TABLE OF CONTENTS




|                                           |                                                                          |  |  |  |  |  |  | 
|------------------------------------------ | ------------------------------------------------------------------------ |  |  |  |  |  |  | 
|Independent Auditors' Report              
|Financial Statements:                     
|                                           | Consolidated Balance Sheets                                             
|                                           | Consolidated Statements of Operations                                   
|                                           | Consolidated Statements of Shareholders' Equity
  and Comprehensive Loss
|                                           | Consolidated Statements of Cash Flows                                   
|Notes to Consolidated Financial Statements
|Financial Statements                      
|Subsidiaries                              



---



##### Table of Contents



Exhibit 13

UROPLASTY, INC. AND SUBSIDIARIES

Consolidated Financial Statements
March 31, 2001 and 2000

TABLE OF CONTENTS

|                                                                          |  |           
|------------------------------------------------------------------------- |  | ----------
|                                                                          |  | Page(s)   
|Independent Auditors Report                                              |  | F-2       
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|Financial Statements:                                                    
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|Consolidated Balance Sheets                                               |  | F-3  F-4 
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|Consolidated Statements of Operations                                     |  | F-5       
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|Consolidated
Statements of Shareholders Equity and
   Comprehensive Loss |  | F-6       
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|Consolidated Statements of Cash Flows                                     |  | F-7       
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|Notes to Consolidated Financial Statements                                |  | F-8  F-17

F-1



---



##### Table of Contents






INDEPENDENT AUDITORS REPORT

The Board of Directors and Shareholders
Uroplasty, Inc.:

We have audited the accompanying consolidated balance sheets of Uroplasty, Inc.
and subsidiaries as of March 31, 2001 and 2000, and the related consolidated
statements of operations, shareholders equity and comprehensive loss, and cash
flows for the years 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
audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Uroplasty, Inc. and
subsidiaries as of March 31, 2001 and 2000, and the results of their operations
and their cash flows for the years then ended in conformity with accounting
principles generally accepted in the United States of America.

May 2,
2001                                     
          
          
          
          KPMG LLP



F-2



---



##### Table of Contents









UROPLASTY, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

March 31, 2001 and 2000

|       |                                                                                             |                           |   |           |           |      |   |           |           | 
|------ | ------------------------------------------------------------------------------------------- | ------------------------- | - | --------- | --------- | ---- | - | --------- | --------- | 
|       |                                                                                             |                           |   | 2001      |           | 2000
|       |                                                                                             |                           |   |           |           |     
|Assets
|       | Current assets:                                                                             |                           |   |           |           |      |   |           |          
|      
|      
|      
|      
|       |                                                                                             | Cash and cash equivalents |   | $         | 1,012,397 |      |   | $         | 1,553,093 | 
|      
|      
|      
|      
|       |                                                                                             | Marketable securities     |   |           |          |      |   |           | 750,000   | 
|      
|      
|      
|      
|       |                                                                                             | Accounts receivable, net  |   |           | 983,450   |      |   |           | 954,525   | 
|      
|      
|      
|      
|       |                                                                                             | Inventories               |   |           | 752,436   |      |   |           | 735,630   | 
|      
|      
|      
|      
|       |                                                                                             | Other                     |   |           | 258,997   |      |   |           | 400,283   | 
|       |                                                                                             |                           |   |           |           |      |   |          
|       | Total current assets                                                                        |                           |   | 3,007,280 |           |      |   | 4,393,531 |          
|      
|      
|      
|      
|       | Property, plant, and equipment, net                                                         |                           |   | 902,189   |           |      |   | 1,097,118 |          
|      
|      
|      
|      
|       | Intangible assets, net of accumulated
amortization of $145,021 in 2001
and $117,677 in 2000 |                           |   | 101,232   |           |      |   | 108,892   |          
|       |                                                                                             |                           |   |           |           |      |   |          
|       | Total assets                                                                                |                           | $ | 4,010,701 |           |      | $ | 5,599,541 |          
|       |                                                                                             |                           |   |           |           |      |   |          

