##### 



Exhibit 13 UROPLASTY, INC. AND SUBSIDIARIES Consolidated Financial Statements
March 31, 2005 and 2004 TABLE OF CONTENTS Page(s)Reports of Independent Registered Public Accounting Firms
    
    F-2 - F-3Financial Statements:Consolidated Balance Sheets
    
    F-4 - F-5Consolidated Statements of Operations
    
    F-6Consolidated Statements of Shareholders Equity and Comprehensive
Income (Loss)
    
    F-7Consolidated Statements of Cash Flows
    
    F-8Notes to Consolidated Financial Statements
    
    F-9 - F-20
 F-1




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##### 



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Shareholders
Uroplasty, Inc.
Minneapolis, Minnesota We have audited the consolidated balance sheet of Uroplasty, Inc. and Subsidiaries as of March 31,
2005, and the related consolidated statements of operations, shareholders equity and comprehensive
loss, and cash flows for the year then ended. These consolidated financial statements are the
responsibility of the Companys management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit. We conducted our audit 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 audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Uroplasty, Inc. and subsidiaries as of March 31, 2005,
and the results of their operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America. /s/ McGladrey & Pullen, LLPMinneapolis, MinnesotaJune 22, 2005
 F-2




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##### 



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Shareholders
Uroplasty, Inc. We have audited the accompanying consolidated balance sheet of Uroplasty, Inc. and Subsidiaries as
of March 31, 2004, and the related consolidated statements of operations, shareholders equity and
comprehensive loss, and cash flows for the year then ended. These consolidated financial statements
are the responsibility of the Companys management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audit. We conducted our audit 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 audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Uroplasty, Inc. and subsidiaries as of March 31, 2004,
and the results of their operations and their cash flows for the year then ended in conformity with
U.S. generally accepted accounting principles. /s/ KPMG LLP Minneapolis, Minnesota
July 26, 2004 F-3




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##### 



UROPLASTY, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
March 31, 2005 and 2004 2005
    
    
    2004AssetsCurrent assets:Cash and cash equivalents
    
    $
    1,492,684
    
    
    $
    2,697,670Accounts receivable, net
    
    
    944,527
    
    
    
    1,065,176Income tax receivable
    
    
    114,189
    
    
    
    Inventories
    
    
    547,476
    
    
    
    519,130Other
    
    
    161,920
    
    
    
    235,078Total current assets
    
    
    3,260,796
    
    
    
    4,517,054Property, plant, and equipment, net
    
    
    1,040,253
    
    
    
    1,071,116Intangible assets, net of accumulated
amortization of $225,090 and
$222,014, respectively
    
    
    39,100
    
    
    
    51,495Deferred tax assets
    
    
    103,075
    
    
    
    123,893Total assets
    
    $
    4,443,224
    
    
    $
    5,763,558
 See accompanying notes to consolidated financial statements. F-4




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##### 



UROPLASTY, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
March 31, 2005 and 2004 2005
    
    
    2004Liabilities and Shareholders EquityCurrent liabilities:Current maturities  long-term debt
    
    $
    44,606
    
    
    $
    42,301Accounts payable
    
    
    362,994
    
    
    
    225,315Accrued liabilities:Compensation and payroll taxes
    
    
    284,255
    
    
    
    197,939Income taxes
    
    
    
    
    
    
    101,562Foreign sales tax
    
    
    181
    
    
    
    13,130Royalties
    
    
    24,710
    
    
    
    29,006Clinical
    
    
    12,702
    
    
    
    52,767Audit and tax-consulting
    
    
    45,566
    
    
    
    32,056Legal
    
    
    22,750
    
    
    
    61,663Other
    
    
    88,518
    
    
    
    89,396Total current liabilities
    
    
    886,282
    
    
    
    845,135Long-term debt  less current maturities:
    
    
    461,265
    
    
    
    479,720Accrued pension liability
    
    
    303,781
    
    
    
    334,470Total liabilities
    
    
    1,651,328
    
    
    
    1,659,325Commitments and ContingenciesShareholders equity:Common stock $.01 par value; 20,000,000
shares authorized, 4,699,597 and
4,584,802 shares issued and
outstanding at March 31, 2005 and
2004, respectively
    
    
    46,996
    
    
    
    45,848Additional paid-in capital
    
    
    9,366,644
    
    
    
    9,130,580Accumulated deficit
    
    
    (6,491,387
    )
    
    
    (4,756,622
    )Accumulated other comprehensive loss
    
    
    (130,357
    )
    
    
    (315,573
    )Total shareholders equity
    
    
    2,791,896
    
    
    
    4,104,233Total liabilities and shareholders equity
    
    $
    4,443,224
    
    
    $
    5,763,558
 See accompanying notes to consolidated financial statements. F-5




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##### 



UROPLASTY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended March 31, 2005 and 2004 2005
    
    
    2004Net sales
    
    $
    6,657,726
    
    
    $
    5,714,896Cost of goods sold
    
    
    1,755,456
    
    
    
    1,452,331Gross profit
    
    
    4,902,270
    
    
    
    4,262,565Operating expensesGeneral and administrative
    
    
    2,260,240
    
    
    
    2,069,568Research and development
    
    
    2,258,127
    
    

    
    1,820,690Selling and marketing
    
    
    2,015,655
    
    
    
    1,714,4756,534,022
    
    
    
    5,604,733Operating loss
    
    
    (1,631,752
    )
    
    
    (1,342,168
    )Other income (expense)Interest income
    
    
    30,168
    
    
    
    30,173Interest expense
    
    
    (25,934
    )
    
    
    (21,995
    )Foreign currency exchange gain (loss)
    
    
    (15,744
    )
    
    
    45,882Other
    
    
    
    
    
    
    6,000(11,510
    )
    
    
    60,060Loss before income taxes
    
    
    (1,643,262
    )
    
    
    (1,282,108
    )Income tax expense
    
    
    91,503
    
    
    
