

 

The following table discloses all compensation paid to our ChiefExecutive Officer for the years ended December 31, 2004 and 2003.

 
| **(a)**                                 | ** ** | **(b)**    | ** ** | **(c)**       | ** ** | **(d)**      | ** ** | **(e)**             | ** ** | **(f)**        | ** ** | **(g)**      | ** ** |
|-----------------------------------------|------------|------------|------------|---------------|------------|--------------|------------|---------------------|------------|----------------|------------|--------------|------------|
| **Name  and**                           | ** ** | ** ** | ** ** | ** **    | ** ** | ** **   | ** ** | **Other**           | ** ** | **Restricted** | ** ** | ** **   | ** ** |
| **Principal**                           | ** ** | ** ** | ** ** | ** **    | ** ** | ** **   | ** ** | **Annual**          | ** ** | **Stock**      | ** ** | **Options/** | ** ** |
| **Position**                            | ** ** | **Year**   | ** ** | **Salary($)** | ** ** | **Bonus($)** | ** ** | **Compensation($)** | ** ** | **Awards($)**  | ** ** | **SARS(#)**  | ** ** |
|                                    |       |       |       |          |       |         |       |                |       |           |       |         |       |
| Michael C. Boyd (1)                     |       | 2004       |       | -0-           |       | -0-          |       | -0-                 |       | -0-            |       | -0-          |       |
| Chief Executive  Officer                |       | 2003       |       | -0-           |       | -0-          |       | -0-                 |       | -0-            |       | -0-          |       |
|                                    |       |       |       |          |       |         |       |                |       |           |       |         |       |
| Paul D. Wilson                          |       | 2004       |       | 126,819       |       | -0-          |       | -0-                 |       | -0-            |       | -0-          |       |
| President and  Chief Financial  Officer |       | 2003       |       | 78,560        |       | -0-          |       | -0-                 |       | -0-            |       | -0-          |       |

 

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(1) In October 2001, we entered into a three-year employmentagreement with Mr. Boyd to act as our Chief Executive Officer. Under theemployment agreement, Mr. Boyd does not receive a cash salary but received100,000 shares of our common stock and options to purchase up to 1,000,000additional shares exercisable at $.25 per share until October 2004.  Mr. Boyd’s contract was extended for aperiod of one year at the September 22, 2004 meeting of the Board ofDirectors.   In connection with thiscontract extension, Mr. Boyd received options to purchase 1,000,000 sharesof common stock in the Company at $.95 per share (250,000 shares), $1.20 pershare (250,000 shares), $1.70 per share (250,000 shares) and $3.40 per share(250,000 shares).  These options areimmediately exercisable though 535,000 of such options are contingent uponapproval by a vote of the Company’s shareholders at the next annual meeting.

 

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

 

The following table sets forth certain information with respect to theownership of our Common Stock on the record date by (i) each person who isknown 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 agroup. All shares are owned beneficially and of record and the shareholders

 

37

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listed in the table have sole voting and investment powers with respectto the shares of Common Stock. The addresses of all shareholders listed in thetable are in care of us. The table includes common stock purchase warrants andstock options exercisable by the holder within 60 days from the date hereof.

 
| ** **                                            | ** ** | ** **                 | ** ** | **Percent**  | ** ** |
|-------------------------------------------------------|------------|----------------------------|------------|--------------|------------|
| **Name**                                              | ** ** | **Number of Shares Owned** | ** ** | **of Class** | ** ** |
|                                                  |       |                       |       |         |       |
| Michie and Joyce Proctor (1)                          |       | 3,640,550                  |       | 14.7         | %          |
| Michael C. Boyd (2)                                   |       | 2,037,008                  |       | 8.5          | %          |
| Paul R. Quintavalle (3)                               |       | 487,480                    |       | 2.1          | %          |
| Brian W. Clymer (4)                                   |       | 200,000                    |       | 0.9          | %          |
| Paul D. Wilson (5)                                    |       | 1,518,504                  |       | 6.3          | %          |
| Church of Southwest Broward (6)                       |       | 2,385,477                  |       | 9.9          | %          |
| All officers and directors as a group (five  persons) |       | 7,883,542                  |       | 25.5         | %          |

 

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(1) Includes 200,000 common stock options exercisable at $3.00 pershare. Also includes 1,000,000 common stock options exercisable at $.25 pershare which the Company agreed to give to Dr. Proctor in 2002 for assumingthe Chairmanship of the company.  Alsoincludes 400,000 common stock options exercisable in tiers of 100,000 shares at$.90, $1.20, $1.70 and $3.40 respectively (which are contingent uponshareholder approval).  Dr. Proctoris also the President of the First Baptist Church of Southwest Broward, whichowns 2,585,477 shares of our common stock. Dr. Proctor disclaims any ownership or control of these shares.

 

(2) Includes 1,000,000 common stock options.

 

(3) Includes 300,000 common stock options.

 

(4) Includes 200,000 common stock options.

 

(5) Includes 1,200,000 common stock options.

 

(6) Includes 1,000,000 warrants to purchase common stock.

 

**ITEM 12.  CERTAIN RELATIONSHIPSAND RELATED TRANSACTIONS**

 

In March of 2003, the Company entered into a note payableagreement with the Church of Southwest Broward. Under the terms of the agreement, the Company received $200,000 to bepaid in full within sixteen months of the date of the agreement.