F-3



---



##### Table of Contents



UROPLASTY, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

March 31, 2001 and 2000

|                                      |                                                                                   |                                                                                                                                                           |                                |           |            |         |      |           |            |         | 
|------------------------------------- | --------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------ | --------- | ---------- | ------- | ---- | --------- | ---------- | ------- | 
|                                      |                                                                                   |                                                                                                                                                           |                                |           | 2001       |         | 2000
|                                      |                                                                                   |                                                                                                                                                           |                                |           |            |         |     
|Liabilities and
Shareholders  Equity
|                                      | Current liabilities:                                                             
|                                     
|                                     
|                                     
|                                     
|                                      |                                                                                   | Accounts payable                                                                                                                                          |                                | $         | 213,288    |         |      | $         | 348,176    |        
|                                     
|                                     
|                                     
|                                     
|                                      |                                                                                   | Accrued liabilities:                                                                                                                                     
|                                     
|                                     
|                                     
|                                     
|                                      |                                                                                   |                                                                                                                                                           | Compensation and payroll taxes |           |            | 141,708 |      |           |            | 149,571 | 
|                                     
|                                     
|                                     
|                                     
|                                      |                                                                                   |                                                                                                                                                           | Foreign sales tax              |           |            | 55,502  |      |           |            | 11,776  | 
|                                     
|                                     
|                                     
|                                     
|                                      |                                                                                   |                                                                                                                                                           | Royalties                      |           |            | 30,960  |      |           |            | 29,200  | 
|                                     
|                                     
|                                     
|                                     
|                                      |                                                                                   |                                                                                                                                                           | Other                          |           |            | 365,827 |      |           |            | 237,604 | 
|                                     
|                                     
|                                     
|                                     
|                                      |                                                                                   | Current maturities  long-term debt                                                                                                                       |                                |           | 46,557     |         |      |           | 49,390     |        
|                                      |                                                                                   |                                                                                                                                                           |                                |           |            |         |      |          
|                                      | Total current liabilities                                                         |                                                                                                                                                           |                                | 853,842   |            |         |      | 825,717   |           
|                                     
|                                     
|                                     
|                                     
|                                      | Long-term debt  less current maturities:                                        
|                                     
|                                     
|                                     
|                                     
|                                      |                                                                                   | Notes payable                                                                                                                                             |                                |           | 431,381    |         |      |           | 504,087    |        
|                                     
|                                     
|                                     
|                                     
|                                      |                                                                                   | Capital lease obligations                                                                                                                                 |                                |           | 6,954      |         |      |           | 24,721     |        
|                                      |                                                                                   |                                                                                                                                                           |                                |           |            |         |      |          
|                                      | Total liabilities                                                                 |                                                                                                                                                           |                                | 1,292,177 |            |         |      | 1,354,525 |           
|                                      |                                                                                   |                                                                                                                                                           |                                |           |            |         |      |          
|                                      | Shareholders equity:                                                            
|                                     
|                                     
|                                     
|                                     
|                                      |                                                                                   | Common stock $.01 par value; 20,000,000
shares authorized, 6,041,071 and
5,975,271 shares issued and
outstanding at March 31, 2001 and
2000, respectively |                                |           | 60,411     |         |      |           | 59,753     |        
|                                     
|                                     
|                                     
|                                     
|                                      |                                                                                   | Additional paid-in capital                                                                                                                                |                                |           | 5,999,398  |         |      |           | 5,809,977  |        
|                                     
|                                     
|                                     
|                                     
|                                      |                                                                                   | Accumulated deficit                                                                                                                                       |                                |           | (2,954,456 | )       |      |           | (1,273,557 | )      
|                                     
|                                     
|                                     
|                                     
|                                      |                                                                                   | Accumulated other comprehensive loss                                                                                                                      |                                |           | (386,829   | )       |      |           | (351,157   | )      
|                                      |                                                                                   |                                                                                                                                                           |                                |           |            |         |      |          
|                                      | Total shareholders equity                                                        |                                                                                                                                                           |                                | 2,718,524 |            |         |      | 4,245,016 |           
|                                      |                                                                                   |                                                                                                                                                           |                                |           |            |         |      |          
|                                      | Commitments and
contingencies (note 6)
Total liabilities and shareholders equity |                                                                                                                                                           | $                              | 4,010,701 |            |         | $    | 5,599,541 |           
|                                      |                                                                                   |                                                                                                                                                           |                                |           |            |         |      |          

See accompanying notes to consolidated financial statements.