    229,185Net loss
    
    $
    (1,734,765
    )
    
    $
    (1,511,293
    )Net loss per common share:Basic and diluted
    
    $
    (0.37
    )
    
    $
    (0.33
    )Weighted average common shares outstanding:Basic and diluted
    
    
    4,651,732
    
    
    
    4,517,979
 See accompanying notes to consolidated financial statements. F-6




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##### 



UROPLASTY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY AND COMPREHENSIVE LOSS
Years ended March 31, 2005 and 2004 AccumulatedAdditional
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    TotalCommon Stock
    
    
    Paid-in
    
    
    Accumulated
    
    
    Vendor
    
    
    Comprehensive
    
    
    ShareholdersShares
    
    
    Amount
    
    
    Capital
    
    
    Deficit
    
    
    Deposit
    
    
    Loss
    
    
    EquityBalance at March 31, 2003
    
    
    4,488,971
    
    
    $
    44,890
    
    
    $
    8,457,901
    
    
    $
    (3,245,329
    )
    
    $
    (112,000
    )
    
    $
    (503,835
    )
    
    $
    4,641,627Exercise of stock options
    
    
    23,931
    
    
    
    239
    
    
    
    37,405
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    37,644Warrants conversion
    
    
    23,600
    
    
    
    236
    
    
    
    46,964
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    47,200Employee retirement
savings plan
contribution
    
    
    13,300
    
    
    
    133
    
    
    
    57,647
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    57,780Non-employee stock-based
consulting and
compensation expense
    
    
    35,000
    
    
    
    350
    
    
    
    472,663
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    473,013Release of restricted
common stock to vendor
    
    
    
    
    
    
    
    
    
    
    58,000
    
    
    
    
    
    
    
    112,000
    
    
    
    
    
    
    
    170,000Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,511,293
    )
    
    
    
    
    
    
    
    
    
    
    (1,511,293
    )Translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    239,323
    
    
    
    239,323Additional pension
liability
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (51,061
    )
    
    
    (51,061
    )Total comprehensive
loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,323,031
    )Balance at March 31, 2004
    
    
    4,584,802
    
    
    $
    45,848
    
    
    
    9,130,580
    
    
    
    (4,756,622
    )
    
    
    
    
    
    
    (315,573
    )
    
    
    4,104,233Exercise of stock options
    
    
    38,300
    
    
    
    383
    
    
    
    67,638
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    68,021Warrants conversion
    
    
    68,395
    
    
    
    684
    
    
    
    136,107
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    136,791Employee retirement
savings plan
contribution
    
    
    8,100
    
    
    
    81
    
    
    
    32,319
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    32,400Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,734,765
    )
    
    
    
    
    
    
    
    
    
    
    (1,734,765
    )Translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    150,505
    
    
    
    150,505Additional pension
liability
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    34,711
    
    
    
    34,711Total comprehensive
loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,549,549
    )Balance at March 31, 2005
    
    
    4,699,597
    
    
    $
    46,996
    
    
    $
    9,366,644
    
    
    $
    (6,491,387
    )
    
    $
    
    
    
    $
    (130,357
    )
    
    $
    2,791,896
 See accompanying notes to consolidated financial statements. F-7




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##### 



UROPLASTY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended March 31, 2005 and 2004 2005
    
    
    2004Cash flows from operating activities:Net loss
    
    $
    (1,734,765
    )
    
    $
    (1,511,293
    )Adjustments to reconcile net loss to net cash used in operations:Depreciation
    
    
    144,911
    
    
    
    140,884Amortization
    
    
    18,968
    
    
    
    23,300Loss on disposal of assets
    
    
    3,751
    
    
    
    Stock-based consulting expense
    
    
    
    
    
    
    473,013Deferred tax assets
    
    
    23,680
    
    
    
    (29,734
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    168,779
    
    
    
    31,902Inventories
    
    
    21,896
    
    
    
    40,217Other current assets
    
    
    78,867
    
    
    
    (23,689
    )Accounts payable
    
    
    162,526
    
    
    
    67,125Accrued liabilities
    
    
    (221,646
    )
    
    
    163,893Accrued pension liability
    
    
    (38,909
    )
    
    
    93,262Additional pension liability
    
    
    36,537
    
    
    
    (51,061
    )Net cash used in operating activities
    
    
    (1,335,405
    )
    
    
    (582,181
    )Cash flows from investing activities:Payments for property, plant and equipment
    
    
    (74,966
    )
    
    
    (115,352
    )Payments relating to intangible assets
    
    
    (7,277
    )
    
    
    (26,581
    )Net cash used in investing activities
    
    
    (82,243
    )
    
    
    (141,933
    )Cash flows from financing activities:Repayment of long-term debt
    
    
    (43,356
    )
    
    
    (40,419
    )Net proceeds from issuance of common stock
    
    
    204,812
    
    
    
    84,844Net cash provided by financing activities
    
    
    161,456
    
    
    
    44,425Effect of exchange rates on cash and cash equivalents
    
    
    51,206
    
    
    
    1,378Net decrease in cash and cash equivalents
    
    
    (1,204,986
    )
    
    
    (678,311
    )Cash and cash equivalents at beginning of year
    
    
    2,697,670
    
    
    
    3,375,981Cash and cash equivalents at end of year
    
    $
    1,492,684
    
    
    $
    2,697,670Supplemental disclosure of cash flow information:Cash paid during the year for interest
    
    $
    24,751
    
    
    $
    23,517Cash paid during the year for income taxes
    
    
    304,018
    
    
    
    130,282Supplemental
disclosure of non-cash financing and investing activities:Shares issued for 401(k) plan profit sharing contribution
    
    
    32,400
    
    
    
    57,780Vesting of restricted shares for mold purchase
    
    
    
    
    
    
    170,000Minimum
pension liability, net of tax
    
    
    (34,711
    )
    
    
    51,061
 See accompanying notes to consolidated financial statements. F-8




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##### 



UROPLASTY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005 and 2004  1.
    
