Use these links to rapidly review the documentTABLE OF CONTENTS INDEX TO CONSOLIDATED FINANCIAL STATEMENTS IOMED, Inc.



UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-K

|(Mark One)                              |                                                                                     
|--------------------------------------- | ------------------------------------------------------------------------------------
|ý                                       | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|For the Fiscal Year Ended June 30, 2004

Commission File Number: 001-14059

IOMED, Inc.(Exact name of registrant as specified in its charter)

|Utah(State or other jurisdiction of
incorporation or organization)                              |  | 87-0441272(I.R.S. Employer Identification No.)
|----------------------------------------------------------------------------------------------- |  | ----------------------------------------------
|2441 South 3850 West, Salt Lake City, Utah(Address of principal executive offices)              |  | 84120(Zip Code)                               
|(801) 975-1191(Registrant's telephone number, including area code)                             
|Securities registered pursuant to Section 12(b) of the Exchange Act: Common Stock, no par value

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. o

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

The aggregate market value of the Registrant's voting stock held by non-affiliates based upon the closing price of the common stock as quoted on the
American Stock Exchange on December 31, 2003, was approximately $10,289,000.

The
number of shares of Registrant's common stock outstanding on August 31, 2004, was 6,585,213.

DOCUMENTS INCORPORATED BY REFERENCE

Certain information is incorporated into Part III of this Report on Form 10-K by reference to the Registrant's Proxy Statement for its
2004 Annual Meeting of Shareholders.



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TABLE OF CONTENTS



|           |         |  |   | 
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|Part I     |         |  |   | 
|           | Item 1  |  |  | 
|           | Item 2  |  |  | 
|           | Item 3  |  |  | 
|           | Item 4  |  |  | 
|Part II    |         |  |   | 
|           | Item 5  |  |  | 
|           | Item 6  |  |  | 
|           | Item 7  |  |  | 
|           | Item 7a |  |  | 
|           | Item 8  |  |  | 
|           |         |  |  | 
|           | Item 9  |  |  | 
|           | Item 9A |  |  | 
|Part III   |         |  |   | 
|           | Item 10 |  |  | 
|           | Item 11 |  |  | 
|           | Item 12 |  |  | 
|           | Item 13 |  |  | 
|           | Item 14 |  |  | 
|Part IV    |         |  |   | 
|           | Item 15 |  |  | 
|Signatures

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PART I

Item 1.    BUSINESS

Forward-Looking Statements

Certain statements contained in this report on Form 10-K (the "Report") are "forward-looking statements" within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements may be identified by the use of terminology such as "may," "will," "expect," "anticipate,"
"intend," "designed," "estimate," "should," or "continue" or the negatives thereof or other variations thereon or comparable terminology. Such forward-looking statements involve known and unknown
risks, uncertainties and other factors which may cause the actual results, performance or achievements of IOMED, Inc. (the "Company"), or industry results, to be materially different from any
future results, performance or achievements expressed or implied by such forward-looking statements. These risks, uncertainties and other factors include, among other things, the following: the
uncertainties related to the Company's continuing profitability; the uncertainties related to the Company's product development programs; the uncertainties related to the Company's ability to attract
collaborative development partners; the Company's reliance on third party distribution; the risks associated with obtaining governmental approval of the Company's products; the highly competitive
industry in which the Company operates and the rapid pace of technological change within that industry; the uncertainty of patented and proprietary technology protection and the Company's reliance on
such patented and proprietary technology (including reliance on technology licensed from third parties); defense of the Company's intellectual property rights; changes in or failure to comply with
governmental regulation; the uncertainty of third party reimbursement for the Company's products; the Company's dependence on key employees; general economic and business conditions and other factors
discussed in this Report and the Company's other Securities and Exchange Commission ("SEC") filings. The Company undertakes no obligation to update publicly any forward-looking statements for any
reason, even if new information becomes available or other events or circumstances occur in the future.

Introduction

The Company was incorporated in Utah in 1974 as Motion Control, Inc. In 1987, the Company merged with JMW Acquisition Corporation, and the name of the
merged entity was changed to IOMED, Inc. The Company is a leader in developing, manufacturing and marketing active drug delivery systems used primarily to treat acute local inflammation in the
physical and occupational therapy and sports medicine markets. The Company is pursuing opportunities to advance its position as a provider of quality, innovative medical products that improve patient
healthcare. In addition, the Company is seeking collaborative opportunities to develop its non-invasive drug delivery technology to satisfy unmet medical needs. The Company has proprietary
iontophoresis technology in various stages of research and product development primarily for transdermal drug delivery and for the treatment of ophthalmic disease.

Commercial Business

The Company is in the business of developing, manufacturing, and marketing proprietary products used in the site-specific, non-invasive
administration of soluble salts or other drugs into the body for medical purposes. The Company's active drug delivery systems employ iontophoresis (explained more fully below) as a
non-invasive method of enhancing and controlling the transport of water-soluble ionic drugs into and through the skin and other body tissues using a low-level electrical
current. The Company currently markets iontophoretic products used to deliver various drug compounds. The primary drug compounds used with our products are potent corticosteroids for the treatment of
acute local inflammatory conditions and Iontocaine®, the Company's brand of lidocaine HCl 2% and

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epinephrine
1:100,000 topical solution, for the administration of local dermal anesthesia. The Company's products are used in situations when it is advisable to avoid the pain that may accompany
needle insertion and drug injection, to minimize the infiltration of carrier fluids, and/or to avoid the damage caused by needle insertion when tissue is traumatized.

The
Company's proprietary, patented iontophoresis system (the "Phoresor® system" or "Phoresor") is designed for clinical use and is comprised of a reusable dose controller
and single use, disposable active transdermal patch kits ("patch kits"). The dose controller incorporates an advanced microprocessor to precisely control drug dosage through the Company's proprietary
single-use, disposable patch kits, including its IOGEL®, TransQ®, OptimA, and Numby® patch kits. The Company also markets a
self-contained iontophoresis system, the Companion 80, that provides a Mobile Solution allowing the patient to resume daily activity and the clinician to optimize
the use of patient time in the clinic.

GRAPHIC

GRAPHIC

Using
the Company's products, medical professionals are able to deliver dexamethasone, a potent and effective corticosteroid, to treat local inflammatory conditions. Because of the
negative side effects often associated with the oral or injectable administration of dexamethasone, it is used only as a second- or third-line therapy. However, using the Company's
technology, the administration of this drug without the occurrence of these negative side effects is possible. The Company's products are used for site-specific corticosteroid therapy in
clinics nationwide to treat a variety of conditions, including those suffered by top professional, collegiate, and Olympic athletes.

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The
Company also markets a specialty pharmaceutical product, Numby Stuff®, for the delivery of Iontocaine with the Phoresor system. Numby Stuff offers
non-invasive, local dermal anesthesia in as little as 10 minutes, and can be used prior to needle sticks, IV starts, lumbar punctures, PICC insertions, fine needle and skin biopsies, and
other minor dermatological surgeries.

GRAPHIC

Business Strategy

The majority of the Company's revenues are generated through the sale of the Phoresor system, which consists of a reusable dose controller and
single-use disposable patch kits. The Company is continuously seeking opportunities to improve the quality of its existing products and to market or develop new products to support this
"razor-razor blade" business model.

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The
Company intends to promote growth in its core business by:



Current and Future Products

The following table lists the therapeutic applications of the principal products developed and future products pending development by the Company. The application
of the Company's technology as an approved pharmaceutical product for the treatment of ophthalmic disease is not currently under development. This table is qualified in its entirety by reference to
such detailed descriptions. There can be no assurance that any future products will be developed successfully or approved in a timely manner, if at all, or even if developed or approved, be
successfully manufactured or marketed. In
addition, the status of development indicated below does not necessarily indicate the order in which the products shown may be submitted to or approved by the Food and Drug Administration ("FDA").

|Application              |  | Therapeutic Agent               |  | Product Status          
|------------------------ |  | ------------------------------- |  | ------------------------
|Acute local inflammation |  | None specified                  |  | Currently marketed(1)   
|Dermal anesthesia        |  | Iontocaine                      |  | Currently marketed      
|Ophthalmic diseases      |  | None specified                  |  | Pre-clinical(2)         
|General                  |  | Water soluble ionic medicaments |  | Currently marketed(1)(3)

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Acute Local Inflammation

Acute local inflammatory conditions resulting from exercise, sports injuries, trauma or repetitive motion disorders are among the leading types of injuries
occurring in the workplace and among physically active adults. The most common of these injuries include tendonitis, bursitis, carpal tunnel syndrome and epicondylitis (tennis elbow). The Company
believes the electro-transport of corticosteroids may provide significant advantages over other current treatment regimens for acute local inflammation.

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GRAPHIC

Commercial Products.The Company pioneered the commercial introduction of its active transdermal drug delivery systems in
1979. These products are used principally by physical therapists

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(under
a doctor's prescription) and have been clinically administered in over 24 million patient treatments for the delivery of corticosteroids and other drugs. More than 22 million of
these treatments have occurred since 1990, when advancements in patch technology made by the Company led to the introduction of its present range of hydrogel patches for use with its microprocessor
controlled dose controllers. The Company's products are also used by athletic trainers and physical therapists serving a number of professional, collegiate, and Olympic athletes and teams, including
golfers, tennis players, men's and women's Olympic ski teams, as well as by football, basketball, baseball and hockey teams. The Company believes that its active transdermal drug delivery systems have
been accepted in the rehabilitation marketplace due to their ease of use, non-invasiveness, recognized efficacy and lack of significant side effects.

GRAPHIC

Products Under Development.The Company continues to seek to develop and market "next generation" products for use in
treating acute local inflammatory conditions. Enhancements to its dose controllers
and electrode patches, as well as the developing, manufacturing, and marketing of new products are part of the Company's efforts to provide customers the most advanced iontophoresis technology
commercially available.

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GRAPHIC

IontoDex
is a miniaturized, integrated version of the Company's active drug transport system designed for patient in-home use to treat acute local inflammation.
This proprietary active drug transport system, combined with dexamethasone, has the potential to address a significant unmet medical need by offering patients the benefits of the
anti-inflammatory effects of dexamethasone while avoiding all of the gastrointestinal (GI) and other systemic side effects of oral drugs, such as non-steroidal
anti-inflammatory drugs (NSAIDs), including Cox-II inhibitors.

During
fiscal 2001, the Company completed both a pivotal Phase III and a confirmatory Phase III clinical study for the delivery of dexamethasone to treat acute local inflammation. The
confirmatory study failed to meet primary clinical endpoints. The study showed a positive response in patients treated with the drug; however, increased benefit in the study's placebo group prevented
the statistical separation between the two patient groups necessary to achieve the desired conclusions. Due to these study results and to financial and other resource constraints, the Company
suspended all major internal development efforts and may seek corporate development partners or other strategic funding sources prior to any substantial continuation of this development program.

Dermal Anesthesia

Healthcare professionals recognize the importance of managing pain associated with invasive medical procedures, such as needle injections, placement of access
devices (including phlebotomies, IV catheters, lumbar punctures, epidurals, etc), dermatological procedures (biopsies, wart and mole removal, Mohs procedures, etc), as well as gynecological and
urological procedures (vasectomies, etc). In 2001, two new standards were instituted that may affect our product offerings. The Occupational Safety and Health Administration (OSHA) revised their
Bloodborne Pathogen Standard, requiring employers to use safer medical devices wherever feasible in order to reduce the risk of injury from sharps. The Joint Commission on Accredited Healthcare
Organizations (JCAHO) also passed their new Pain Management Standards requiring healthcare professionals to inform patients of methods available to minimize pain prior to, during, and after medical
procedures. These two new standards favor the type of non-invasive drug delivery systems that the Company offers and could enhance the use of its

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products
in medical practice. The Company is continuing to pursue marketing and other opportunities arising from these new standards.

Commercial Products.The Company's Iontocaine is approved by the FDA under a New Drug Application ("NDA") and is specifically
labeled for use with the Company's Phoresor system and its proprietary, single use, disposable active transdermal patch kits.

The
Company currently sells its dermal anesthesia product into the pediatric, adult vascular access, and dermatology markets under the brand name Numby Stuff. Numby Stuff is used to
induce dermal anesthesia prior to invasive procedures and the Company believes it is more effective than the leading topical product. However, to date, Numby Stuff has not generated significant
revenues.

Ophthalmic Diseases

The Company believes that its unique active drug transport system presents a significant opportunity in the ophthalmic pharmaceutical marketplace due to large
patient populations with sight threatening medical needs that are unmet. Age-related macular degeneration ("AMD") and diabetic retinopathy ("DR") are the major causes of visual impairment
in the United States and Europe. Both AMD and DR are conditions caused by angiogenesis (unwanted blood vessel growth) resulting in neovascularization that damages the retina and ultimately causes
blindness. Posterior uveitis and retinitis secondary to glaucoma also contribute considerably to loss of sight worldwide. A common characteristic among all of these conditions is their occurrence at
the back of the eye, where drug
treatment is difficult to administer. The Company believes that its proprietary drug delivery products offer a solution or a significant improvement to currently unmet medical needs in this area.

GRAPHIC

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A leading obstacle in the advancement of new therapies to treat serious ophthalmic disease is the inability to both safely and effectively deliver drugs to diseased cells in the back of
the eye. Current drug delivery methods, which include intravenous, oral, topical (eye drops), intraocular injections and surgical implants, all have limitations that potentially affect their technical
as well as their commercial viability in the treatment of these diseases. Furthermore, the complex physiology of the human eye presents unique problems for drug delivery, which are not optimally
addressed by current ocular drug delivery methods.