 

The payment terms are that for each of forty scanners sold over thesixteen-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 anon-performance penalty will be assessed in the event that the Company isunable to repay the note under the terms set forth above.  The penalty is the issuance of 1,800,000shares of restricted common stock of the Company to be received by the lender,in addition to full payment.  Inconnection with the issuance of the debt, the Company issued 200,000 shares ofits restricted common stock on the date of the agreement to the lender. Interestexpense of $15,625 and $80,375 was recorded with respect to this note in 2004and 2003 respectively. The note is collateralized by all of the Company’sassets. This note was paid in full during 2004.

 

In October of 2003, the Company entered into another note payableagreement with the Church of Southwest Broward whereby the Company received$240,000 explicitly for the production of twenty of the Company’s scanners forsubsequent resale.  The terms of theagreement are such that for each scanner sold, the Company will pay $12,000plus 50% of the difference between the per-unit sales price and $12,000, thelatter representing an interest payment. In connection with the issuance of the debt, the Company issued1,000,000 warrants for the purchase of an equal number of shares of the Company’srestricted common stock at $0.60 per share for a period of up to five yearsfrom the date of issuance.  The Companydetermined the fair value of the warrants and the debt independently andrecorded a discount on the note payable, which is being accreted to the valueof the debt based on each scanner sold, which approximates the effectiveinterest rate. Interest expense of $137,130 and $34,375 was recorded in 2004and 2003 respectively with respect to this note. This note was repaid in fullin 2004. All 1,000,000 warrants are outstanding as of December 31, 2004.

 

The Company 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 foran agreed upon monthly fee*.*Theconsulting fee**was $5,000 monthly and ended in June2004.

 

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**ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K**

 

(a)  Exhibits.

 
| **Exhibit No.** | ** ** | **Title**                                      |
|----------------------|------------|------------------------------------------------|
| 3.1                  |       | 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)    |
|                 |       |                                           |
| 10.36                |       | Technology Transfer Agreement (VMOS) (1)       |
| 10.37                |       | Technology Transfer Agreement (SWS) (1)        |
| 10.38                |       | Glen Mills, PA Office Lease                    |
| 10.39                |       | Futurescan Distribution Agreement              |
|                 |       |                                           |
| 21.1                 |       | Subsidiaries of Registrant                     |
| 31.1                 |       | Certification                                  |
| 31.2                 |       | Certification                                  |
| 32.1                 |       | Certification                                  |
| 32.2                 |       | Certification                                  |

 

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(1) Incorporated by reference to the Registrant’s RegistrationStatement on Form SB-2, File No.33- 75236 and Post Effective AmendmentNo.1 thereto.

 

(b) Reports on Form 8-K: None

 

**ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES**

 

The followingtable shows the fees paid or accrued by Longport for the audit and otherservices provided by the Company accountants for the fiscal year ended December31, 2004 and 2003:

 
| ** **                                                                                                                              | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Audit fees for the years ended December 31  and fees for the review of financial statements included in quarterly reports  on Form 10-Q |       | $        | 104,863    |     | $          | 68,310 |   |
| Audit-related fees: (1)                                                                                                                 |       | $        | 19,225     |     | $          | 0 |   |
| Tax fees (2):                                                                                                                           |       | 10,000   |       | $        | 5,840      |   |
| Other service fees(3):                                                                                                                  |       |     |       | $        | 7,385      |   |
| Total:                                                                                                                                  |       | $        | 134,088    |     | $          | 81,535 |   |

 

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(1)           Fees for the reviewof financial statements including the filing of Form SB-2 relating toregistration of securities.

 

(2)           Includes taxcompliance.

 

(3)           Includes consultingand advisory services.

 

All services described above were approved by the Board of Directors.

 

The Board of Directors has considered and decided that the provisionsof the non-audit services referred to in the “Other Service Fees” Portion ofthe above table (including the footnote thereto) are compatible withmaintaining the independence of the Company’s auditors.

 

**Policy onAudit Committee Pre-Approval**

 

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

 

39

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**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 theundersigned, thereunto duly authorized, in Glen Mills, Pennsylvania, on April 8,2005.

 
|   | LONGPORT, INC.           |
|--------|--------------------------|
|   |                     |
|   |                     |
|   | By: /s/ Michie Proctor   |   |
|   | Michie Proctor, Chairman |

 

Pursuant to the requirements of the Securities Exchange Act of 1933, asamended, this Registration Statement has been signed by the following personson the dates indicated.

 
| **Signature**        | ** ** | **Title** | ** **                          | **Date** |
|----------------------|------------|-----------|-------------------------------------|----------|
|                 |       |      |                                |     |
| /s/ Michie Proctor   |       |      | Chairman of the Board of Directors, |     | April 15, 2005 |
| Michie Proctor       |       |      |                                |     |   |
|                 |       |      |                                |     |   |
| /s/ Michael C. Boyd  |       |      | Chief Executive Officer             |     | April 15, 2005 |
| Michael C. Boyd      |       |      |                                |     |   |
|                 |       |      |                                |     |   |
| /s/ Paul D. Wilson   |       |      | President, Chief Financial Officer  |     |   |
| Paul D. Wilson       |       |      | and Director                        |     | April 15, 2005 |
|                 |       |      |                                |     |   |
| /s/ Paul Quintavalle |       |      | Director                            |     | April 15, 2005 |
| Paul Quintavalle     |       |      |                                |     |   |
|                 |       |      |                                |     |   |
| /s/ Brian W. Clymer  |       |      | Director                            |     | April 15, 2005 |
| Brian W. Clymer      |       |      |                                |     |   |

 

40

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