    Summary of Significant Accounting Policies Nature of Business.Uroplasty, Inc. and subsidiaries (the Company) is a medical device company
that develops, manufactures and markets innovative, proprietary products for the treatment of
voiding dysfunctions. The Company has developed, and is developing, minimally invasive products
primarily for the treatment of urinary and fecal incontinence and overactive bladder symptoms. The
Company currently sells its products outside of the United States and is pursuing regulatory
approvals to market its products in the United States. The Company anticipates increasing its
sales and marketing activities in the U.S. once it obtains such approvals. The FDA approval
process can be costly, lengthy and uncertain. Principles of Consolidation.The consolidated financial statements include the accounts of the
Company and its wholly owned foreign subsidiaries. All significant intercompany accounts and
transactions have been eliminated. Revenue Recognition.The Company recognizes revenue upon shipment of product to customers. Upon
shipment, the risks and rewards of ownership are passed on to the buyer. There are no customer
acceptance provisions. The Company sells its products to distributors who sell to other
distributors and end users, and to end users in the United Kingdom. Sales to distributors were
$4,700,000 and $3,800,000 in fiscal 2005 and 2004, respectively, or 70% and 66%, respectively, of
net sales. Payment terms range from prepayment to 60 days. The distributor payment terms are not
contingent on the distributor selling the product to other distributors or end users. Customers do
not have the right to return unsold product to the Company except for warranty claims. The Company
offers customary product warranties. During fiscal 2005, two customers accounted for approximately
15% and 11% of the Companys net sales. During fiscal 2004, the same two customers accounted for
approximately 13% and 11% of the Companys net sales. Cash and Cash Equivalents.The Company considers highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents. The Company maintains its cash in
bank accounts, which, at times, exceed federally insured limits. The Company has not experienced
any losses in such accounts. Accounts Receivable. Accounts receivable are carried at the original invoice amount less an
estimate made for doubtful receivables based on a periodic review of all outstanding amounts. The
Company determines the allowance for doubtful accounts based on customer financial condition, and
both historical and expected credit loss experience. Accounts receivable are written off when
deemed uncollectible. Recoveries of accounts receivable previously written off are recorded when
received. The allowance for doubtful accounts was $218,000 and $33,000 at March 31, 2005 and 2004,
respectively. Patents.Patents are stated at cost and are amortized over six years using the straight-line
method. Income Taxes.Deferred tax assets and liabilities are recognized for future tax consequences
attributable to differences between the financial carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to be applied to taxable income in the years in which those temporary
differences are expected to be recovered or settled. During fiscal 2005 and 2004 the Companys
Dutch subsidiaries recorded income tax expense of $91,503 and $229,185 respectively, as they have
fully utilized their net operating loss carryforwards. The U.S. net operating loss carryforwards
cannot be used to offset taxable income in foreign jurisdictions. Use of Estimates.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 amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from these estimates. The Companys significant
accounting policies and estimates include revenue recognition, accounts receivable, valuation of
inventory, foreign currency translation/transactions, and the determination of recoverability of
long-lived and intangible assets. Product Warranty. The Company warrants its new products to be free from defects in material and
workmanship under normal use and service for a period of twelve months after date of sale. Under
the terms of these warranties, the Company is obligated to repair or replace the products it deems
to be defective due to material or workmanship. The Company does not have an accrual for warranty
costs, as warranty claims are infrequent and immaterial. F-9




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##### 



Inventories.Inventories are stated at the lower of cost (first-in, first-out method) or market
(net realizable value) and consist of the following at March 31, 2005 and 2004: 2005
    
    
    2004Raw materials
    
    $
    193,980
    
    
    $
    138,920Work-in-process
    
    
    75,337
    
    
    
    110,511Finished goods
    
    
    278,159
    
    
    
    269,699$
    547,476
    
    
    $
    519,130
 Property, Plant, and Equipment.Property, plant, and equipment are carried at cost and consist of
the following at March 31, 2005 and 2004: 2005
    
    
    2004Land
    
    $
    158,861
    
    
    $
    150,652Building
    
    
    692,646
    
    
    
    656,855Equipment
    
    
    1,391,516
    
    
    
    1,369,8472,243,023
    
    
    
    2,177,354Less accumulated depreciation
    
    
    (1,202,770
    )
    
    
    (1,106,238
    )$
    1,040,253
    
    
    $
    1,071,116
 Depreciation is provided using the straight-line method over useful lives of three to seven years
for equipment and 40 years for the building. Maintenance and repairs are charged to expense as
incurred. Renewals and betterments are capitalized and depreciated over their estimated useful
service lives. Intangible Assets.Intangible assets are comprised of patents and trademarks which are amortized
on a straight-line basis over their estimated useful lives, generally six years. Estimated annual amortization for these assets for the years ended March 31, are as follows: 2006
        
        $
        15,4142007
        
        
        8,5122008
        
        
        5,7562009
        
        
        5,6522010
        
        
        3,369Thereafter
        
        397$
        39,100
 Impairment of Long-Lived Assets. Long-lived assets at March 31, 2005 consist of property, plant and
equipment. The Company reviews its long-lived assets for impairment whenever events or business
circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability
of assets to be held and used is measured by a comparison of the carrying amount of an asset to
future undiscounted net cash flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less costs to sell. F-10




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##### 



Research and Development.Research and development costs are expensed as incurred and consist of
the following for the years ended March 31, 2005 and 2004: 2005
    
    
    2004FDA regulatory costs
    
    $
    809,281
    
    
    $
    745,690Other research and development costs
    
    
    1,448,846
    
    
    