GRAPHIC

Development Stage Products.Using its proprietary technology, the Company has developed an ocular drug delivery system that
seeks to address the safe and effective administration of therapeutics to the back of the eye. The Company's delivery system, trademarked OcuPhor, allows for site-specific
administration of a pharmacologic agent without the collateral tissue damage associated with surgery, lasers, needle injections or implants. OcuPhor has been designed as a platform technology to
deliver drug compounds non-invasively and site-specifically to posterior segments of the eye. Through both collaborations and internal research efforts, the Company has made
significant advancements with the OcuPhor System. Feasibility studies confirmed OcuPhor's ability to deliver an anti-angiogenic drug to the back of the eye. Preliminary clinical studies in
human volunteers have shown that the OcuPhor System is safe and well tolerated using both positive and negative polarity currents and does not produce any ophthalmic changes as measured by a series of
standard tests. Additionally, the Company has demonstratedin-vivothat the OcuPhor System is capable of delivering antiangiogenic,
anti-inflammatory, antibiotic, and antiviral drugs. The Company believes that OcuPhor's transport capabilities are within the theoretical therapeutic range of a variety of drugs, including
small molecules as well as some macromolecules and small proteins. The Company is evaluating strategies to capitalize on this technology, including license agreements and collaborative partnerships to
identify specific drugs which will be able to take advantage of the OcuPhor System and thereafter move it beyond the preclinical stage and advance its commercial development.

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GRAPHIC

General Iontophoretic Drug Delivery Technology and Its Advantages

Iontophoretic drug delivery systems are designed to overcome many of the limitations associated with other drug delivery methods. Iontophoresis is an active
method of drug delivery in which water-soluble, ionized (electrically charged) drugs are transported through the skin or other body tissues for local or systemic therapeutic applications by applying a
low-level electrical current. The amount of drug delivered is proportional to the total electrical charge applied (which is a function of time and current). Therefore, it is possible to
program the system's electrical current levels to control more precisely the desired drug dose, delivery rate and the pattern of delivery.

GRAPHIC

Among
the many drug delivery methods available today, the Company believes the advantages of iontophoretic drug delivery are many and include the following:



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Although
the fundamentals of iontophoresis have been understood for decades, the method has become commercially practicable as a means of delivering drugs only recently as a result of
advances in electronics, materials science and electrochemistry. These advances have led to the development of more efficient and adaptable drug patches and more reliable, compact and programmable
dose controllers. The Company has an expansive portfolio of intellectual property with which it has developed iontophoretic systems that have unique and enhanced performance characteristics, which the
Company believes are adaptable to a number of clinical settings and therapeutic applications.

Patents and Proprietary Rights

The Company's proprietary technology includes patents, trademarks, trade secrets and other proprietary know-how. These technologies are used in
various combinations in the testing, evaluation and formulation of optimal ionic drug solutions and in the research, development, design and manufacture of microprocessor controlled power supplies and
active transdermal patches which are specifically designed and constructed for particular therapeutic applications.

The
Company has implemented a policy of actively patenting and maintaining as trade secrets and proprietary information all inventions and technologies that it believes are important to
its business operations. The Company generally seeks patent protection for its key proprietary technologies in the United States and other major markets. The Company also relies on trade secrets,
know-how, continuing technological innovations and licensing opportunities to develop and maintain its competitive position. The Company seeks protection of its trade secrets and
proprietary know-how, in part, through confidentiality agreements. Employees, consultants, advisors, collaborators, and other individuals and entities are required to execute
confidentiality agreements upon the start of employment or other contractual relationships.

In
1997, the Company acquired exclusive worldwide rights to Elan Corporation, plc's ("Elan") broad base of United States and foreign patents, in vitro drug transport data and in vivo
animal and human clinical data, in addition to other proprietary know-how in iontophoretic drug delivery and electro-transport fields.

As
of June 30, 2004, the Company held or had rights to utilize approximately 74 United States patents and 85 foreign patents and has (or has the rights to utilize) approximately 8
pending patent applications in the United States and 35 pending patent applications in foreign countries. The Company also owns or has licensed rights to issued and pending United States patents
governing the design and manufacture of certain myoelectric prosthetic devices which it has sublicensed to a third party in connection with the sale of the Company's Motion Control division in
December 1996.

Collaborative Relationships and Licenses

The Company may enter into new collaborative relationships. The potential collaborative partners may provide proprietary drugs, technology, financial resources,
research and pharmaceutical manufacturing capabilities or marketing infrastructure to aid in the development and commercialization of the Company's current and future products. Depending on the
availability of financial, marketing and scientific resources and other factors, the Company may also license or cross-license its technology or products to others and retain profit sharing, royalty,
manufacturing, co-marketing, co-promotion or similar rights. Any such arrangements could limit the Company's flexibility in pursuing alternatives for the development or
commercialization of its products.

The
Company's license arrangements and prior collaborative relationships include the following:

Elan.In March 1997, the Company acquired exclusive world-wide licenses to certain iontophoretic drug
delivery technologies, including rights to Elan's broad base of United States and foreign patents, in vitro drug transport data and in vivo animal and human clinical data, in addition to

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other
proprietary know-how in iontophoretic drug delivery and electro-transport fields. Under the terms of the license, the Company is obligated to pay Elan a royalty on net revenues, as
defined in the agreement.

Alza.In 1993, the Company entered into a cross-license agreement with Alza Corporation ("Alza"). Under the agreement,
non-exclusive, royalty free rights to certain patented technologies were exchanged.

University of Utah.In 1974, the Company entered into a licensing agreement with the University of Utah Research Foundation
("University"). Under the agreement, as amended, the Company obtained an exclusive license to certain iontophoretic drug delivery technologies developed at the University. Under the terms of the
amended license, the Company is obligated to pay the University a royalty on certain sales of its iontophoretic drug delivery products through the year 2007.

Manufacturing

All of the Company's products are inspected, labeled and prepared for shipment at its manufacturing facility in Salt Lake City, Utah. At this facility, the
Company also manufactures the patch kits using several proprietary materials, components, processes and production technologies developed by the Company in conjunction with its equipment and materials
suppliers. The Company has manufactured all of the drug electrode patches it has sold, and believes its electrode manufacturing capacity can be expanded to meet its needs for the foreseeable future.

The
Company outsources the manufacture and assembly of its Phoresor dose controllers, which employ a variety of sub-assemblies and components that are designed or specified
by the Company. These components and subassemblies are manufactured by third parties, and are then shipped to a contract manufacturer for final assembly. The Company's manufacturing activities for the
Phoresor are limited to design, labeling, inspection and packaging. The Company manufactures its Companion 80 product in-house from components and subassemblies manufactured by third
parties. The Company does not manufacture or repackage any drugs or compounds used in its delivery systems.

The
Company and certain of its suppliers are required to comply with FDA regulations governing manufacturing practices, including the Quality System Regulations, which mandate controls
for product design, control and quality. The Company believes it is in compliance with current Quality System Regulations. The Company is also certified to European quality systems regulation EN13485,
which is similar to ISO 9001 and includes elements specifically for medical device manufacturers. Additionally, the Company has earned the right, through continued compliance to European regulations,
to place the CE mark on its products, allowing it to market them in the European community. The Company has current Good Manufacturing Practices ("GMP") audits conducted on a regular basis.

Sales and Distribution

The Company's marketing strategy is to position its products in the marketplace as the preferred means of administering a wide range of drugs. The Company
currently employs the use of multiple sales and distribution channels, including (i) a network of medical supply dealers; (ii) independent sales representatives; and
(iii) national distribution partners. The Company uses these distribution channels to maximize its sales and marketing resources.

The
Company currently sells the majority of its products into the physical and occupational therapy, sports medicine and other healthcare markets. The Company employs a nationwide
network of distributors and independent sales representatives to sell and distribute its products in those markets. This distribution network is supported by regional business managers and internal
customer service representatives who are employees of the Company. In addition to the Company's domestic sales and distribution efforts for its local inflammation products in the United States, it
maintains marketing and

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sales
activities in international markets. These sales are made through independent distributors operating in those countries.

During
the fourth quarter of Fiscal 2004, the Company restructured its independent distribution network to achieve long-term growth objectives. This restructuring resulted in
termination of some dealer relationships and reallocation of territories. The Company believes that the breadth of its product line, distributor pricing incentives, and reduced interference among
distributors will strengthen business relationships with its long-term strategic distribution partners.

Two
distributors combined to account for approximately 32%, 25% and 22% of the Company's total product sales for the fiscal years ended June 30, 2004, 2003 and 2002. Although
valued distribution channels, in the event of a loss of either distributor, the Company believes that it could continue to reach a substantial portion of its end user customers through alternative
distribution channels. Less than 10% of product sales are to foreign customers.

Government Regulation

Both drugs and medical devices, including the Company's iontophoretic drug delivery systems, are subject to extensive regulation by the FDA in the United States
and by comparable authorities in other foreign countries.

The
Company's iontophoretic drug delivery products involve a medical device component, thereby subjecting such products to compliance with the FDA's regulations governing medical
devices. Where such medical devices are labeled for use with a specific pharmaceutical product for a specific therapeutic indication, they are subject to the FDA's regulations governing both medical
devices and pharmaceutical products. The Company's future iontophoretic drug delivery systems may involve a pharmaceutical component or specific labeling for use with a pharmaceutical product.

Products
regulated as medical devices may not be commercially distributed in the United States unless they have been cleared or approved by the FDA. Currently, there are two methods for
obtaining FDA clearance or approval of medical devices. Devices deemed to pose less risk are placed in class I (general controls) or class II (general and special controls) and qualify
for 510(k) notification, a procedure under section 510(k) of the Federal Food, Drug, and Cosmetic Act. A medical device that does not qualify for the 510(k) clearance is placed in
class III, which is reserved for devices deemed by the FDA to pose the greatest risk. A preamendment class III device is one that was on the market before May 28, 1976. This
status means that the device at present can be marketed through a 510(k) clearance, but it remains subject to a call for a Pre-Market Approval ("PMA") application under section 515
of the Drug Act. A PMA application generally requires a more complex submission than a 510(k) notification. Typically, it requires showing that the device is safe and effective based on extensive and
costly preclinical and clinical tests, as well as information about the device and its components regarding, among other things, manufacturing, labeling and promotion.

The
regulatory status of iontophoretic devices is complex. The FDA has classified them as class II devices eligible for marketing through 510(k) premarket clearance when intended
for use with a drug whose labeling bears adequate directions for the device's use with that drug. However, if an iontophoretic device is intended for use with a drug that is not labeled for use with
the device, the FDA considers the iontophoresis device to be a preamendment class III device.

The
Company's Phoresor received 510(k) clearance as a preamendment class III device labeled for use with ions of soluble salts or other drugs. In 1995, the FDA approved an NDA for
Iontocaine to be used as a local anesthetic and delivered iontophoretically by the Phoresor, which effectively moved the Phoresor into class II for this intended use. Unlike Iontocaine,
dexamethasone does not have an NDA approval allowing it to be labeled for iontophoretic delivery. Thus, at the present time, the Company's Phoresor is a preamendment class III device when used
with dexamethasone (or any drug other than

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Iontocaine).
The Company is not currently seeking, and gives no assurance that it will ever obtain, an approved NDA for the iontophoretic delivery of any drug other than Iontocaine.

In
August 2000, the FDA published a proposed rule to amend the physical medical device regulations to remove the class III iontophoresis device identification. Because the
Company's products are all approved as class II devices, the Company does not believe that the proposed regulation would have any effect on the Company's ability to continue the manufacturing
and selling of its current products.

A
lengthy and complex regulatory framework also applies to the labeling and marketing of specific drugs. Generally these pharmaceutical products require the submission of an NDA. The NDA
approval process generally entails: (i) conducting preclinical laboratory and animal testing to enable FDA authorization of an Investigational New Drug ("IND") application, (ii) initial
IND clinical studies to define safety and dose parameters, (iii) well controlled IND clinical trials to demonstrate product safety and efficacy, and (iv) submission to the FDA of an NDA.
Preclinical studies involve laboratory evaluation of product characteristics and animal studies to assess the efficacy and safety of the drug. Human clinical trials are typically conducted in three
sequential phases. Phase I trials normally consist of testing the product in a small number of healthy volunteers for safety and pharmacokinetic parameters using single and multiple dosing regimens.
In Phase II trials, the manufacturer evaluates safety, initial efficacy, and dose ranging of the product for specific indications in a somewhat larger patient population. Phase III trials typically
involve expanded testing for safety and clinical efficacy in a broad patient population at multiple clinical testing centers. The FDA, under Good Laboratory Practice regulations, regulates the
preclinical and clinical studies. Results of the studies must be submitted to the FDA for review. The FDA may grant marketing approval, require additional testing and/or information, or deny the
application. The process of obtaining FDA approval for a new product through this process may take several years and typically involves substantial risks and the expenditure of substantial resources.

The
FDA regulates the Company's quality control and manufacturing procedures by requiring it and its contract manufacturers to comply with certain standards, including compliance with
the Quality System Regulations (for devices) and current GMP regulations (for drugs).

The
Company may be subject to certain fees that the FDA is authorized to collect, including user fees authorized under the Public Health Security and Bioterrorism Preparedness and
Response Act of 2002, which includes the reauthorization of user fees under the Prescription Drug User Fee Amendments of 2002 (PDUFA III).

Agencies
similar to the FDA regulate medical devices and pharmaceutical products in most foreign countries. The International Standards Organization (ISO) has established regulations for
medical devices in the European Union. Currently, the Company is in compliance with these regulations and its products are CE Marked. The Company will be required to meet the regulations of any
foreign country where it markets its products. In addition, various aspects of the Company's business and operations are also regulated by a number of other governmental agencies including the Drug
Enforcement Agency, U.S. Department of Agriculture, the Environmental Protection Agency, the Occupational Safety and Health Administration as well as by other federal, state and local authorities.

Noncompliance
with these various government regulatory requirements could result in enforcement actions that could include fines, plant closure, a recall of the Company's products or
other civil or criminal sanctions. Noncompliance as well as unanticipated changes in existing regulatory requirements or adoption of new requirements could have a material adverse effect on the
Company.

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Competition

The drug delivery, pharmaceutical and biotechnology industries are highly competitive and rapidly evolving, with significant developments expected to continue at
a rapid pace. The Company's success depends upon maintaining a competitive position and developing products and technologies for efficient and cost effective drug delivery. The Company's products
compete with other drugs and drug delivery systems, including other iontophoretic delivery systems. The Company believes its products compete on the basis of quality, efficacy, cost, convenience,
safety and patient compliance.

The
Company is aware of many other competitors in the general field of drug delivery, including, among others, competitors developing injectable or implantable drug delivery systems,
oral drug delivery technologies, passive transdermal systems, oral transmucosal systems and intranasal and inhalation systems. The Company is also aware of other companies that have developed or are
currently developing iontophoretic and other active transdermal drug delivery systems.