    1,075,000$
    2,258,127
    
    
    $
    1,820,690
 Foreign Currency Translation.All assets and liabilities are translated using period-end exchange
rates and statements of operations items are translated using average exchange rates for the
period. The resulting translation adjustment is recorded within accumulated other comprehensive
loss, a separate component of shareholders equity. Foreign currency transaction gains and losses
are recognized currently in the consolidated statement of operations, including unrealized gains
and losses on short-term inter-company obligations using period-end exchange rates. Unrealized
gains and losses on long-term inter-company obligations are recognized within accumulated other
comprehensive loss, a separate component of shareholders equity. Exchange gains and losses are recognized primarily as a result of fluctuations in currency rates
between the U.S. dollar (the functional reporting currency) and the euro and British pound
(currencies of the Companys subsidiaries), as well as their effect on the dollar denominated
intercompany obligations between the Company and its foreign subsidiaries. The Company recognized
net foreign currency gains (losses) of $(15,744) and $45,882 for the years ended March 31, 2005 and
2004, respectively. Stock-Based Compensation.The Company applies the intrinsic-value method to account for employee
stock-based compensation. As such, compensation expense, if any, is determined on the date of grant
if the current market price of the underlying stock exceeds the exercise price. The Company accounts for stock-based instruments granted to non-employees under the fair value
method of Statement of Financial Accounting Standards No.123, Accounting for Stock-Based
Compensation(SFAS No. 123) and Emerging Issues Task Force (EITF) 96-18, Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services. Under SFAS No. 123, options are recorded at their fair value on the measurement
date, which is typically the vesting date. Stock Option Plans.Had the Company determined compensation cost based on the fair value at the
grant date for its stock options under SFAS No. 123, the Companys net loss would have changed to
the pro forma amounts shown below: 2005
    
    
    2004Net loss
- As reported
    
    $
    (1,734,765
    )
    
    $
    (1,511,293
    )Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards
    
    
    (2,321,745
    )
    
    
    (253,374
    )Net loss  Pro forma
    
    $
    (4,056,510
    )
    
    $
    (1,764,667
    )Net loss per common share  As reported:Basic and diluted
    
    $
    (0.37
    )
    
    $
    (0.33
    )Net loss per common share  Pro forma:Basic and diluted
    
    $
    (0.87
    )
    
    $
    (0.39
    )
 F-11




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##### 



The per share weighted-average fair value of stock options granted during 2005 and 2004 was $4.63
and $1.86, respectively, on the date of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions: 2005
    
    
    2004Expected dividend yield
    
    
    0.00
    %
    
    
    0.00
    %Risk-free interest rate
    
    
    3.40
    %
    
    
    2.93
    %Expected volatility
    
    
    117
    %
    
    
    118
    %Expected life, in years
    
    
    7.40
    
    
    
    5.00
 Basic and Diluted Net Loss per Common Share.Basic per common share amounts are calculated by
dividing net loss by the weighted-average common shares outstanding. Diluted per common share
amounts are computed similar to basic per common share amounts except that the weighted-average
shares outstanding are increased to include additional shares for the assumed exercise of stock
options and warrants, if dilutive. Because the Company had a loss in fiscal 2005 and 2004, diluted
shares were the same as basic shares since the effect options and warrants would have been
anti-dilutive. The following options and warrants outstanding at March 31, 2005 and 2004 to
purchase shares of common stock were excluded from diluted loss per share as their impact would be
anti-dilutive as follows: Number of
    
    
    Range ofOptions/Warrants
    
    
    exercise pricesYears ended:March 31, 2005
    
    
    1,820,859
    
    
    $
    0.90-10.50March 31, 2004
    
    
    1,718,966
    
    
    $
    0.90-10.50
 New Accounting Pronouncements. In May 2005, the FASB issued FASB Statement No. 154, Accounting Changes and Error Corrections. This
new standard replaces APB Opinion No. 20, Accounting Changes, and FASB Statement No. 3, Reporting
Accounting Changes in Interim Financial Statements.Among other changes, Statement 154 requires
that a voluntary change in accounting principle be applied retrospectively with all prior period
financial statements presented on the new accounting principle, unless it is impracticable to do
so. Statement 154 also provides that (1) a change in method of depreciating or amortizing a
long-lived nonfinancial asset be accounted for as a change in estimate (prospectively) that was
effected by a change in accounting principle, and (2) correction of errors in previously issued
financial statements should be termed a restatement. The new standard is effective for accounting
changes and correction of errors made in fiscal years beginning after December 15, 2005. Early
adoption of this standard is permitted for accounting changes and correction of errors made in
fiscal years beginning after June 1, 2005. The Company does not believe the adoption of FASB
Statement 154 will have a material effect on its financial position or results of operations. In November 2004, the Financial Accounting Standards Board, or FASB, issued Statement of Financial
Accounting Standards, or SFAS, 151, Inventory Costs, An Amendment of Accounting Research Bulletin
No. 43, Chapter 4,which adopts wording from the International Accounting Standards Boards, or
IASB, IAS 2 Inventoriesin an effort to improve the comparability of cross-border financial
reporting. The new standard requires the Company to treat abnormal freight, handling costs and
wasted materials (spoilage) as current period charges rather than as a portion of inventory cost.
Additionally, the standard clarifies that we should allocate fixed production overhead based on the
normal capacity of a production facility. The statement is effective for the Company beginning in
fiscal 2007. The Company does not expect adoption to have a material impact on its consolidated
financial statements. In December 2004, the FASB issued SFAS 123(R), Share-Based Payment, which is a revision of SFAS
123, Accounting for Stock-Based Compensation,and supersedes APB Opinion 25, Accounting for Stock
Issued to Employees.SFAS 123(R) requires all share-based payments to employees, including grants
of employee stock options, to be valued at fair value on the date of grant, and to be expensed over
the applicable vesting period and is effective for us beginning on April 1, 2006. The Company
expects the provisions of SFAS 123(R) to result in a significant charge to compensation expense, as
it currently does not recognize stock compensation expense in accordance with SFAS 123(R). In March 2005, FASB Interpretation No.47 FIN 47 was issued, which clarifies certain terminology
as used in FASB Statement No. 143, Accounting for Asset Retirement Obligations. In addition it
clarifies when an entity would have sufficient information to reasonably estimate the fair value of
an asset retirement obligation. FIN 47 is effective no later than the end of fiscal years ending
after December 15, 2005. Early adoption of FIN 47 is encouraged. The Company believes the adoption
of FIN 47 will have no impact on the financials of the Company, once adopted. F-12




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##### 



2.
    
    Notes Payable Notes payable consist of the following at March 31, 2005 and 2004: 2005
    
    
    2004Mortgage note, monthly payments of $3,145 plus
variable rate interest through November 2017 (rate
at March 31, 20054.1%)
    
    $
    482,467
    
    
    $
    493,327Note payable, monthly payments of $571 plus fixed
rate interest through August 2008 (rate until
August 20084.4%)
    
    
    23,404
    
    
    
    28,694505,871
    
    
    
    522,021Less current maturities
    
    
    44,606
    
    
    
    42,301$
    461,265
    
    
    $
    479,720
 Future approximate payments of long-term debt for the years ended March 31, are as follows: 2006
    
    $
    44,6062007
    
    
    44,6062008
    
    
    44,6062009
    
    
    40,5952010
    
    
        37,738Thereafter
    
    
        293,720$
    505,871
 In March 2005, the Company entered into a business loan agreement with Venture Bank, pursuant to
which it may borrow up to $500,000 on a revolving basis. All amounts which the bank advances to
the Company are due in March 2006, unless the bank renews the agreement. Amounts advanced to the
Company accrue interest at a variable rate of 1% in excess of the published prime rate in the Wall
Street Journal, with a minimum rate of 6% per annum. The Company is obligated to pay interest
monthly on the outstanding principal balance. Advances under this agreement are secured by
substantially all of the Companys assets. At March 31, 2005, the Company had no outstanding
balances under the agreement.  3.
    
    Shareholders Equity Stock Options.The Company has reserved 1,928,811 shares of our common stock for issuance to
employees, directors, consultants, and independent contractors. Outstanding options generally
expire five years from date of grant and vest at varying rates ranging up to five years. On
January 2005, the Company granted 500,000 options to purchase common stock to certain officers with
an expiration period of ten years from date of grant. Options are granted at the discretion of the
directors and are exercisable in amounts equal to or greater than the fair market value of the
Companys common stock at date of grant. The plans provide for the exercise of options during a
limited period following termination of employment, death or disability. F-13




---



##### 



Stock option activity under these plans is summarized as follows: WeightedaverageShares
    
    
    exercise priceOutstanding
    
    
    per shareBalance at March 31, 2003
    
    
    841,911
    
    
    $
    2.87Granted
    
    
    90,000
    
    
    
    2.59Exercised
    
    
    (23,931
    )
    
    
    1.57Cancelled
    
    
    (53,627
    )
    
    
    4.12Balance at March 31, 2004
    
    
    854,353
    
    
    
    2.80Granted
    
    
    1,047,400
    
    
    
    5.24Exercised
    
    
    (38,300
    )
    
    
    1.78Cancelled
    
    
    (142,594
    )
    
    
    7.16Balance at March 31, 2005
    
    
    1,720,859
    
    
    $
    3.96
 The following table summarizes information concerning currently outstanding and exercisable options
by price. WeightedaverageNumber
    
    
    remainingof shares
    
    
    life in
    
    
    NumberPrice
    
    
    outstanding
    
    
    years
    
    
    exercisable$
    0.90
    
    
    
    1,200
    
    
    
    2.58
    
    
    
    4001.10
    
    
    
    396,400
    
    
    
    2.42
    
    
    
    237,8002.25
    
    
    
    30,000
    
    
    
    8.00
    
    
    
    12,0002.40
    
    
    
    144,192
    
    
    
    1.50
    
    
    
    144,1922.80
    
    
    
    50,000
    
    
    
    3.00
    
    
    
    50,0003.50
    
    
    
    10,000
    
    
    
    3.50
    
    
    
    10,0003.75
    
    
    
    5,000
    
    
    
    4.25
    
    
    
    5,0004.10
    
    
    
    500
    
    
    
    4.83
    
    
    
    2505.19
    
    
    
    500,000
    
    
    
    9.75
    
    
    
    150,0005.25
    
    
    
    3,333
    
    
    
    0.33
    
    
    
    3,3335.30
    
    
    
    541,900
    
    
    
    4.75
    
    
    
    270,9506.75
    
    
    
    35,000
    
    
    
    0.30
    
    
    
    35,00010.50
    
    
    
    3,334
    
    
    
    0.67
    
    
    
    3,3341,720,859
    
    
    
    
    
    
    
    922,259
 Warrants.In July 2002, the Company conducted a rights offering pursuant to which its stockholders
purchased certain units consisting of shares of the Companys common stock and common stock
purchase warrants exercisable for two years at $2.00 per share. However, the Company suspended the
exercise of the warrants when it delayed the filing of its annual report on Form 10-KSB for the
fiscal year ended March 31, 2004. As a result, 706,218 of the warrants lapsed unexercised at July
31, 2004. As part of a consulting agreement with CCRI Corporation (CCRI), the Company issued a warrant to
purchase 50,000 shares of common stock at a price of $3.00 per share on April 1, 2003, and an
additional warrant to purchase 50,000 shares at a price of $5.00 on November 2, 2003. At March 31,
2005, all of these warrants were outstanding and expire five years from date of issue. F-14




---



##### 



Other Comprehensive Loss.Other comprehensive loss consists of accumulated translation adjustment,
and accumulated additional pension liability as follows: Accumulated
    
    
    Accumulatedtranslation
    
    
    additional pensionadjustment
    
    
    liability
    
    
    TotalBalance at March 31, 2003
    
    $
    (454,401
    )
    
    $
    (49,434
    )
    