Alza,
Vyteris, Inc., and Empi, Inc. are engaged in the development and/or marketing of iontophoretic devices. Alza, a licensee of the Company, and Vyteris are both
undertaking the development of iontophoretic drug delivery systems, but neither currently markets any iontophoretic products. Empi is the Company's primary competitor in the sale of iontophoretic drug
delivery systems for the treatment of acute local inflammation in the physical therapy market and, the Company estimates, controls a majority of that market.

The
Company's iontophoretic system for delivering Iontocaine for the inducement of dermal anesthesia primarily competes with traditional methods of delivering dermal anesthetics by
needle injection or is used in circumstances where either no anesthesia is used, due to the pain associated with needle injection (including needle injections themselves), or where topical anesthetic
creams are used. The most effective and widely used topical anesthetic cream, EMLA, is manufactured and sold by AstraZeneca International, a large international pharmaceutical company. There can be no
assurance that the Company can effectively compete with these products or any other drug delivery system.

Employees

As of June 30, 2004, the Company had 51 full-time employees, 10 of whom hold either an advanced business or technical degree. Of the Company's
full-time employees on that date, 6 were engaged in engineering and product development, 22 in manufacturing and quality control, and 23 in sales, marketing and general administration.
None of the Company's employees is represented by a labor union. The Company has not experienced any employee related work stoppages and considers its relations with employees to be good.

Item 2.    PROPERTIES

The Company's administrative, manufacturing operations, and research office space is housed in a single facility, consisting of approximately 34,000 square feet,
located at 2441 South 3850 West in Salt Lake City, Utah. The facility is leased to the Company until December 31, 2012. The Company believes its facilities will be adequate and suitable for its
present needs and that additional space will be available as needed.

17

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Item 3.    LEGAL PROCEEDINGS

IOMED, Inc. v. Jamal Yanaki, et al.,Third District Court of Utah, Salt Lake County. IOMED filed the
Complaint in this action on April 2, 2002. As amended on December 2, 2002 (the "Amended Complaint"), IOMED has named as defendants Jamal Yanaki, ActivaTek, LLC, Ceramatec, Inc.,
Ashok Joshi, James Weersing, Shunt Power Technology, LLC, and Empi, Inc. On February 27, 2003, IOMED filed an additional complaint against JRW Technology, Inc. in the Third
District Court of Utah, Salt Lake County asserting claims arising out of the same factual allegations. Mr. Yanaki is a former IOMED executive officer. ActivaTek, LLC is a company formed by
Mr. Yanaki and Ceramatec following his resignation from IOMED. Ceramatec is an engineering consulting firm. Mr. Joshi is the principal owner of Ceramatec. Mr. Weersing is the
former chief executive officer and chairman of IOMED. Shunt Power Technology and JRW Technology are companies formed by Mr. Weersing. Empi is IOMED's principal competitor in the iontophoretic
marketplace. In addition, Mr. Weersing was a managing director of MBW Venture Partners, LP, which beneficially owned more than five percent of IOMED's common stock at the time the litigation
commenced.

The
claims arise out of IOMED's allegations that the defendants engaged in conduct to misappropriate IOMED's confidential information related to a new product that was being developed by
IOMED under the supervision of Messrs. Weersing and Yanaki. In the Amended Complaint, IOMED alleges that all defendants misappropriated trade secrets, tortiously interfered with IOMED's
economic relationships and engaged in a civil conspiracy. IOMED further alleges that Messrs. Weersing and Yanaki engaged in fraud and tortiously interfered with IOMED's contractual
relationships, breached fiduciary duties and duties of loyalty and, that Mr. Yanaki breached his contract with IOMED and an implied covenant of good faith and fair dealing. IOMED seeks
injunctive relief against all defendants.

In
response, a Counterclaim was filed with respect to the Amended Complaint on January 10, 2003 against IOMED and certain IOMED employees, including Mr. Robert J. Lollini,
President and Chief Executive Officer. The counterclaim alleges, among other things, defamation and seeks, among other things, $5 million in monetary damages.

The
parties have conducted limited discovery, including production of documents and depositions of various witnesses. No date has been set for trial of the matter. The parties
participated in mediation administered by a third party mediator in an attempt to resolve the dispute. No resolution was reached, but settlement discussions have continued. Unless a settlement is
reached, the Company intends to vigorously prosecute the claims against the defendants and vigorously defend the claims asserted against it by Yanaki and Activatek.

Yanaki v. IOMED, Inc., et alandMoss v. IOMED, Inc., et
al,U.S. District Court for the District of Utah. On April 14, 2003, Mr. Yanaki and Ms. Susan I. Moss filed separate Complaints
against IOMED and certain IOMED employees and agents, alleging violation of civil rights, invasion of privacy, intentional infliction of emotional distress, trespassing, and conspiracy. These actions,
which were subsequently consolidated into a single action, are related to the state court action involving Jamal Yanaki, et al. discussed above in that they arise out of the seizure of
Mr. Yanaki's computer hard drives, other electronic media, and certain business files, pursuant to an order by the Third Judicial District Court for the State of Utah. The court-ordered seizure
was conducted by the Salt Lake County Sheriff's Office. Mr. Yanaki and Ms. Moss were seeking, among other things, combined monetary damages of $60 million. On January 27,
2004, the court granted, with prejudice, the Company's motion to dismiss these claims. The plaintiffs have appealed and the appeal is now pending.

Yanaki v IOMED, Inc., et al, Third District Court of Utah, Salt Lake County. Mr. Yanaki filed the Complaint against IOMED
and certain IOMED employees on June 24, 2003. The complaint alleges, among other things, unlawful employment practices, discrimination and breach of contract by the Company and certain of its
employees. This Complaint is related to the state court action involving

18

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Jamal
Yanaki, et al. discussed above in that the claims asserted arise from the same series of transactions and occurrences. Mr. Yanaki was seeking compensatory and punitive damages,
declaratory relief, and attorneys' fees. On February 10, 2004, the Court granted the Company's motion to dismiss this claim. The plaintiff has indicated an intent to ask leave of the Court to
file claims as a Counterclaim in the trade secret litigation described above.

Management
believes that the Company's complaints contain meritorious claims and intends to vigorously protect the Company's intellectual property. Additionally, management believes that
there is no basis for the claims and counterclaims asserted or the penalties sought against the Company and the other defendants.

Birch Point Medical, Inc. v IOMED, Inc., U.S. District Court for the district of Minnesota. This claim was filed on
May 11, 2004. The complaint involves a patent infringement claim asserted against the Company by Birch Point Medical, Inc., a Minnesota corporation, related to the Company's recently
released Companion 80 product, which is an iontophoretic drug delivery system. The patent-in-suit is U.S. Patent No. 6,653,014, which Birch Point Medical acquired by
assignment. Birch Point Medical has not asserted that any of the Company's other products infringe the patent-in-suit. The Company has denied infringement, and has asserted a
counterclaim for a declaratory judgment of noninfringement and/or that the patent is invalid. This case is entering the discovery phase and it is too early to predict the outcome. The Company intends
to vigorously defend this lawsuit and prosecute its counterclaims.

In
addition to the legal matters above, the Company is subject to various claims and legal proceedings covering matters that arise in the ordinary course of business.

Management
does not believe that the outcomes of the legal matters discussed in this section above will have a material adverse impact on the Company. However, the legal fees and
expenses in these actions will likely be material and, in the event of an unfavorable resolution, the outcome could have a material adverse impact on the Company's business, financial position, or
results of operations.

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

No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this Report.

PART II

Item 5.    MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Market Information

The Company's common stock is traded on the American Stock Exchange (the "AMEX"), under the symbol "IOX". The following table sets forth, for the periods
indicated, the high and low sales prices as reported by the AMEX. These prices represent quotations between dealers and do not include retail mark-up, markdown or commission, and do not
necessarily represent actual transactions.

2004

2003High

Low

High

LowFirst Quarter

$
2.94

$
1.00

$
1.00

$
0.60Second Quarter

$
2.58

$
1.86

$
1.85

$
0.50Third Quarter

$
3.50

$
1.90

$
1.52

$
1.18Fourth Quarter

$
3.74

$
2.40

$
1.64

$
1.32


19

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Security Holders

As of June 30, 2004, there were 132 shareholders of record of the Company's common stock.

Dividends

The Company has not paid dividends to date and does not anticipate or contemplate paying cash dividends in the foreseeable future. It is the present intention of
management to utilize all available funds for the development and growth of the Company's business.

Equity Compensation Plan Information

The following table shows information about the securities authorized for issuance under the Company's equity compensation plans as of June 30, 2004:

|Plan Category                                              |  | (a)
Number of securities to be issued
upon exercise of outstanding options, warrants and rights |  | (b)
Weighted-average exercise price of
outstanding options, warrants and rights |      | (c)
Number of securities remaining available for future issuance
under equity compensation plans (excluding securities reflected in column (a))
|---------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------- | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------
|Equity compensation plans approved by security holders     |  | 1,374,217                                                                                       |  | $                                                                               | 2.60 |                                                                                                                                                
|Equity compensation plans not approved by security holders |  |                                                                                                |  |                                                                                 |     |                                                                                                                                                
|                                                           |  |                                                                                                 |  |                                                                                 |      |                                                                                                                                                
|Total                                                      |  | 1,374,217                                                                                       |  | $                                                                               | 2.60 |                                                                                                                                                
|                                                           |  |                                                                                                 |  |                                                                                 |      |                                                                                                                                                

Recent Sales of Unregistered Securities

None.

20

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Item 6.    SELECTED CONSOLIDATED FINANCIAL DATA

The
following selected statement of operations data for the years ended June 30, 2004, 2003 and 2002, and the balance sheet data as of June 30, 2004 and 2003 are derived
from the audited consolidated financial statements included in this report and should be read in conjunction with those consolidated financial statements and the notes thereto. The selected statement
of operations data for the years ended June 30, 2001 and 2000, and the balance sheet data as of June 30, 2002, 2001 and 2000 are derived from the audited consolidated financial
statements of the Company, which are not included herein and are qualified by reference to such financial statements and the notes thereto. Certain reclassifications have been made to prior year
balances to conform to the financial statement presentation included herein.

|                                                       |                                     | Fiscal Year ended June 30, |            
|------------------------------------------------------ | ----------------------------------- | -------------------------- | -----------
|
|Statement of Operations Data:                          |                                    
|Product sales                                          |                                     | $                          | 12,189,000 
|Cost of products sold                                  |                                     |                            | 4,607,000  
|                                                       |                                     |                            |            
|                                                       | Gross profit                        |                            |            
|Operating costs and expenses:                          |                                     |                            |            
|                                                       | Selling, general and administrative |                            |            
|                                                       | Research and development            |                            |            
|                                                       | Non-recurring (income) expense      |                            |            
|                                                       |                                     |                            |            
|                                                       | Total costs and expenses            |                            |            
|                                                       |                                     |                            |            
|Income (loss) from operations                          |                                     |                            | 939,000    
|Interest expense                                       |                                     |                            | (169,000   
|Interest income & other, net(5)                        |                                     |                            | 184,000    
|                                                       |                                     |                            |            
|Net income (loss)                                      |                                     | $                          | 954,000    
|                                                       |                                     |                            |            
|Diluted Per Common Share Amounts:                      |                                    
|Net income (loss)                                      |                                     | $                          | 0.12       
|                                                       |                                     |                            |            
|Shares used in computing diluted per share amounts (6) |                                     |                            | 7,709,000  
|Balance Sheet Data:                                    |                                    
|Cash and cash equivalents                              |                                     | $                          | 7,338,000  
|Restricted cash                                        |                                     |                            | 1,062,000  
|Total assets                                           |                                     |                            | 12,511,000 
|Long-term obligations, including current portion       |                                     |                            | 1,971,000  
|Accumulated deficit                                    |                                     |                            | (32,157,000
|Shareholders' equity                                   |                                     |                            | 9,443,000  

---

21

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Item 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of the financial condition and results of operations of the Company should be read in conjunction with the
Consolidated Financial Statements and the related Notes thereto included elsewhere in this Report. The following Management's Discussion and Analysis of Financial Condition and Results of Operations
contains forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, that involve risks and
uncertainties. The Company's actual results of operations could differ significantly from those anticipated in such forward-looking statements as a result of numerous factors discussed under Item 1
"Business" and elsewhere in this Report.

Overview

The Company is a leader in the development, manufacture and sale of active drug delivery systems primarily used to treat local inflammation in the physical and
occupational therapy and sports medicine markets. The Company's current product line is based on proprietary iontophoretic drug delivery technology. The majority of the Company's revenues have been
generated through the sale of the Phoresor system, including the reusable dose controller and single use, disposable patch kits. The Company is pursuing opportunities to advance its position as a
provider of quality, innovative medical products that improve patient healthcare. In addition, the Company is seeking collaborative opportunities to develop its non-invasive drug delivery
technology to satisfy unmet medical needs. The Company has proprietary iontophoresis technology in various stages of research and product development primarily for transdermal drug delivery and for
the treatment of ophthalmic disease. From its inception through fiscal 2002, the Company had generally incurred operating losses as a result of costs associated with internally funded research and
development activities. During fiscal 2003 and 2004, the Company reported net income. As of June 30, 2004, the Company's accumulated deficit was approximately $32.2 million. The
Company's ability to sustain profitability will depend on its ability to achieve market acceptance and successfully expand sales of its existing products and successfully complete the development of,
receive regulatory approvals for, and successfully manufacture and market its current and future products, as to which there can be no assurance.

Fiscal Years Ended June 30, 2004 and 2003

Revenues.The Company achieved record annual product sales of $12.2 million in fiscal 2004, a 2% increase from
$11.9 million in fiscal 2003. Revenues from increased unit volume were offset, in part, by
dealer price incentives introduced during the fourth quarter of fiscal 2004 that were recorded as a reduction of revenues. Sales from three products introduced by the Company in the last half of
fiscal 2004 contributed to the increase in unit volume demand.

Costs of Products Sold.Costs of products sold increased 5% to $4.6 million in fiscal 2004 from $4.4 million in
fiscal 2003. Gross margins on product sales were 62% and 63% in fiscal 2004 and 2003, respectively. The decreased gross margin was due, in part, to price incentives introduced during the fourth
quarter of fiscal 2004. These price incentives may lead to a decreased gross margin percent in future years.

Selling, General and Administrative Expenses.Selling, general and administrative expenses decreased 2% to
$5.6 million in fiscal 2004 compared to $5.7 million in 2003. This decrease relates primarily to decreased sales and marketing expenses, offset, in part, by an increase in general and
administrative expenses.

Research and Product Development Expense.Research and development expenditures decreased 15% to $1,050,000 in fiscal 2004
from $1,232,000 in fiscal 2003. The Company's research and product

22

---



development
expenditures in the current period reflect its investment in product development programs for its core business. During fiscal 2005, the Company intends to focus research and product
development efforts on its core business and new market opportunities for its iontophoresis technology.

Non-recurring (income) expense.During fiscal 2003, the Company fulfilled its obligations related to the
non-recurring expense taken in fiscal 2000 for certain non-cancelable abandoned lease and other obligations related to the Company's relocation to its new facilities. As a
result, in fiscal 2003 the Company reversed the remaining amount that was expensed as a non-recurring item in fiscal 2000 and realized a one-time benefit of $76,000.

Other Income and Expenses.Interest expense decreased to $169,000 in fiscal 2004 from $213,000 in fiscal 2003 due to a
decreasing balance on long-term obligations. Interest income and other miscellaneous income was $184,000 in fiscal 2004 compared to $306,000 in fiscal 2003. Amounts in both periods reflect
interest earnings on invested cash balances and income from a royalty and license agreement. The decrease is primarily due to reduced royalty income from the royalty and license agreement. Under the
terms of this agreement, the royalty rate decreased during fiscal 2004 and future periods.

Income Taxes.During fiscal years 2004 and 2003, the Company recognized no income tax expense due to certain future tax
benefits and the reversal of valuation allowance that had been previously recorded to offset deferred tax assets associated with the Company's net operating loss carryforwards. The Company has
substantial net operating loss carryforwards, which, under the current "change of ownership" rules of the Internal Revenue Code of 1986, as amended, may be subject to substantial annual limitation.
The Company's net deferred tax assets, primarily associated with net operating loss carryforwards, are fully offset by a valuation allowance. The Company will continue to monitor the realizability of
these assets and could adjust the valuation allowance in the future.

Net Income.Net income of $954,000 in fiscal 2004 was a 22% increase over the $785,000 net income reported in fiscal 2003.
The improvement in fiscal 2004 was principally a result of reduced operating expenses.

Fiscal Years Ended June 30, 2003 and 2002

Revenues.The Company reported product sales of $11.9 million in fiscal 2003, a 7% increase from $11.2 million
in fiscal 2002. The increase in product sales was a result of increased demand from the Company's largest customers and a return of the Company's sales orders to normal levels following a shortage of
an anti-inflammatory drug often used with its products, which negatively impacted sales during the first quarter of fiscal 2002.

Costs of Products Sold.Costs of products sold increased 5% to $4.4 million in fiscal 2003 from $4.2 million in
fiscal 2002. Gross margins on product sales were 63% in both fiscal 2003 and 2002.

Selling, General and Administrative Expenses.Selling, general and administrative expenses increased 2% to
$5.7 million in fiscal 2003 compared to $5.6 million in 2002. This increase related primarily to increased sales and marketing expenses and an increase in legal costs related to
litigation the Company is pursuing against certain parties. These costs were offset, in part, by reductions in other general and administrative expenses.

Research and Product Development Expense.Research and development expenditures decreased $1.4 million, or 53%, to
$1.2 million in fiscal 2003 from $2.6 million in fiscal 2002. The Company's research and product development expenditures in fiscal 2003 reflected its investment in product development
programs for its core business. The decrease in fiscal 2003 was a result of cost reduction measures, including the suspension or curtailment of certain product development programs.

23

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Non-recurring (income) expense.During fiscal 2003, the Company fulfilled its obligations related to the
non-recurring expense taken in fiscal 2000 for certain non-cancelable abandoned lease and other obligations related to the Company's relocation to its new facilities. As a
result, during fiscal 2003 the Company reversed the remaining $76,000 that was expensed as a non-recurring item in fiscal 2000.

During
2002, following the suspension of certain research and development activities, a change in strategic focus, and the implementation of a new patent management strategy, the Company
reviewed its intangible assets for impairment. Based on the review, the Company recorded a non-cash expense of $1,190,000 for the period ended June 30, 2002. The expense represented
the write-off of unamortized acquisition costs of certain patents and other intellectual property rights.

The
Company recorded a restructuring expense of $505,000 in fiscal 2002 for certain involuntary employee termination benefits related to the suspension or curtailment of certain product
development programs. As of June 30, 2003, all termination benefits had been paid.

Other Income and Expenses.Interest expense decreased to $213,000 in fiscal 2003 from $263,000 in fiscal 2002 due to a
decreasing balance on long-term obligations. Interest income and other miscellaneous income was $306,000 in fiscal 2003 compared to $777,000 in fiscal 2002. Amounts in both periods reflect
interest earnings on invested cash balances and income from contract research, royalties and license fees. The decrease was primarily due to the recognition during fiscal 2002 of a $350,000
one-time payment for work performed under a collaborative research agreement with Santen Pharmaceuticals Co., Ltd. The Company and Santen have concluded work under their
collaborative development agreement.

Income Taxes.No income tax expense or benefit was recognized for fiscal 2003 or 2002.

Net Income (loss).The Company had net income of $785,000 in fiscal 2003 compared to a net loss of $2,362,000 in fiscal 2002.
The improvement in fiscal 2003 was a result of increased product sales and significant cost control measures, including the suspension or curtailment of certain development
programs, taken by the Company. The net loss in fiscal 2002 includes non-recurring expenses of $1,695,000.

Liquidity and Capital Resources

During fiscal 2004, 2003, and 2002, the Company's operations, including costs associated with its research and development programs, were funded largely by cash
flow from its commercial operating business. In fiscal 2002, cash reserves from its initial public offering in April 1998 were also used to fund costs associated with research and development
programs.

As
of June 30, 2004, the Company had cash and cash equivalents totaling approximately $7.3 million. Additionally, the Company had approximately $1.1 million of
long-term restricted cash, invested in mutual funds and used to secure long-term financing. Cash in excess of immediate requirements is invested in a manner which is intended
to maximize liquidity and return while minimizing investment risk, and, whenever possible, the Company seeks to minimize the potential effects of concentration of credit risk.

The
Company generated $1.4 million and $1.7 million in cash from operating activities in fiscal 2004 and 2003, respectively, compared to consumption of $1.7 million
from operating activities during fiscal 2002. The positive operating cash flow in fiscal 2004 and 2003 was a result of increased product sales and reduced operating costs as compared to fiscal 2002.
In fiscal 2004, cash generated from operations was offset, in part, from the payment of certain accrued and other liabilities.

As
of June 30, 2004, the Company had approximately $2.0 million, including the current portion, outstanding under financing agreements. The Company does not anticipate a
significant investment in

24

---



capital
equipment during the next 12 months. The Company's equipment and furniture expenditures were $95,000, $200,000, and $110,000 in fiscal 2004, 2003, and 2002, respectively.

Other
sources and uses of cash during the periods included the following: During fiscal 2004, the Company used $598,000 for payments on long-term obligations; received
$73,000 in proceeds from exercise of stock options; and its restricted cash requirements decreased $627,000. The reduction in cash restrictions resulted from payments made on long-term
obligations and more favorable terms negotiated with the lender. During fiscal 2003, the Company used $556,000 for payments on long-term obligations and its restricted cash requirements
decreased
$590,000. During fiscal 2002, the Company used $575,000 for payments on long-term obligations and its restricted cash requirements decreased $376,000.

During
fiscal 2005, costs associated with its commercial business, including research and development activities, will be funded internally from the Company's established commercial
business; term loan and capital lease financing agreements; and from existing cash balances. The Company anticipates that at its current operating levels, existing cash balances and cash generated
from operations will be sufficient to fund its operating needs through fiscal 2006 and beyond. However, the Company may be required to or elect to raise additional capital before that time. The
Company's actual capital requirements will depend on numerous factors, many of which are outside the Company's control.

Disclosure About Contractual Obligations

The following table represents the Company's contractual obligations as of June 30, 2004:

|                              |  | Payments Due by Period
|----------------------------- |  | ----------------------
|
|Term loan obligations         |  | $                     
|Capital Lease obligations     |  |                       
|Operating Leases(1)           |  |                       
|                              |  |                       
|Total Contractual Obligations |  | $                     
|                              |  |                       

---

Critical Accounting Policies

The Securities Exchange Commission's Financial Reporting Release No. 60 requires all companies to include a discussion of critical accounting policies or
methods used in the preparation of financial statements. The following list is not intended to be a comprehensive list of all of our accounting policies. Our significant accounting policies are more
fully described in Note 1 of our consolidated financial statements. In many cases, the accounting treatment of a particular transaction is dictated by U.S. generally accepted accounting
principles, with no need for management's judgment or estimation in its application. There are also areas in which management's judgment in selecting an available alternative would not produce a
materially different result. The following is a brief discussion of the more significant accounting policies and methods we employ:

GeneralThe preparation of financial statements in conformity with U.S. generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported

25

---



amounts
of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those
estimates.

Revenue RecognitionRevenues on product sales are recognized when there is persuasive evidence that an arms length transfer
has occurred, generally upon shipment, when title has passed, and the price is fixed or determinable. The Company provides its customers certain purchase incentives, including performance rebates and
volume pricing discounts, based on the achievement of specified purchase levels. The Company recognizes such incentives as contra-revenue. The Company accrues for performance rebates based upon
estimated customer purchase levels and records volume pricing discounts when products are purchased.

Long Lived AssetsThe carrying amounts of long-lived assets, and the related amortization periods, are reviewed
for impairment whenever events occur or changes in circumstances indicate that the carrying amount of an asset may not be recoverable within the estimated useful life. When the Company determines the
existence of impairment indicators, the impairment loss is measured based on the excess of carrying value over the estimated fair value of the impaired assets. The carrying value of the underlying
assets is reduced, with the reduction charged to expense, so that the carrying value is equal to fair value.

InventoriesInventories are stated at the lower of cost or market. Cost is determined using the first-in,
first-out method. The Company evaluates the carrying value of its inventories at least quarterly, taking into account such factors as historical and anticipated future sales compared with
quantities on hand, the price the Company expects to obtain for its products in their respective markets compared with historical cost, and the remaining shelf life of goods on hand.

InventoriesInventories are stated at the lower of cost or market. Cost is determined using the first-in,
first-out method. The Company evaluates the carrying value of its inventories at least quarterly, taking into account such factors as historical and anticipated future sales compared with
quantities on hand, the price the Company expects to obtain for its products in their respective markets compared with historical cost, and the remaining shelf life of goods on hand.

Additional Risk Factors

Future results could differ materially from those currently anticipated by the Company due to a number of factors, including those identified in this section and
elsewhere in this Form 10-K, any of which could have a material adverse impact on the Company's business, financial condition or results of operations.

26

---





Historical Operating Losses; Uncertainty of Future Profitability.With limited exception, prior to fiscal 2003, the Company
has sustained losses in each fiscal year. The Company had an accumulated deficit of $32.2 million as of June 30, 2004. The Company's ability to sustain profitability will depend on its
ability to successfully expand market acceptance and sales of its existing products, and successfully complete the development of, receive regulatory approvals for, and successfully manufacture and
market, its new products. The success of the Company's current and future products may also depend on the timing of new product introductions by the Company relative to its competitors and other
factors.

Uncertainties Related to Product Development.The Company may be required or elect to undertake time-consuming
and costly product development activities, including clinical trials, and seek regulatory approval for new applications and products. Product revenues may not be realized from the sale of any such
products for several years, if at all. The Company can give no assurance that its product development efforts, either alone or in collaboration with other parties, will ever be successfully completed,
that it can obtain required regulatory approvals of its products, that future products can be manufactured at acceptable cost or with appropriate quality, or that its products can meet market needs or
achieve market acceptance.

Before
seeking regulatory approval for the commercial sale of its products, the Company must demonstrate through preclinical studies and clinical trials that those products are safe and
effective for use in the target indications. There can be no assurances the Company will be able to complete its clinical trials in a timely manner, if at all. The results from preclinical studies and
early clinical trials may not be indicative of results the Company will obtain in large-scale testing. There can be no assurance the Company's clinical trials will demonstrate sufficient safety and
efficacy to obtain requisite regulatory approvals or that those clinical trials will result in additional marketable products. The use of any product the Company develops may produce undesirable side
effects that could result in the interruption, delay or suspension of clinical trials, or the failure to obtain FDA or other regulatory approval for targeted indications. If the Company's future
products are not shown to be safe and effective in clinical trials, the resulting delays in developing other compounds and conducting related preclinical testing and clinical trials, as well as the
need for additional financing to complete such testing and trials, could have a material adverse effect on the Company's business, financial condition, and results of operations.

Uncertainties Related to Collaborative Partners.The Company has previously entered into arrangements with corporate
partners, licensors, licensees and other parties for the development, clinical testing, manufacture, marketing or commercialization of certain of its products or products in development. The process
of establishing collaborative partners is difficult, time-consuming, and involves significant uncertainty. Discussions with potential collaborators may not lead to the establishment of new
collaborative relationships on favorable terms, if at all. If successful in establishing a collaborative agreement, such agreement may never result in the successful development of products
or the generation of significant revenue. Until the Company elects to and enters into additional collaborative agreements, it will be required to internally fund all of its research and development
expenditures. Any such agreements could limit the Company's flexibility in pursuing alternatives for the development or commercialization of its products. To the extent the Company chooses not, or is
not able, to establish such collaborations, it could experience significantly increased business risk and capital requirements in the development, clinical testing, manufacturing, marketing and
commercialization of new products. The Company could also encounter significant delays in introducing products into markets or find that the development, manufacture or sale of proposed products in
such markets is adversely affected by the absence of those collaborative arrangements.