    $
    (503,835
    )Translation adjustment
    
    
    239,323
    
    
    
    
    
    
    
    239,323Additional pension liability
    
    
    
    
    
    
    (51,061
    )
    
    
    (51,061
    )Balance at March 31, 2004
    
    
    (215,078
    )
    
    
    (100,495
    )
    
    
    (315,573
    )Translation adjustment
    
    
    150,505
    
    
    
    
    
    
    
    150,505Additional pension liability
    
    
    
    
    
    
    34,711
    
    
    
    34,711Balance at March 31, 2005
    
    $
    (64,573
    )
    
    $
    (65,784
    )
    
    $
    (130,357
    )
 Consulting Agreements.On April 1, 2003, the Company executed a consulting agreement with CCRI to
provide investor relations and development services. The Company pays CCRI a monthly fee of $4,000
plus expenses. CCRI received 35,000 shares of fully vested restricted common stock, and vested
warrants to purchase 50,000 shares of common stock at an exercise price of $3.00 per share, and
received vested warrants to purchase 50,000 shares of common stock at an exercise price of $5.00
per share on November 2, 2003. The Company recorded the fair value of the common stock and the
warrants aggregating $212,974, as of April 1, 2003, in shareholders equity as additional paid-in
capital and deferred compensation, which was fully amortized as of April 30, 2003. The balance was
amortized over the 1-year service period. Also, the Company recorded the fair value of the
additional warrants to acquire 50,000 of common stock aggregating $144,200, as of November 2, 2003,
as deferred compensation in shareholders equity. This balance was amortized over the remaining 5
months of the 1-year service period. Stock-based compensation expense for CCRI agreement for the
year ended March 31, 2004 aggregated $357,174. On April 1, 2004, the Company extended the
agreement for one year. The monthly fee of $4,000 plus expenses remained the same. On April 1, 2003, the Company executed a consulting agreement with Executive Advisory Group (EAG)
to provide general management advice and guidance as well as strategic and tactical planning
services. Mr. Sam B. Humphries, at that time a director of the Company, was President of EAG. The
Company paid EAG a monthly fee of $6,000 plus expenses and granted to EAG stock options to purchase
50,000 shares of common stock, exercisable at $2.80 per share. The Company fully amortized the
fair value of the stock options in fiscal 2004. Stock-based compensation expense for the EAG
agreement for the year ended March 31, 2004 aggregated $115,839. On April 1, 2004, the Company
extended the agreement. The monthly fee of $6,000 plus expenses remained the same. This agreement
was terminated on January 1, 2005, the date Mr. Humphries was appointed President and Chief
Executive Officer of the Company. The options and warrants issued to EAG and CCRI to acquire an aggregate of 150,000 shares of common
stock were fully vested upon issuance. The fair value of these instruments was determined using
the Black-Scholes options pricing model with the following variables: April 1, 2003
    
    
    November 2, 2003Expected dividend yield
    
    
    0.00
    %
    
    
    0.00
    %Risk-free interest rate
    
    
    2.93
    %
    
    
    3.29
    %Expected volatility
    
    
    118
    %
    
    
    113
    %Expected life, in years
    
    
    5.00
    
    
    
    5.00
  4.
    
    Commitments and Contingencies Royalties.The Company has received an absolute assignment of a patent relating to the
Macroplastique Implantation System from a British surgeon, in return for a royalty for each unit
sold during the life of the patent. The aggregate amount of royalty expense recognized by the
Company pursuant to such royalty agreement during the fiscal years ended March 31, 2005 and 2004
was $18,042 and $13,802, respectively. Under the terms of an agreement with former officers and directors of the Company, the Company pays
royalties equal to between three percent and five percent of the net sales of certain products,
subject to a specified monthly minimum of $4,500. The royalties payable under this agreement will
continue until the patent referenced in the agreement expires in F-15




---



##### 



2010. Total expense recognized under the agreement was $181,598 and $162,047 for the fiscal years
ended March 31, 2005 and 2004, respectively. In 1992, the Company agreed to settle alleged patent infringement claims by Collagen Corporation
(now Inamed Corporation). Under the settlement agreement, the Company pays Collagen a royalty of
5% of net sales in the U.S. of Macroplastique products with a minimum of $50,000 per year. The
agreement is through May 1, 2006. In April 2005, the Company entered into an exclusive manufacturing and distribution agreement with
CystoMedix for the Urgent PC product. The Company paid CystoMedix an initial royalty payment of
$225,000 and is paying an additional $250,000 in 12 monthly installments of $20,833. The Company
will also pay CystoMedix a 7% royalty on product sales. However, the 7% royalty is first offset
against the monthly royalty installments. Option for Asset Acquisition. CystoMedix has granted the Company an exclusive option to acquire
CystoMedixs assets. The option price is $3,485,000, reduced by up to $50,000 of liabilities
assumed by the Company. However, the $3,485,000 amount used to compute the option price will
increase at a rate of 10% per year after April 2007. The option price is payable in shares of the
Companys common stock valued at the average of the closing bid price of the Companys shares for
the 20 trading days prior to its exercise of the option. The Company may exercise the option
between January 2006 and June 2008. If the Company exercises the option, the Company will also
assume up to $1.4 million of bridge loan advances made to CystoMedix by its Chairman. The Company
would repay up to $1.1 million of the bridge loan advances at closing and would issue its common
stock for the balance of the bridge loan based on the above option price. The Company also has
certain rights of first refusal to acquire CystoMedixs assets in the event CystoMedix receives a
third party offer in advance of any exercise of the Companys option. Purchase Requirements. The Company has agreed to purchase its entire requirement of product
components from CL Medical. Contingent on U.S. FDA clearance of the product for U.S. sale, the
Company also has specified minimum purchase requirements of $240,000 of units in the first year
thereafter, increasing to approximately $1.9 million of units over a five year period, subject
to periodic adjustment based on the value of the Euro. Operating Lease Commitments.The Company leases office, warehouse, and production space under
three operating leases and leases various automobiles for its European employees. At March 31,
2005, minimum lease payments under noncancelable operating leases with an initial term in excess of
one year for the ensuing years ending March 31 are as follows: 2006
        