Intense Competition and Rapid Technological Change.The drug delivery, pharmaceutical and biotechnology industries are highly
competitive and rapidly evolving, with significant developments

27

---



expected
to continue at a rapid pace. Many competitors, including public and private corporations, academic institutions, governmental agencies and other public and private research organizations, are
involved in the development of drug delivery systems, including competing electrotransport-related drug delivery technologies. Many of these competitors have substantially greater financial and other
resources, are more experienced, and are larger, more established organizations than the Company. In addition, these competitors may offer broader product lines, have greater name recognition, and
offer discounts as a competitive tactic. Accordingly, competitors may succeed in developing competing technologies, and obtaining FDA approval or gaining market share for products, more rapidly than
the Company. Many of these competitors currently have drug delivery products that are approved or in development. There can be no assurance the Company's competitors will not succeed in more rapidly
developing or marketing products that are more effective or commercially attractive than the Company's current or future products, or that would render the Company's products obsolete or
noncompetitive. There can also be no assurance the Company will have the financial resources, technical or management expertise, or manufacturing or support capability to compete in the future.

The
first pharmaceutical product to reach the market in a therapeutic area or using a certain drug delivery technology generally obtains and maintains a significant market share relative
to later entrants to the market. The Company's success will depend on its ability to maintain a competitive position and develop new products and technologies for efficient and cost effective drug
delivery. There can be no assurance any of the Company's products will have advantages that will be significant enough to cause medical professionals to prefer or even use them. New drugs or further
development of alternative drug delivery methods may provide greater therapeutic benefits for a specific drug or indication, or may offer comparable performance at lower cost, than that offered by the
Company's products.

Reliance on Third Party Distribution.The Company presently markets its products through a nationwide network of independent
distributors and sales representatives. In order to broaden distribution and market penetration of its current and future products, the Company may expand its marketing presence through direct sales
and marketing or through co-marketing of its products with collaborative marketing partners or distributors that have national or market-specific marketing capabilities. There can be no
assurance that the Company will be able to maintain existing, or establish new, marketing arrangements on terms favorable to the Company, if at all.

Dependence on Patents and Proprietary Technology.The Company's ability to commercialize and continue to commercialize its
products and products under development will depend, in part, on its or its licensors' ability, both in the United States and in other countries, to obtain patents, enforce those patents, preserve
trade secrets and operate without infringing on the proprietary rights of third parties.

The
patent positions of drug delivery, pharmaceutical and biotechnology companies are highly uncertain and involve complex legal and factual questions. There can be no assurance the
patents currently owned and licensed by the Company, or any future patents, will prevent other companies from developing similar or therapeutically equivalent products, or that other companies will
not be issued patents that may prevent the sale of Company products or require licensing and the payment of significant fees or royalties by the Company. Furthermore, there can be no assurance any of
the Company's products or methods will be patentable, will not infringe upon the patents of third parties, or that the Company's patents or future patents will give the Company an exclusive position
in the subject matter claimed by those patents. The Company may be unable to avoid infringement of third party patents and may have to obtain licenses, defend infringement actions or challenge the
validity of those patents in court. There can be no assurance a license will be available to the Company, if at all, on terms and conditions acceptable to the Company, or that the Company will prevail
in any patent litigation. There can be no assurance the Company's pending patent applications will result in issued patents, patent protection will be secured for any particular technology, any
patents that have been or may be issued to the Company or its licensors will be valid or enforceable or that the Company's patents will provide meaningful protection to the Company.

28

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The
Company also relies on trade secrets and other unpatented proprietary information in its product development activities. The Company seeks to protect trade secrets and proprietary
knowledge, in part, through confidentiality agreements with its employees, consultants, advisors and collaborators. To the extent the Company relies on confidential information to maintain its
competitive position, there can be no assurance other parties may not independently develop the same or similar information. These agreements may not effectively prevent disclosure of the Company's
confidential information and may not provide the Company with an adequate remedy in the event of unauthorized disclosure of such information. The Company's failure to obtain or maintain patent and
trade secret protection, for any reason, could have a material adverse effect on the Company's business, financial position and results of operations. Also, the effect of potential legislative changes
on the Company's intellectual property is uncertain.

Defense of Our Intellectual Property Rights.If we fail to protect our proprietary rights adequately, our competitors might
gain access to our technology and, even if we protect it properly, unauthorized parties might attempt to copy aspects of the Company's products or to obtain and use information that the Company
regards as proprietary. Other persons might independently develop similar or competing technologies or methods or design around the Company's patents. In addition, the laws of many foreign countries
in which the Company or its customers do business do not protect intellectual property rights
to the same extent as the laws of the United States. As a result, competitors might offer similar products with which the Company might not be able to compete successfully.

Furthermore,
the Company might be required to expend significant resources to monitor and protect its intellectual property rights. It may initiate claims or litigation against third
parties for infringement of its proprietary rights or to establish the validity of its proprietary rights. For example, the Company has initiated an action against two former executive officers and
against certain of their associates, alleging misappropriation of trade secrets relating to a new product that was being developed by the Company under the supervision of the former officers. Any
litigation involving the Company's intellectual property, whether or not it is resolved in the Company's favor, could result in significant expense and divert the efforts of the Company's technical
and management personnel. See "Item 3. Legal Proceedings."

Need to Manage Expanding Operations.If the Company is successful in achieving market acceptance of its current and future
products, it will be required to expand its operations, particularly in the areas of research and development, sales and marketing, and manufacturing. As the Company expands its operations in these
areas, those expansions will likely result in new and increased responsibilities for management personnel and place significant strain on the Company's management, operating and financial systems and
other resources. To accommodate any such growth and compete effectively, the Company will be required to implement improved information systems, procedures and controls, and to expand, train, motivate
and manage its work force. The Company's future success will depend to a significant extent on the ability of its current and future management personnel to operate effectively both independently and
as a group. There can be no assurance the Company's personnel, systems, procedures and controls will be adequate to support the Company's future operations.

Risks Related to Possible Business Combinations or Acquisitions.From time to time, we have evaluated and in the future may
evaluate potential acquisitions of businesses, services, products or technologies. These acquisitions may result in a potentially dilutive issuance of equity securities, the incurrence of debt and
contingent liabilities, and amortization of expenses related to intangible assets. In addition, acquisitions involve numerous risks, including difficulties in the assimilation of the operations,
technologies, services and products of the acquired companies, the diversion of management's attention from other business concerns, risks of entering markets in which we have no or limited direct
prior experience and the potential loss of key employees of the acquired company.

29

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Future Capital Needs; Uncertainty of Additional Funding.Our capital requirements will depend on numerous factors, including
but not limited to, requirements to improve or increase manufacturing capacity, business acquisition opportunities, the costs and timing of research and development activities, the number and type of
clinical tests required in seeking approval of products from governmental agencies, the success of the development efforts, the costs and timing of sales and marketing expansion, the extent to which
existing and new products gain market acceptance, the ability to enter into new collaborative relationships, competing technological and market developments, the progress of
distributors' commercialization efforts, the costs involved in preparing, filing, prosecuting, maintaining, enforcing and defending intellectual property rights, and other factors.

Although
the Company believes that at its current operating levels, existing cash balances and cash generated from operations will be sufficient to fund its operating needs through
fiscal 2006 and beyond, it may be required or elect to raise additional capital before that time. To satisfy its capital requirements, the Company may seek to raise funds through public or private
financings, collaborative relationships or other arrangements. Any additional equity financing may be dilutive to shareholders and debt financing may involve significant restrictive covenants.
Collaborative arrangements to raise additional funds may require the Company to relinquish its rights to certain of its technologies, products or marketing territories. There can be no assurance that
any such financing, if required, will be available on terms satisfactory to the Company, if at all. Failure to raise capital when needed could have a material adverse effect on the Company's business,
financial condition and results of operations.

Uncertainty of Government Regulation.The research, development, manufacture and marketing of the Company's products are
extensively regulated by the FDA, which requires its approval of drugs and medical devices before they can be marketed in the United States. Similar approvals are also required from other regulatory
bodies in foreign countries. The regulatory processes established by these government agencies are lengthy, expensive and uncertain. In addition, once approval is obtained, that approval may be
withdrawn.

The
Company has received approval from the FDA on its NDA for Iontocaine, and the FDA has allowed the Company to market its iontophoretic dose controllers and electrode products for use
with ions of soluble salts or other drugs under the FDA's 510(k) regulations governing medical devices. However, in 1994, the FDA publicly stated that it intends to require manufacturers of
iontophoretic devices to obtain PMAs for marketed devices currently used with drugs not specifically labeled for iontophoretic delivery, which would include the Company's dose controller for use with
ions of soluble salts or other drugs, such as dexamethasone. The agency to date has not published such a regulation.

If
the FDA calls for PMAs for preamendment class III iontophoretic devices, the Company would be required to have a PMA accepted for filing by the FDA within 90 days after
the date of the final regulation calling for PMAs. There can be no assurance that the Company would be able to complete and file a PMA within the prescribed time period, or that the FDA would
approve it. The Company's failure to submit a PMA within the required timeframe could result in the Company being required to cease commercial distribution of the Phoresor system for use with any drug
other than Iontocaine. Any interference with the Company's ability to distribute its Phoresor system for use with dexamethasone would have a material adverse effect on the Company's financial
condition and results of operations.

Even
if the Company obtains regulatory approval, a marketed product, its manufacturer and its manufacturing facilities and pertinent operations are subject to extensive regulation and
periodic inspections. Discovery of previously unknown problems with a product, manufacturer or facility could result in FDA sanctions, restrictions on a product or manufacturer, or an order to
withdraw and/or recall a specific product from the market. There can also be no assurance that changes in the legal or regulatory framework or other subsequent developments will not result in the
limitation, suspension or revocation of regulatory approvals granted to the Company. Such events, were they to occur, could have a material adverse effect on the Company's business, financial
condition and results of operations.

30

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The
Company and certain of its suppliers are also required to comply with US and foreign regulations governing manufacturing practices, which mandate procedures for extensive control and
documentation of product design, control and validation of the manufacturing process and overall product quality. If the Company or its suppliers fail to comply with applicable regulations regarding
these manufacturing practices, the Company could be subject to sanctions.

Under
the FDA's regulations, when a manufacturer changes or modifies a device for which it has received a 510(k) clearance, it is required to obtain an additional 510(k) clearance for
the modified device if the modification significantly affects the safety or efficacy of the device, or if the modification results in a major change in intended use. In such cases, the manufacturer is
expected to make the initial determination as to whether the modification is of a kind that would require a new 510(k) clearance. The FDA's regulations provide only limited guidance in making this
determination. The FDA has cleared the Company's iontophoretic dose controller and electrode kits for marketing under a 510(k) clearance. Since obtaining its 510(k) clearances, the Company has made
modifications to its products. Based on the checklist developed by the FDA to assist manufacturers in determining whether they are required to obtain a 510(k) clearance for a modified device, the
Company has determined that a new 510(k) submission was not required in connection with the commercial introduction of such products. However, there can be no assurance that the FDA will not require
the Company to obtain additional 510(k) clearances with respect to those products. If the FDA requires the Company to submit a new 510(k) notice for any device modification, the Company may be
prohibited from marketing the modified device until the 510(k) notice is cleared by the FDA.

The
Company may be required to comply with other proposed and new US and foreign regulations governing its current and future products. There can be no assurance that proposed and new
regulations will not have a materially adverse effect on the Company.

Dependence on Limited Sources of Supply.Key materials used in many of the Company's electrode products have limited sources
of supply. In addition, the Company's contract to obtain Iontocaine from Abbott Laboratories terminated and an alternative supply source has not been identified. The Company believes that, if
necessary, alternative sources may be developed or alternate materials may be substituted for each of these limited-source materials. Although the Company has not experienced
difficulty acquiring these materials on commercially reasonable terms and in sufficient quantities to maintain required production levels, no assurance can be given that price increases or
interruptions in the supply of these materials will not occur in the future or that the Company will not have to seek alternate suppliers or obtain substitute materials, which may require additional
product validations and regulatory submissions. Any significant price increase, interruption of supply, inability to secure an alternate source or qualify a substitute material could have a material
adverse effect on the Company's ability to manufacture its products or to obtain or maintain regulatory approval of its products.

The
Company's current dose controllers are manufactured under a contract with a third party electronics manufacturer. There can be no assurance that its present supplier can manufacture
sufficient quantities of dose controllers that meet quality and performance standards on a timely basis. If the supplier cannot meet the Company's requirements, or in the event of an interruption of
its supply, the Company would be required to identify, qualify and validate an alternate supply source within a reasonable period of time.

Limited Manufacturing Experience.The Company manufactures its iontophoretic drug delivery electrode patches in quantities
sufficient to satisfy its current level of product sales. Significant capital expenditures on manufacturing equipment or contract manufacturing may be required to increase its manufacturing capacity
for existing products or any modifications to existing products or new products.    There can be no assurance the Company can successfully increase its capacity on a profitable basis, or
contract with another party on terms acceptable to the Company, if at all. Significant increases in production volume will likely require changes in the Company's product and manufacturing process in

31

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order
to facilitate increased automation of the Company's production. There can be no assurance such changes in products or processes or efforts to automate the Company's manufacturing process will be
successful.

The
Company believes its facilities operate in accordance with the Quality System Regulations currently prescribed by the FDA and other quality systems regulations, including EN13485,
which is similar to ISO 9001 and includes elements specifically for medical device manufacturers, and CE Mark standards. In addition, the Company has GMP audits conducted by a qualified, independent
organization on a regular basis. There can be no assurance the Company will be able to maintain such compliance, particularly if the scale of the Company's manufacturing operations changes.

Uncertainty of Health Care Reimbursement.The Company's ability to commercialize its products successfully will depend, in
part, on the extent to which reimbursement for the costs of those products and related treatments will be available from government health administration authorities, private health insurers and other
organizations in the United States and in foreign markets where the Company's products will be sold and used. Third party payors can affect the pricing or relative attractiveness of the Company's
products by regulating the reimbursement they provide on the Company's or competing products or therapies. There can be no assurance such reimbursement will
continue at present levels, if at all. Some insurance carriers do not reimburse health care providers for use of the Company's products in certain applications. Furthermore, significant uncertainty
exists as to the reimbursement status of new health care products.

The
Company is unable to predict what adverse impact on the Company, if any, additional government regulations, legislation or initiatives or changes by third party payors affecting
reimbursement or other matters that may influence decisions to obtain medical devices may have.

Retention and Attraction of Key Employees.The Company is dependent on its ability to continue to attract and retain
qualified scientific, managerial, manufacturing, engineering and sales and marketing personnel. There is intense competition for qualified personnel in the Company's area of activity, and there can be
no assurance the Company will be able to continue to attract and retain the qualified personnel necessary for the development of its business. The Company does not carry key-man insurance
with respect to any of its executives or employees.

Risk of Product Liability, Product Recalls and Warranty Claims; Availability of Insurance.The testing, marketing and sale of
drug delivery and related pharmaceutical products for use in humans involves unavoidable risks. The use of the Company's products in clinical trials and the sale of its products upon approval may
expose the Company to potential product liability resulting from the use of such products. In addition, the existence of a product liability claim, a product recall or excessive warranty claims (in
any such case, whether arising from defects in design or manufacture or otherwise) could have an adverse effect on the Company's product sales or require a change in the indications for which it may
be used.

Product
liability insurance in the Company's industry is expensive and difficult to obtain. Although the Company currently has product liability insurance, there can be no assurance the
existing coverage is adequate. The Company will seek to maintain and appropriately increase its insurance coverage as its product sales increase and the clinical development of its new product
applications progress. There can be no assurance that the Company will be able to maintain its current levels of insurance on acceptable terms, will be able to secure increased coverage as the
commercialization of its products proceeds or that any particular level of insurance will provide adequate protection against potential liabilities.

Potential Volatility of Share Price.The market price of the Company's common shares, like that of the common shares of many
other drug delivery, pharmaceutical, biotechnology, medical device and other high technology companies, is likely to be highly volatile. Factors such as fluctuations or volatility in the Company's
operating results, announcements of technological innovations, results of clinical trials

32

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or
new commercial products by the Company or competitors, regulatory developments in the United Sates or foreign countries, changes in the current structure of health care financing and payment
systems, developments in or disputes regarding patent or other proprietary rights, general market conditions, economic and other external factors may have a significant effect on the market price of
the common shares. In addition, sales of substantial amounts of common shares (including shares issuable upon exercise of outstanding options and warrants) in the public market could adversely affect
the market price of the common shares. Such sales could also make it more difficult for the Company to sell equity securities or equity-related securities in the future at a time and price that the
Company deems appropriate.

Anti-Takeover Provisions of Certain of the Company's Agreements.Certain provisions of a cross-license agreement
between the Company and Alza may have the effect of deferring, delaying or preventing a change in control of the Company, a merger involving the Company or the assignment or transfer of certain
technologies of the Company. Under the agreement, the Company and Alza, among other things, exchanged non-exclusive, royalty free rights to certain patented technologies which each party
believed to be of significant strategic importance to the potential technological success of many iontophoretic drug delivery applications. Both parties are prohibited from assigning their rights
under the agreement to certain named companies or any other entity that derives more than 50 percent of its income from the development, licensing and/or sale of drug delivery systems to other
pharmaceutical companies without first receiving the consent of the other party. Restrictions imposed on the Company's ability to assign its rights under this agreement may have the effect of
prohibiting a sale of the Company to such named companies or entities, or may otherwise limit the Company's ability to capitalize on the commercial and other economic potential of these technologies
through a technology license, asset sale, merger, combination or similar transaction.

Environmental Matters.The Company's research and development activities involve the controlled use of hazardous materials,
chemicals and various radioactive compounds. These materials, and their use, disposal and handling, are extensively regulated by federal, state and local government authorities. Although the Company
believes its safety procedures for handling and disposing of such materials comply in all material respects with the standards prescribed by state and federal regulations, the risk of accidental
environmental contamination or personal injury from these materials cannot be completely eliminated. In the event of such an accident, the Company could be held liable for any damages and any such
liability could exceed the resources of the Company. There can be no assurance the Company will not be required to incur significant costs to comply with environmental and health and safety laws and
regulations in the future, particularly if the Company develops additional manufacturing or research facilities and capacity.

Item 7a.    QUANTITATIVE AND QUALITATIVE INFORMATION ABOUT MARKET RISK

Not applicable.

Item 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Company's consolidated financial statements are included elsewhere in this Report.

Item 9.    CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

Item 9A.    CONTROLS AND PROCEDURES

Our Chief Executive Officer and Chief Accounting Officer, after conducting an evaluation, together with other members of the Company's management, of the
effectiveness of the design and

33

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operation
of the Company's disclosure controls and procedures as of the end of the period covered by this report, have concluded that the Company's disclosure controls and procedures were effective to
ensure that information required to be disclosed by the Company in its reports filed or submitted under the Securities Exchange Act of 1934 (the "Exchange Act") is recorded, processed, summarized, and
reported within the time periods specified in the rules and forms of the SEC. There were no significant changes in the Company's internal controls or in other factors that could significantly affect
these controls subsequent to that evaluation, and there were no significant deficiencies or material weaknesses in such controls requiring corrective actions.

34

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Consolidated Financial Statements        IOMED, Inc.        June 30, 2004

35

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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS        IOMED, Inc.



|                                                                                                
|------------------------------------------------------------------------------------------------
|Audited Consolidated Financial Statements:                                                      
|Report of Independent Registered Public Accounting Firm                                         
|Consolidated Balance Sheets at June 30, 2004 and 2003                                           
|Consolidated Statements of Operations for the Years Ended June 30, 2004, 2003 and 2002          
|Consolidated Statements of Shareholders' Equity for the Years Ended June 30, 2004, 2003 and 2002
|Consolidated Statements of Cash Flows for the Years Ended June 30, 2004, 2003 and 2002          
|Notes to Consolidated Financial Statements                                                      

36

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The
Board of Directors and Shareholders
IOMED, Inc.

We
have audited the accompanying consolidated balance sheets of IOMED, Inc. as of June 30, 2004 and 2003, and the related consolidated statements of operations,
shareholders' equity, and cash flows for each of the three years in the period ended June 30, 2004. These financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on our audits.

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

In
our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of IOMED, Inc. at June 30, 2004 and
2003, and the consolidated results of its operations and its cash flows for each of the three years in the period ended June 30, 2004, in conformity with U.S. generally accepted accounting
principles.

|                                    | /S/:    ERNST & YOUNG LLP
|----------------------------------- | -------------------------
|Salt Lake City, Utah
August 6, 2004 |                          

37

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IOMED, Inc.        CONSOLIDATED BALANCE SHEETS

|                                     |                                                                                                                                                  | June 30,                                   |          
|------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------ | ---------
|
|ASSETS                               |                                                                                                                                                 
|Current assets:                      |                                                                                                                                                  |                                            |          
|                                     | Cash and cash equivalents                                                                                                                        |                                            | $        
|                                     | Accounts receivable, less allowance for doubtful accounts of $62,000 in 2004 and 2003                                                            |                                            |          
|                                     | Inventories                                                                                                                                      |                                            |          
|                                     | Prepaid expenses                                                                                                                                 |                                            |          
|                                     |                                                                                                                                                  |                                            |          
|                                     |                                                                                                                                                  | Total current assets                       |          
|Equipment and furniture, net         |                                                                                                                                                  |                                            | 1,505,000
|Restricted cash                      |                                                                                                                                                  |                                            | 1,062,000
|Other assets                         |                                                                                                                                                  |                                            | 71,000   
|                                     |                                                                                                                                                  |                                            |          
|                                     |                                                                                                                                                  | Total assets                               |          
|                                     |                                                                                                                                                  |                                            |          
|LIABILITIES AND SHAREHOLDERS' EQUITY |                                                                                                                                                 
|Current liabilities:                 |                                                                                                                                                  |                                            |          
|                                     | Trade accounts payable                                                                                                                           |                                            | $        
|                                     | Accrued liabilities                                                                                                                              |                                            |          
|                                     | Current portion of long-term obligations                                                                                                         |                                            |          
|                                     |                                                                                                                                                  |                                            |          
|                                     |                                                                                                                                                  | Total current liabilities                  |          
|Long-term obligations                |                                                                                                                                                  |                                            | 1,368,000
|Commitments and contingencies        |                                                                                                                                                  |                                            |          
|Shareholders' equity:                |                                                                                                                                                  |                                            |          
|                                     | Common shares, no par value; 100,000,000 shares authorized; 6,585,213 and 6,544,670 shares issued and outstanding in 2004 and 2003, respectively |                                            |          
|                                     | Convertible preferred shares, no par value; 10,000,000 shares authorized; 893,801 shares issued and outstanding in 2004 and 2003                 |                                            |          
|                                     | Accumulated deficit                                                                                                                              |                                            |          
|                                     |                                                                                                                                                  |                                            |          
|                                     |                                                                                                                                                  | Total shareholders' equity                 |          
|                                     |                                                                                                                                                  |                                            |          
|                                     |                                                                                                                                                  | Total liabilities and shareholders' equity |          
|                                     |                                                                                                                                                  |                                            |          

See
accompanying notes.

38

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IOMED, Inc.        CONSOLIDATED STATEMENTS OF OPERATIONS

|                                                  |                                     | Year ended June 30,      |           
|------------------------------------------------- | ----------------------------------- | ------------------------ | ----------
|
|Product sales                                     |                                     | $                        | 12,189,000
|Cost of products sold                             |                                     |                          | 4,607,000 
|                                                  |                                     |                          |           
|                                                  |                                     | Gross profit             |           
|Operating costs and expenses:                     |                                     |                          |           
|                                                  | Selling, general and administrative |                          |           
|                                                  | Research and product development    |                          |           
|                                                  | Non-recurring (income) expense      |                          |           
|                                                  |                                     |                          |           
|                                                  |                                     | Total costs and expenses |           
|                                                  |                                     |                          |           
|Income (loss) from operations                     |                                     |                          | 939,000   
|Interest expense                                  |                                     |                          | (169,000  
|Interest income and other, net                    |                                     |                          | 184,000   
|                                                  |                                     |                          |           
|Income (loss) before income tax expense (benefit) |                                     |                          | 954,000   
|Income tax expense (benefit), net                 |                                     |                          |          
|                                                  |                                     |                          |           
|Net income (loss)                                 |                                     | $                        | 954,000   
|                                                  |                                     |                          |           
|Basic net income (loss) per common share          |                                     | $                        | 0.15      
|Diluted net income (loss) per common share        |                                     | $                        | 0.12      

See
accompanying notes.

39

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IOMED, Inc.        CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

|                         |                                                          | Common Shares |        |   |            |        |   |           |  
|------------------------ | -------------------------------------------------------- | ------------- | ------ | - | ---------- | ------ | - | --------- | -
|
|
|Balance at June 30, 2001 |                                                          | 6,544,670     |        | $ | 34,636,000 |        | $ | 6,881,000 |  
|                         | Compensation related to non-employee stock option grants |               |       |   |            | 10,000 |   |           | 
|                         | Net loss                                                 |               |       |   |            |       |   |           | 
|                         |                                                          |               |        |   |            |        |   |           |  
|Balance at June 30, 2002 |                                                          | 6,544,670     |        |   | 34,646,000 |        |   | 6,881,000 |  
|                         | Net income                                               |               |       |   |            |       |   |           | 
|                         |                                                          |               |        |   |            |        |   |           |  
|Balance at June 30, 2003 |                                                          | 6,544,670     |        |   | 34,646,000 |        |   | 6,881,000 |  
|                         | Stock options exercised                                  |               | 40,543 |   |            | 73,000 |   |           | 
|                         | Net income                                               |               |       |   |            |       |   |           | 
|                         |                                                          |               |        |   |            |        |   |           |  
|Balance at June 30, 2004 |                                                          | 6,585,213     |        | $ | 34,719,000 |        | $ | 6,881,000 |  
|                         |                                                          |               |        |   |            |        |   |           |  

See
accompanying notes.

40

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IOMED, Inc.        CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                                                                   |                                                            | Year ended June 30,                    |          
|-------------------------------------------------------------------------------------------------- | ---------------------------------------------------------- | -------------------------------------- | ---------
|
|Cash flows from operating activities                                                               |                                                            |                                        |          
|Net income (loss)                                                                                  |                                                            | $                                      | 954,000  
|Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |                                                            |                                        |          
|                                                                                                   | Depreciation and amortization                              |                                        |          
|                                                                                                   | Impairment of long-lived assets and other non-cash charges |                                        |          
|                                                                                                   | Changes in operating assets and liabilities:               |                                        |          
|                                                                                                   |                                                            | Accounts receivable                    |          
|                                                                                                   |                                                            | Inventories                            |          
|                                                                                                   |                                                            | Prepaid expenses                       |          
|                                                                                                   |                                                            | Trade accounts payable                 |          
|                                                                                                   |                                                            | Accrued expenses and other liabilities |          
|                                                                                                   |                                                            |                                        |          
|Net cash provided by (used in) operating activities                                                |                                                            |                                        | 1,410,000
|Cash flows from investing activities                                                               |                                                            |                                        |          
|Purchases of equipment and furniture                                                               |                                                            |                                        | (95,000  
|Cash flows from financing activities                                                               |                                                            |                                        |          
|Proceeds from issuance of common shares                                                            |                                                            |                                        | 73,000   
|Change in restricted cash                                                                          |                                                            |                                        | 627,000  
|Payments on long-term obligations                                                                  |                                                            |                                        | (598,000 
|                                                                                                   |                                                            |                                        |          
|Net cash provided by (used in) financing activities                                                |                                                            |                                        | 102,000  
|                                                                                                   |                                                            |                                        |          
|Net increase (decrease) in cash and cash equivalents                                               |                                                            |                                        | 1,417,000
|Cash and cash equivalents at beginning of year                                                     |                                                            |                                        | 5,921,000
|                                                                                                   |                                                            |                                        |          
|Cash and cash equivalents at end of year                                                           |                                                            | $                                      | 7,338,000
|                                                                                                   |                                                            |                                        |          
|Supplemental disclosures of cash flow information                                                  |                                                            |                                        |          
|Cash paid for interest                                                                             |                                                            | $                                      | 169,000  
|Cash paid for income taxes                                                                         |                                                            | $                                      |         

See
accompanying notes.