        $
        315,1952007
        
        
        94,5882008
        
        
        28,6872009
        
        
        4,635$
        443,105
 Total rent expense paid for operating leases was $386,614 and $383,624 in fiscal 2005 and 2004,
respectively. Employment Agreements.The Company entered into employment agreements with certain officers, the
terms of which, among other things, specify a base salary subject to annual adjustment by mutual
agreement of the parties, and a severance payment to the employee upon employment termination
without cause. Any severance amounts payable under the agreement shall be limited to the
employees base salary for not less than four months and not longer than twelve months after
employment termination, depending on the employees years of service. Contemporaneously with the
execution of the employment agreement, each of the officers executed an Employee Confidentiality,
Inventions, Non-Solicitation, and Non-Compete Agreement, certain terms of which specify the
employee shall not disclose confidential information, shall assign to the Company without charge
all intellectual property relating to the Companys business which is created or conceived during
the term of employment, shall not encourage employees to leave the employment of the Company for
any reason and shall not compete with the Company during the term of employment and for a period of
eighteen months thereafter.  5.
    
    Savings and Retirement Plans The Company sponsors various plans for eligible employees in the United States, the United Kingdom
(UK), and The Netherlands. The Companys retirement savings plan in the United States conforms to
Section 401(k) of the Internal Revenue Code and participation is available to substantially all
employees. The Company may also make discretionary contributions ratably to all eligible
employees. The Companys contributions in fiscal 2005 and 2004 in the United States were made in
the form of Company common stock and became fully vested when made. The total contribution expense
associated with these plans in the United States was $32,481 and $30,156 for the fiscal years ended
March 31, 2005 and 2004, respectively. F-16




---



##### 



The Companys international subsidiaries have defined benefit retirement plans for eligible
employees. These plans provide benefits based on the employees years of service and compensation
during the years immediately preceding retirement, termination, disability, or death, as defined in
the plans. The Companys UK subsidiary defined benefit plan was frozen on December 31, 2004. On
March 10, 2005, the UK subsidiary established a defined contribution plan. The cost for the Companys plans in The Netherlands and United Kingdom include the following
components for the years ended March 31, 2005 and 2004: 2005
    
    
    2004Gross service cost, net of employee contribution
    
    $
    141,745
    
    
    $
    102,564Interest cost
    
    
    89,031
    
    
    
    71,165Expected return on assets
    
    
    (56,001
    )
    
    
    (44,102
    )Amortization
    
    
    56,394
    
    
    
    62,606Net periodic retirement cost
    
    $
    231,169
    
    
    $
    192,233
 The following summarizes the change in benefit obligation and the change in plan assets for the
years ended March 31, 2005 and 2004: 2005
    
    
    2004Projected benefit obligation, beginning of year
    
    $
    1,503,534
    
    
    $
    1,126,749Service cost
    
    
    141,745
    
    
    
    102,564Interest cost
    
    
    89,031
    
    
    
    71,165Other
    
    
    (11,759
    )
    
    
    18,792Actuarial result
    
    
    254,618
    
    
    
    18,387Foreign currency translation
    
    
    84,867
    
    
    
    165,877Projected benefit obligation, end of year
    
    $
    2,062,036
    
    
    $
    1,503,534Plan assets, beginning of year
    
    $
    998,620
    
    
    $
    713,438Contributions to plan
    
    
    210,124
    
    
    
    198,500Benefits paid
    
    
    (9,415
    )
    
    
    (5,586
    )Actual return on assets
    
    
    (3,588
    )
    
    
    (17,767
    )Foreign currency translation
    
    
    50,661
    
    
    
    110,035Plan assets, end of year
    
    $
    1,246,402
    
    
    $
    998,620
 The funded status of the Companys pension retirement plans at March 31, 2005 and 2004, are as
follows: 2005
    
    
    2004Funded status
    
    $
    (815,634
    )
    
    $
    (504,914
    )Unrecognized net loss
    
    
    638,684
    
    
    
    296,909Minimum pension liability
    
    
    (103,122
    )
    
    
    (153,525
    )Accrued pension liability
    
    $
    (280,072
    )
    
    $
    (361,530
    )
 F-17




---



##### 



Major assumptions used in the above calculations include: 2005
    
    
    2004Discount rate
    
    
    4.50-5.50
    %
    
    
    5.25-5.75
    %Expected return on assets
    
    
    4.00-5.00
    %
    
    
    4.50-5.00
    %Expected rate of increase in future compensationgeneral
    
    
    3
    %
    
    
    3
    %individual
    
    
    0%-3
    %
    
    
    0%-3
    %
  6.
    
    Income Taxes The components of income tax expense for the years ended March 31, 2005 and 2004, consist of the
following: 2005
    
    
    2004Income tax provision:Current:U.S. and state
    
    $
    
    
    
    $
    Foreign
    
    
    79,585
    
    
    
    232,025Deferred:U.S. and state
    
    
    
    
    
    
    Foreign
    
    
    11,918
    
    
    
    (2,840
    )Total income tax expense
    
    $
    91,503
    
    
    $
    229,185
 Effective tax rates differ from statutory federal income tax rates for the year ended March 31,
2005 and 2004 as follows: 2005
    
    
    2004Statutory federal income tax benefit
    
    $
    (589,820
    )
    
    $
    (435,917
    )State tax benefit
    
    
    
    
    
    
    (56,658
    )Valuation allowance increase
    
    
    792,685
    
    
    
    715,023UK temporary differences not previously
tax effected
    
    
    (109,983
    )
    
    
    Other
    
    
    (1,379
    )
    
    
    6,737$
    91,503
    
    
    $
    229,185
 Deferred taxes as of March 31, 2005 and 2004 consist of the following: 2005
    