41

---





IOMED, Inc.        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.     Description of Business and Summary of Significant Accounting Policies

Description of Business

IOMED, Inc., a Utah corporation (the "Company"), is a leader in the development, manufacture and sale of active drug delivery systems used primarily to
treat acute local inflammation in the physical and occupational therapy and sports medicine markets. The Company is pursuing opportunities to advance its position as a provider of quality, innovative
medical products that improve patient healthcare. In addition, the Company is seeking collaborative opportunities to develop its non-invasive drug delivery technology to satisfy unmet
medical needs. The Company has proprietary technology in various stages of research and product development primarily for transdermal drug delivery and for the treatment of ophthalmic disease.

Principles of Consolidation

The consolidated financial statements for fiscal 2002 include the accounts of the Company and its wholly owned subsidiary, Dermion, Inc., which was
unincorporated in fiscal 2002. All significant intercompany transactions and accounts have been eliminated in the fiscal year 2002 financial statements.

Estimates

Preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ
from those estimates.

Cash Equivalents

The Company considers all highly liquid investments with maturities of three months or less, when purchased, to be cash equivalents, including $328,000 restricted
to secure the current portion of certain long-term obligations (see note 4).

Concentrations of Credit Risk

The Company's financial instruments that are exposed to concentrations of credit risk consist primarily of cash, cash equivalents and trade accounts receivable.
Cash and cash equivalents are held in federally insured financial institutions or invested in high-grade short-term commercial paper issued by major United States corporations.
The Company sells its products primarily to, and has trade accounts receivable with, independent durable medical equipment dealers in the United States and abroad. Less than 10% of product sales are
to foreign customers. As a general policy, collateral is not required for accounts receivable. The Company maintains an allowance for losses based upon expected collections of accounts receivable.
Additionally, customers' financial condition and credit worthiness are regularly evaluated and historical losses have not been material. Combined sales to the Company's two largest customers accounted
for approximately 32%, 25% and 22% of the Company's total product sales for the years ended June 30, 2004, 2003 and 2002. At June 30, 2004, 2003 and 2002, amounts due from such customers
accounted for approximately 47%, 29% and 34% of trade receivables, all of which was current. The Company considers credit risk from concentrations of trade accounts receivable to be low.

42

---



Reclassifications

Certain reclassifications have been made to prior year balances to conform to the financial statement presentation included herein.

Revenue Recognition

Revenues on product sales are recognized when there is persuasive evidence that an arms length transfer has occurred, generally upon shipment, when title has
passed, the price is fixed or determinable, and collectibility is reasonably assured. The Company provides its customers certain purchase incentives, including performance rebates and volume pricing
discounts, based on the achievement of specified purchase levels. The Company recognizes such incentives as contra-revenue. The Company accrues for performance rebates based upon estimated customer
purchase levels and records volume pricing discounts when products are purchased.

Research and Product Development and Patent Costs

The Company expenses costs associated with its research and development efforts, including collaborative relationship efforts, as incurred. Research and
development expenses include salaries and benefits, facility costs, overhead allocations, clinical trials, consulting, contract services, and costs related to development of commercial scale
manufacturing capabilities. The Company also incurs certain costs in the preparation, application, filing, maintenance and defense of patents and trademarks. Where such costs primarily relate to
patents and trademarks covering technologies or products which are under development or in the early stages of commercialization, the Company expenses such costs as incurred.

Inventories

Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out method. The Company evaluates the
carrying value of its inventories at least quarterly, taking into account such factors as historical and anticipated future sales compared with quantities on hand, the price the Company expects to
obtain for its products in their respective markets compared with historical cost, and the remaining shelf life of goods on hand. Inventories consist of the following:

June 30,2004

2003Raw materials

$
660,000

$
596,000Work-in-progress


54,000


40,000Finished goods


381,000


391,000$
1,095,000

$
1,027,000


Equipment and Furniture

Equipment and furniture are stated at cost. Depreciation and amortization is computed using the straight-line method over estimated useful lives of
three to five years. Leasehold improvements are

43

---



amortized
over the term of the lease or the useful life of the improvements, whichever is shorter. Equipment and furniture consist of the following:

June 30,2004

2003Manufacturing equipment

$
1,777,000

$
1,744,000Office and research and development equipment


2,145,000


2,125,000Leasehold improvements


2,736,000


2,736,0006,658,000


6,605,000Less accumulated depreciation and amortization


(5,153,000
)

(4,265,000
)$
1,505,000

$
2,340,000


Long Lived Assets

The carrying amounts of long-lived assets, and the related amortization periods, are reviewed for impairment whenever events occur or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable within the estimated useful life. When the Company determines the existence of impairment indicators, the impairment
loss is measured based on the excess of carrying value over the estimated fair value of the impaired assets (see Note 6). The carrying value of the underlying asset is reduced, with the
reduction charged to expense, so that the carrying amount is equal to the estimated fair value.

Intangible Assets

In June 2002, the Company recorded a non-recurring, non-cash charge of $1,190,000 for the impairment of certain
long-lived intangible assets (see Note 6), which represented the unamortized acquisition costs of these intangible assets.

Stock Options

The Company has elected to follow Accounting Principles Board Opinion No. 25-Accounting for Stock Issued to
Employees(APB 25) and related Interpretations in accounting for its employee stock options rather than adopting the alternative fair value accounting provided for under
Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 123,Accounting for Stock-Based
Compensation, as amended by SFAS No. 148,Accounting for Stock Based CompensationTransition and Disclosure.
Because the exercise price of the Company's employee stock options equals the market price of the underlying shares on the date of grant, under APB 25, the Company does not recognize any compensation
expense. The following table illustrates the effect on

44

---



net
income (loss) and net income (loss) per common share had compensation cost for the Company's employee stock options been determined consistent with the methodology prescribed under
SFAS 123:

June 30,2004

2003

2002Net income (loss)as reported

$
954,000

$
785,000

$
(2,362,000
)Less: Total stock compensation expense determined under fair value method


(273,000
)

(128,000
)

(119,000
)Net income (loss)pro forma

$
681,000

$
657,000

$
(2,481,000
)Net income (loss) per common share:Basicas reported

$
0.15

$
0.12

$
(0.36
)Dilutedas reported

$
0.12

$
0.10

$
(0.36
)Basicpro forma

$
0.10

$
0.10

$
(0.38
)Dilutedpro forma

$
0.09

$
0.09

$
(0.38
)


Pro
forma information regarding net income and earnings per share is required by SFAS 123, and has been determined as if the Company had accounted for its employee stock options
under the fair value method of that Statement. The fair value of these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average
assumptions for 2004, 2003 and 2002, respectively: risk-free interest rates of 3.3%, 3.8% and 3.8%; dividend yield of 0%; volatility factors of the expected market price of the Company's
common stock of 0.80, 0.74 and 0.73; and a weighted-average expected life of the option of 6 years.

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

For
purposes of pro forma disclosures, the estimated fair value of the options is amortized over the options' vesting period. Because the effect of SFAS 123 is prospective, the
initial impact on pro forma net income (loss) may not be representative of compensation expense in future years.

Stock
compensation expense for options granted to non-employees has been determined in accordance with SFAS 123 and the Emerging Issues Task Force consensus in Issue
No. 96-18,Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring, or in Conjunction with Selling Goods or
Services(EITF 96-18). The fair value of options granted to non-employees and the associated expense is periodically re-measured as the
underlying options vest.

Net Income (loss) Per Common Share

The Company's net income (loss) per common share has been calculated in accordance with SFAS No. 128-Earnings Per
Shareand, accordingly, includes a computation of both basic and diluted net income (loss) per common share. Net income (loss) as presented in the statements of operations
represents the numerator used in computing net income (loss) per common share and the following

45

---



table
sets forth the computation of the weighted average shares used in determining basic and diluted net income (loss) per common share:

2004

2003

2002(in thousands)Denominator for basic net income (loss) per common shareweighted average shares

6,559

6,545

6,545Dilutive securities: preferred stock, warrants and stock options

1,150

952

Denominator for diluted net income (loss) per common shareadjusted weighted average shares and assumed conversions

7,709

7,497

6,545


In
all periods presented, certain securities were not included in the computation of diluted income (loss) per share due to their antidilutive effect. At June 30, 2004, options to
purchase approximately 422,000 common shares at a weighted average exercise price of $4.55 were not included. At June 30, 2003, options to purchase approximately 1,291,000 common shares and
warrants to purchase
approximately 45,000 common shares were not included. At June 30, 2002, options to purchase approximately 1,477,000 common shares, warrants to purchase approximately 234,000 common shares, and
893,801 Series D Convertible Preferred Shares were not included.

Income Taxes

The Company accounts for income taxes using the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

2.     Restricted Cash

The Company maintains an interest bearing money market account with a lending bank, $1,062,000 of which is being held as a compensating balance under a
long-term obligation (see notes 1 and 4) and is restricted as to withdrawal. The restricted cash balance requirement decreases over the life of the obligation as payments are made.

3.     Accrued Liabilities

Accrued liabilities consist of the following:

June 30,2004

2003Payroll and related benefits

$
269,000

$
484,000Professional fees


167,000


306,000Royalties


74,000


72,000Other


139,000


140,000$
649,000

$
1,002,000


46

---



4.     Commitments

Royalty Agreements

The Company is the licensee under royalty agreements, which provide for the payment of royalties to the licensor based upon net sales of the products under
royalty. Royalty expense in each of the three years in the period ended June 30, 2004 was not material.

Operating Leases

The Company leases space and certain equipment under non-cancelable operating lease agreements that expire at various dates through 2008. Rental
expense for such leases was $347,000, $382,000 and $426,000 for the years ended June 30, 2004, 2003 and 2002, respectively. It is generally expected that, in the normal course of business,
operating leases that expire will be renewed or replaced by other leases with similar terms. Future minimum lease payments under non-cancelable operating leases at June 30, 2004,
were $663,000. These obligations mature as follows: fiscal 2005$344,000; fiscal 2006$296,000; fiscal 2007$16,000; and fiscal 2008$7,000.

Long-Term Obligations

The Company has acquired certain equipment and furniture under capital lease agreements. The capitalized cost of such equipment was $1,339,000 at June 30,
2004 and 2003 and accumulated amortization was $1,009,000 and $805,000, respectively. Under these capital lease agreements, the Company is required to meet certain financial covenants, all of which
have been met at June 30, 2004.

During
fiscal 2001, the Company refinanced $2,700,000 of capital lease obligations into a term loan, collateralized by the underlying assets and restricted cash, with a fixed rate of
6.82%, payable in 84 monthly installments of $40,519 maturing April 2008. At June 30, 2004, the outstanding balance was $1,636,000. Payments of approximately $486,000 are due
within one year, of which $387,000 is principal reduction.

The
carrying values of the long-term obligations approximate fair values as the interest rates on these long-term obligations approximate market rates of
interest. Future minimum payments under long-term obligations consisted of the following at June 30, 2004:

Year ending June 30:2005

$
723,0002006


610,0002007


486,0002008


405,000Thereafter


Total minimum payments


2,224,000Amounts representing interest


(253,000
)Present value of net minimum payments


1,971,000Less current portion of long-term obligations


(603,000
)Long-term obligations

$
1,368,000


5.     Shareholders' Equity

Stock Options

The Company has adopted and approved two incentive stock compensation plans. The Company's 1988 Stock Option Plan was approved by the shareholders in
November 1988 and the Company's 1997

47

---



Share
Incentive Plan was approved by the shareholders in November 1997. The 1988 Stock Option Plan expired in August 1998 and no further grants were made under the Plan following the
adoption of the 1997 Share Incentive Plan. In general, options granted vest over zero to five years. A summary of the activity under the Plans during each of the three years ended June 30,
2004, is as follows:

|                         |                   |           |          | Outstanding Stock Options |          |  
|------------------------ | ----------------- | --------- | -------- | ------------------------- | -------- | -
|
|Balance at June 30, 2001 |                   | 1,609,127 |          | 1,411,463                 |          | $
|                         | Options granted   |           | (684,500 | )                         | 684,500  |  
|                         | Options exercised |           |         |                           |         |  
|                         | Options canceled  |           | 591,966  |                           | (618,580 | )
|                         |                   |           |          |                           |          |  
|Balance at June 30, 2002 |                   | 1,516,593 |          | 1,477,383                 |          | $
|                         | Options granted   |           | (301,000 | )                         | 301,000  |  
|                         | Options exercised |           |         |                           |         |  
|                         | Options canceled  |           | 156,686  |                           | (246,251 | )
|                         |                   |           |          |                           |          |  
|Balance at June 30, 2003 |                   | 1,372,279 |          | 1,532,132                 |          | $
|                         | Options granted   |           | (75,000  | )                         | 75,000   |  
|                         | Options exercised |           |         |                           | (40,543  | )
|                         | Options canceled  |           | 158,553  |                           | (192,372 | )
|                         |                   |           |          |                           |          |  
|Balance at June 30, 2004 |                   | 1,455,832 |          | 1,374,217                 |          | $
|                         |                   |           |          |                           |          |  

The
weighted average fair value of options granted in the years ended June 30, 2004, 2003 and 2002, was $1.45, $0.63 and $1.49, respectively. Additional information regarding the
options outstanding at June 30, 2004 follows:

Options OutstandingOptions ExercisableWeighted
Average
Remaining
Contractual
LifeRange of
Exercise
Prices

Number
Outstanding

Weighted
Average
Exercise
Price

Number
Exercisable

Weighted
Average
Exercise
Price$
0.70-$1.89

688,323

7.65

$
1.53

472,177

$
1.58$
2.20-$3.24

419,159

5.83

$
2.45

381,301

$
2.38$
3.75-$4.80

120,021

3.42

$
4.23

114,013

$
4.21$
6.50-$9.00

146,714

4.49

$
6.67

153,497

$
6.67$
0.70-$9.00

1,374,217

6.39

$
2.60

1,120,988

$
2.82


In
accordance with EITF 96-18, the Company accounts for stock options issued to non-employees at fair value. The value of such stock options is amortized to
expense over the vesting period. The Company has issued stock options to certain non-employees and recognized related compensation expense of $10,000 during the fiscal year ended
June 30, 2002. No compensation expense related to such stock options was recognized in the fiscal years ended June 30, 2004 and 2003.