    
    2004Deferred tax assets:Pension liability
    
    $
    110,405
    
    
    $
    133,916Other reserves and accruals
    
    
    70,619
    
    
    
    35,000Deferred profit on intercompany sales
    
    
    186,166
    
    
    
    166,000Net operating loss carryforwards
    
    
    4,018,044
    
    
    
    3,280,0004,385,234
    
    
    
    3,614,916Less valuation allowance
    
    
    (4,282,159
    )
    
    
    (3,491,023
    )$
    103,075
    
    
    $
    123,893
 F-18




---



##### 



At March 31, 2005, the Company had U.S. net operating loss carryforwards (NOL) of approximately
$10,857,000 for U.S. income tax purposes, which expire in 2012 through 2023, and NOLs in the U.K.
of $148,471, which can be carried forward indefinitely. U.S. net operating loss carryforwards
cannot be used to offset taxable income in foreign jurisdictions. In addition, U.S. tax rules
impose limitations on the use of net operating losses following certain changes in ownership. Such
a change in ownership may limit the amount of these benefits that would be available to offset
future taxable income each year, starting with the year of ownership change. A valuation allowance is provided when it is more likely than not a portion of the deferred tax
assets will not be realized. The Company has established a valuation allowance for U.S. and
certain foreign deferred tax assets due to the uncertainty that enough income will be generated in
those taxing jurisdictions to utilize the assets. Therefore, the Company has not reflected any
benefit of such net operating loss carryforwards in the accompanying financial statements. The
deferred tax asset increased by $770,000 and $715,000, respectively in fiscal 2005 and 2004. The
related valuation allowance increased by $791,000 and $715,000, respectively, in fiscal 2005 and
2004.  7.
    
    Business Segment Information The Company sells Macroplastique®, a soft tissue bulking material, for the treatment of urinary
incontinence. In addition, the Company markets its soft tissue bulking material for additional
indications, including for the treatment of vocal cord rehabilitation, fecal incontinence and soft
tissue facial augmentation. At this time, the Company makes sales only outside the United States.
The Companys current objectives are to focus on obtaining U.S. regulatory approvals for
Macroplastique and the I-Stop sling for treating stress urinary incontinence, or SUI, on obtaining
U.S. regulatory approvals for the Urgent PC device for treating overactive bladder and on
increasing market penetration and sales of Macroplastique for the treatment of SUI and
vesicoureteral reflux and of PTQ Implants for the treatment of fecal incontinence in markets
outside the U.S. The Company anticipates initiating marketing in the U.S. once it obtains the
requisite approvals. The Macroplastique product line accounted for 76% and 81%, respectively, of
total net sales during fiscal 2005 and 2004. In addition, the Company sells specialized wound care
products in The Netherlands and United Kingdom as a distributor. Based upon the above, the Company operates in only one reportable segment consisting of medical
products primarily for the urology market. Information regarding operations in different geographies for the years ended March 31, 2005 and
2004 is as follows: AdjustmentsUnited
    
    
    The
    
    
    United
    
    
    andStates
    
    
    Netherlands
    
    
    Kingdom
    
    
    eliminations
    
    
    ConsolidatedFiscal
2005Sales to customers
    
    $
    
    
    
    $
    5,612,250
    
    
    $
    1,703,365
    
    
    $
    (657,889
    )
    
    $
    6,657,726Income tax expense
    
    
    
    
    
    
    91,503
    
    
    
    
    
    
    
    
    
    
    
    91,503Net income (loss)
    
    
    (1,855,416
    )
    
    
    153,977
    
    
    
    21,990
    
    
    
    (55,316
    )
    
    
    (1,734,765
    )Long-lived assets
at March 31, 2005
    
    
    277,780
    
    
    
    791,121
    
    
    
    10,452
    
    
    
    
    
    
    
    1,079,353Fiscal 2004Sales to customers
    
    
    
    
    
    
    4,776,292
    
    
    
    1,524,953
    
    
    
    (586,349
    )
    
    
    5,714,896Income tax expense
    
    
    
    
    
    
    220,672
    
    
    
    
    
    
    
    8,513
    
    
    
    229,185Net income (loss)
    
    
    (1,808,753
    )
    
    
    448,497
    
    
    
    (26,970
    )
    
    
    (124,067
    )
    
    
    (1,511,293
    )Long-lived assets
at March 31, 2004
    
    
    314,514
    
    
    
    788,343
    
    
    
    19,754
    
    
    
    
    
    
    
    1,122,611
  8.
    
    Subsequent Events Warrants.As a result of the Companys suspension of the exercise of the 706,218 warrants
originally issued in July 2002, in April 2005, the Company granted a like number of new common
stock purchase warrants to the holders of the expired warrants. The new warrants will be
exercisable at $2.00 per share for 45 days after the effective date of a new registration statement
that the Company currently plans to file covering the shares underlying these warrants. In April
2005, the Company recognized a liability of $1.4 million associated with the grant of these new
warrants. The Company will report in earnings any subsequent change in the fair value of this
liability. F-19




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##### 



Private Placement.In April 2005, we conducted a private placement of common stock in which we
sold 2,147,142 shares of our common stock at a price per share of $3.50, together with warrants to
purchase 1,180,928 shares of common stock, for an aggregate purchase price of approximately $7.5
million. The warrants are exercisable for five years at an exercise price of $4.75 per share. Legal Proceedings. The Company recently terminated
the services of the former
Vice President of Research and Development and Managing Director of its United Kingdom subsidiary.
Although the individual has commenced no litigation against the Company, he has demanded up to 400,000 (approximately $500,000)
in severance compensation under Dutch law. The Company has rejected this claim and intends to
defend against it if the individual commences suit. Dutch Pension Plan. The Company closed its Dutch defined benefit plan for new employees effective
April 2005. As of that date, the Dutch subsidiary established a defined contribution plan. F-20