Series D Convertible Preferred Shares

The Series D preferred shares are convertible at the option of the holder, Elan Corporation, plc, into common shares, on a
share-for-share basis, subject to adjustment for certain corporate transactions. Further, the Series D preferred shares are non-redeemable,
non-voting and have no dividend, liquidation or similar preferences over common shares but are entitled to a pro rata share of any such distribution as if the Series D preferred
shares had been converted into common shares.

48

---



6.     Non-recurring (Income) Expense

Non-recurring (income) expense consists of the following:

June 30,2004

2003

2002Reversal of lease abandonment accrual

$


$
(76,000
)
$
Non-cash charge for the impairment of long-lived assets








1,190,000Restructuring charge








505,000$


$
(76,000
)
$
1,695,000


Lease Abandonment Reversal

The Company fulfilled its obligations related to the non-recurring expense taken in fiscal 2000 for certain non-cancelable abandoned lease
and other obligations related to the Company's relocation to its new facilities. As a result, the Company reversed the remaining $76,000 that was expensed as a non-recurring item in fiscal
2000.

49

---



Non-cash Charge For the Impairment of Long-Lived Assets

In accordance with U.S. generally accepted accounting principles, certain patents and other intellectual property rights acquired from third parties were
capitalized and were being amortized over the estimated useful lives. Consistent with the requirements of SFAS 144 and its predecessor, SFAS 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," the Company reviews long-lived assets for impairment
whenever events occur or changes in circumstances indicate that the carrying value of an asset may not be recoverable within its estimated useful life. Following the suspension or curtailment of
certain research and development activities, a change in strategic focus, and the implementation of a new patent management strategy, the Company performed a review of its intangible assets for
impairment. Based on the review, the Company recorded a non-recurring, non-cash expense of $1,190,000 for the estimated impairment in the carrying value of certain
long-lived assets in the period ended June 30, 2002. The impairment charge represents the write-off of unamortized acquisition costs of certain patents and other
intellectual property rights.

Restructuring Charge

The Company accrued for and recorded a restructuring charge of $505,000 in fiscal 2002 for certain involuntary employee termination benefits related to the
suspension of certain product development programs. During fiscal 2002, 13 employees were terminated and received involuntary termination benefits. As of June 30, 2003, all of the termination
benefits had been paid.

7.     Employee Benefit Plan

The Company has established a 401(k) savings plan for its full-time employees and makes a matching contribution based on a percentage of the
contributions of participating employees. The Company contributed approximately $79,000, $64,000 and $77,000 for the years ended June 30, 2004, 2003 and 2002, respectively.

8.     Income Taxes

Deferred taxes result from differences in the carrying value of various assets and liabilities between income tax reporting and financial reporting purposes.
These differences arise from differing depreciation methods, and other reserves that are deductible in different periods for tax and financial reporting purposes.

The
approximate tax effect of temporary differences, net operating loss carryforwards and tax credit carryforwards as of June 30, 2004 and 2003, is as follows:

2004

2003Deferred tax assets:Net operating loss carryforwards

$
7,110,000

$
7,260,000Book in excess of tax depreciation


649,000


471,000Book in excess of tax amortization


2,891,000


3,264,000Tax credit carryforwards


874,000


888,000Allowances and accruals


290,000


342,000Total deferred tax assets


11,814,000


12,225,000Valuation allowance


(11,814,000
)

(12,225,000
)Net deferred tax assets

$


$



There
were no significant deferred tax liabilities in 2004 or 2003. The valuation allowance decreased by $411,000 during the fiscal year.

50

---



There
were no net deferred income tax provisions in any of the years presented. The Company recorded no current federal or state income tax provision for fiscal 2004, 2003 and 2002.

The
reconciliation of income taxes at the statutory United States federal income tax rate and the Company's effective income tax expense is as follows:

2004

2003

2002Tax at U.S. statutory rates

34.0
%
34.0
%
(34.0
)%State tax, net of federal tax benefit

3.3

3.3

(3.3
)Tax credits

(2.0
)
3.9

(0.7
)Non-deductible interest and other expenses

1.4

1.7

0.8Effect of deferred tax valuation adjustments

(36.7
)
(42.9
)
37.2Effective income tax rate (percentage)


%

%

%


As
of June 30, 2004, the Company had approximately $19,484,000 and $14,716,000 in federal and state net operating loss carryforwards, respectively, and $874,000 in federal tax
credit carryforwards, that expire from 2004 through 2023. Utilization of the Company's net operating loss and tax credit carryforwards is limited to the future taxable income of the Company. Under the
"change of ownership" provisions of the Internal Revenue Code, utilization of these net operating loss and credit carryforwards may be subject to an annual limitation.

9.     Contingencies

The Company is subject to various claims and legal proceedings covering matters that arise in the ordinary course of its business activities. Except as otherwise
disclosed, management believes any liability that may ultimately result from the resolution of these matters will not have a material adverse effect on the Company's consolidated financial position,
operating results, or cash flows.

10.   Quarterly Financial Information (Unaudited)

|            |                              | First
Quarter |   | Second
Quarter |  | Third
Quarter |           | Fourth
Quarter |   | Total    
|----------- | ---------------------------- | ------------- | - | -------------- |  | ------------- | --------- | -------------- | - | ---------
|Fiscal 2004 |                              |               |   |                |  |               |           |                |   |          
|            | Product sales                |               | $ | 2,922,000      |  | $             | 3,010,000 |                | $ | 3,094,000
|            | Gross profit                 |               |   | 1,818,000      |  |               | 1,894,000 |                |   | 1,923,000
|            | Income from operations       |               |   | 112,000        |  |               | 193,000   |                |   | 290,000  
|            | Net income                   |               |   | 117,000        |  |               | 213,000   |                |   | 280,000  
|            | Basic net income per share   |               | $ | 0.02           |  | $             | 0.03      |                | $ | 0.04     
|            | Diluted net income per share |               | $ | 0.02           |  | $             | 0.03      |                | $ | 0.04     
|Fiscal 2003 |                              |               |   |                |  |               |           |                |   |          
|            | Product sales                |               | $ | 2,942,000      |  | $             | 2,946,000 |                | $ | 2,927,000
|            | Gross profit                 |               |   | 1,873,000      |  |               | 1,855,000 |                |   | 1,846,000
|            | Income from operations       |               |   | 189,000        |  |               | 154,000   |                |   | 105,000  
|            | Net income                   |               |   | 206,000        |  |               | 179,000   |                |   | 118,000  
|            | Basic net income per share   |               | $ | 0.03           |  | $             | 0.03      |                | $ | 0.02     
|            | Diluted net income per share |               | $ | 0.03           |  | $             | 0.02      |                | $ | 0.02     

11.   Litigation

The Company has filed two civil complaints in state court against two former executives, among others, alleging misappropriation of the Company's trade secrets,
interference with economic relationships and civil conspiracy. The claims arise out of the Company's allegations that the defendants

51

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engaged
in conduct to misappropriate confidential information related to a new product that was being developed by the Company under the supervision of the two former executives. The Company is
seeking injunctive relief against all defendants. In response, a counterclaim has been filed against the Company and certain Company employees seeking, among other things, $5 million in
monetary damages.

In
addition, two separate federal court complaints were filed against the Company and certain Company employees and agents, alleging violation of the plaintiffs' federal civil rights,
invasion of privacy, intentional infliction of emotional distress, trespassing, and conspiracy. These complaints are related to one of the state court actions filed by the Company in that they arise
out of the court-ordered seizure of computer hard drives, other electronic media, and certain business files of certain of the defendants in one of the state court actions. Such seizure was conducted
by the Salt Lake County Sheriff's Office. The two federal court complaints sought, among other things, combined monetary damages of $60 million. The United States District Court granted, with
prejudice, the Company's
motion to dismiss the two federal civil rights complaints filed against the Company. The plaintiffs have appealed these rulings.

A
plaintiff in one of the federal civil rights complaints also filed a Utah state court complaint against the Company and certain Company employees alleging discrimination, among other
things. This complaint is related to one of the state court actions filed by the Company in that the claims asserted arise from the same series of transactions and occurrences. The Utah State Court
has granted the Company's motion to dismiss the plaintiff's discrimination claim, and the plaintiff has appealed this ruling.

Management
believes that the Company's complaints contain meritorious claims and intends to vigorously protect the Company's intellectual property. Additionally, management believes that
there is no basis for the claims and counterclaims asserted or the penalties sought against the Company and the other defendants in the above state or federal court actions.

Additionally,
a patent infringement claim has been asserted against the Company regarding its Companion 80 product. This case is entering the discovery phase and it is too early to
predict the outcome.

In
addition to the legal matters above, the Company is subject to various claims and legal proceedings covering matters that arise in the ordinary course of business.

Management
does not believe that the outcomes of these legal matters will have a material adverse impact on the Company. However, legal fees and expenses will likely be material and, in
the event of an unfavorable resolution, the outcome could have a material adverse impact on the Company's business, financial position, or results of operations.

52

---





PART III

Item 10.    DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

Information required by this item is included under "Election of Directors," "The Board of Directors and Committees," "Code of Business Conduct and Ethics," and
"Executive Officers" in the Company's Proxy Statement to be filed in connection with its Annual Meeting of Shareholders, to be held on November 12, 2004, and is incorporated herein by
reference.

Item 11.    EXECUTIVE COMPENSATION

The information required by this item is included under "Compensation of Directors and Executive Officers" in the Company's Proxy Statement to be filed in
connection with its Annual Meeting of Shareholders, to be held on November 12, 2004, and is incorporated herein by reference.

Item 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this item is included under "Security Ownership of Certain Beneficial Owners and Management" in the Company's Proxy Statement to be
filed in connection with its Annual Meeting of Shareholders, to be held on November 12, 2004, and is incorporated herein by reference.

Item 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item is included under "Certain Relationships and Related Transactions" in the Company's Proxy Statement to be filed in
connection with its Annual Meeting of Shareholders, to be held on November 12, 2004, and is incorporated herein by reference.

Item 14.    PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this item is included under "Fees paid to Independent Accountants" in the Company's Proxy Statement to be filed in connection with its
Annual Meeting of Shareholders, to be held on November 12, 2004, and is incorporated herein by reference.

PART IV

Item 15.    EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a)   Financial Statements and Schedules

The consolidated financial statements of the Company are included elsewhere in this Report.

53

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No
schedules are required in connection with the filing of this Report as amounts are either immaterial or are otherwise disclosed in the financial statements.

Exhibits

|Number    |  | Description                                                                                                                                         
|--------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------
|3.1**     |  | Amended and Restated Articles of Incorporation of the Company                                                                                       
|3.2*      |  | Amended and Restated Bylaws of the Company                                                                                                          
|4.1*      |  | Reference is made to Exhibit 3.1                                                                                                                    
|4.2*      |  | Specimen of Common Share Certificate                                                                                                                
|4.3***    |  | 1988 Stock Option Plan of the Company                                                                                                               
|4.4***    |  | 1997 Share Incentive Plan of the Company                                                                                                            
|10.1*     |  | License Agreement between the Company and Elan International Services, dated April 14, 1997                                                         
|10.2*     |  | License Agreement between the Company and Drug Delivery Systems, Inc., dated April 14, 1997                                                         
|10.3*     |  | Asset Acquisition Agreement between the Company and Fillauer, Inc., dated December 27, 1996                                                         
|10.4*     |  | License Agreement between the Company and Fillauer, Inc., dated December 26, 1996                                                                   
|10.5*     |  | Manufacturing Agreement between the Company and KWM Electronics Corporation, dated November 1, 1996                                                 
|10.6*     |  | Research and Development Agreement among the Company, Dermion, Inc. and Ciba-Geigy Corporation, dated March 29, 1996                                
|10.7*     |  | Agreement between the Company and Laboratoires Fournier S.C.A., dated February 20, 1996                                                             
|10.8*     |  | Agreement between the Company and ALZA Corporation, dated July 28, 1993                                                                             
|10.9*     |  | License Agreement between the Company and the University of Utah Research Foundation, dated October 1, 1992                                         
|10.10*    |  | Exchange Agreement among the Company, Novartis Pharmaceuticals Corporation and Dermion, Inc., dated November 1, 1997                                
|10.11*    |  | First Amendment of Research & Development Agreement among the Company, Novartis Pharmaceuticals Corporation and Dermion, Inc. dated November 1, 1997
|10.12**** |  | Lease between the Company and NP#2, dated May 22, 2000                                                                                              
|10.13#    |  | Amendment to Lease Agreement between the Company and NP#2, dated September 17, 2004                                                                 
|11.1***** |  | Statement re computation of earnings per share                                                                                                      
|21.1*     |  | Schedule of Subsidiaries                                                                                                                            
|23.1#     |  | Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm                                                                         
|31.1#     |  | Certification of Chief Executive Officer                                                                                                            
|31.2#     |  | Certification of Chief Accounting Officer                                                                                                           
|32.1#     |  | Certification of Chief Executive Officer                                                                                                            
|32.2#     |  | Certification of Chief Accounting Officer                                                                                                           

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(b)   Reports on Form 8-K

The Company filed a Form 8-K on April 28, 2004 to furnish its press release announcing financial results for the quarter ended
March 31, 2004.

54

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SIGNATURES

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

|                         |  | IOMED, INC.
|------------------------ |  | -----------
|Date: September 22, 2004 |  | By:        
|Date: September 22, 2004 |  | By:        

SIGNATURES

In accordance with the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities
and on the dates indicated.

|Signature                                 |  | Capacity |  | Date              
|----------------------------------------- |  | -------- |  | ------------------
|                                          |  |          |  |                   
|/s/PETER J. WARDLEPeter J. Wardle         |  | Chairman |  | September 22, 2004
|/s/JOHN W. FARA, PH.D.John W. Fara, Ph.D. |  | Director |  | September 22, 2004
|/s/MICHAEL T. SEMBERMichael T. Sember     |  | Director |  | September 22, 2004
|/s/WARREN WOODWarren Wood                 |  | Director |  | September 22, 2004
|/s/ROBERT J. LOLLINIRobert J. Lollini     |  | Director |  | September 22, 2004

55

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