F-4



---



##### Table of Contents






UROPLASTY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

Years ended March 31, 2001 and 2000

|                                               |                                |   |            |           |      |   |            |           |  
|---------------------------------------------- | ------------------------------ | - | ---------- | --------- | ---- | - | ---------- | --------- | -
|                                               |                                |   | 2001       |           | 2000
|                                               |                                |   |            |           |     
|Net sales                                      |                                | $ | 5,668,483  |           |      | $ | 5,560,019  |          
|                                              
|                                              
|                                              
|                                              
|Cost of goods sold                             |                                |   | 1,313,183  |           |      |   | 1,604,123  |          
|                                               |                                |   |            |           |      |   |            |          
|Gross profit                                   |                                |   | 4,355,300  |           |      |   | 3,955,896  |          
|                                              
|                                              
|                                              
|                                              
|Operating expenses                            
|                                               | General and administrative     |   |            | 1,389,943 |      |   |            | 1,491,529 |  
|                                              
|                                              
|                                              
|                                              
|                                               | Research and development       |   |            | 2,150,177 |      |   |            | 1,684,178 |  
|                                              
|                                              
|                                              
|                                              
|                                               | Selling and marketing          |   |            | 2,185,809 |      |   |            | 2,071,547 |  
|                                               |                                |   |            |           |      |   |            |          
|                                               |                                |   | 5,725,929  |           |      |   | 5,247,254  |          
|                                               |                                |   |            |           |      |   |            |          
|Operating loss                                 |                                |   | (1,370,629 | )         |      |   | (1,291,358 | )        
|                                               |                                |   |            |           |      |   |            |          
|Other income (expense)                        
|
|                                               | Interest income                |   |            | 54,617    |      |   |            | 122,825   |  
|                                              
|                                              
|                                              
|                                              
|                                               | Interest expense               |   |            | (27,335   | )    |   |            | (28,021   | )
|                                              
|                                              
|                                              
|                                              
|                                               | Foreign currency exchange loss |   |            | (336,958  | )    |   |            | (177,386  | )
|                                              
|                                              
|                                              
|                                              
|                                               | Other                          |   |            | (594      | )    |   |            |          |  
|                                               |                                |   |            |           |      |   |            |          
|                                               |                                |   | (310,270   | )         |      |   | (82,582    | )        
|                                               |                                |   |            |           |      |   |            |          
|Net loss before income taxes                   |                                |   | (1,680,899 | )         |      |   | (1,373,940 | )        
|                                              
|                                              
|                                              
|                                              
|Income tax benefit                             |                                |   |           |           |      |   | (25,106    | )        
|                                               |                                |   |            |           |      |   |            |          
|Net loss                                       |                                | $ | (1,680,899 | )         |      | $ | (1,348,834 | )        
|                                               |                                |   |            |           |      |   |            |          
|Net loss per common share                      |                                | $ | (0.28      | )         |      | $ | (0.23      | )        
|                                              
|                                              
|                                              
|                                              
|Net loss per common and potential common share |                                | $ | (0.28      | )         |      | $ | (0.23      | )        
|                                              
|                                              
|                                              
|                                              
|Weighted average common shares outstanding:   
|                                              
|                                              
|                                              
|                                              
|                                               | Basic                          |   |            | 5,990,051 |      |   |            | 5,926,936 |  
|                                              
|                                              
|                                              
|                                              
|                                               | Diluted                        |   |            | 5,990,051 |      |   |            | 5,926,936 |  

See accompanying notes to consolidated financial statements.

F-5



---



##### Table of Contents






UROPLASTY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY AND COMPREHENSIVE LOSS

Years ended March 31, 2001 and 2000

|                                                |                          |  |              |  |              |   |         |  |              |   |            |  |          |   |            |   | 
|----------------------------------------------- | ------------------------ |  | ------------ |  | ------------ | - | ------- |  | ------------ | - | ---------- |  | -------- | - | ---------- | - | 
|                                                |                          |  |              |  |              |   |         |  |              |   |            |  |          |   | Retained  
|                                                |                          |  |              |  |              |   |         |  |              |   | Additional |  | Earnings
|                                                |                          |  | Common Stock |  | Common Stock |   | Paid-in |  | (Accumulated
|                                                |                          |  | Shares       |  | Amount       |   | Capital |  | Deficit)    
|                                                |                          |  |              |  |              |   |         |  |             
|Balance at March 31, 1999                       |                          |  | 5,923,371    |  |              | $ | 59,234  |  |              | $ | 5,784,045  |  |          | $ | 75,277     |  
|                                               
|                                               
|                                               
|                                               
|Exercise of stock options                       |                          |  | 51,900       |  |              |   | 519     |  |              |   | 25,932     |  |          |   |           |  
|                                               
|                                               
|                                               
|                                               
|Payment received on note
receivable             |                          |  |             |  |              |   |        |  |              |   |           |  |          |   |           |  
|                                               
|                                               
|                                               
|                                               
|Net loss                                        |                          |  |             |  |              |   |        |  |              |   |           |  |          |   | (1,348,834 | )
|                                               
|                                               
|                                               
|                                               
|Unrealized gain on
marketable securities        |                          |  |             |  |              |   |        |  |              |   |           |  |          |   |           |  
|                                               
|                                               
|                                               
|                                               
|Translation adjustment                          |                          |  |             |  |              |   |        |  |              |   |           |  |          |   |           |  
|                                               
|                                               
|                                               
|                                               
|                                                |                          |  |              |  |              |   |         |  |              |   |            |  |          |   |            |  
|                                               
|                                               
|                                               
|                                               
|                                                | Total comprehensive loss |  |              |  |              |   |         |  |              |   |            |  |          |   |            |   | 
|                                                |                          |  |              |  |              |   |         |  |              |   |            |  |          |   |            |  
|Balance at March 31, 2000                       |                          |  | 5,975,271    |  |              |   | 59,753  |  |              |   | 5,809,977  |  |          |   | (1,273,557 | )
|                                               
|                                               
|                                               
|                                               
|Exercise of stock options                       |                          |  | 65,800       |  |              |   | 658     |  |              |   | 32,242     |  |          |   |           |  
|                                               
|                                               
|                                               
|                                               
|Stock based consulting
and compensation expense |                          |  |             |  |              |   |        |  |              |   | 157,179    |  |          |   |           |  
|                                               
|                                               
|                                               
|                                               
|Net loss                                        |                          |  |             |  |              |   |        |  |              |   |           |  |          |   | (1,680,899 | )
|                                               
|                                               
|                                               
|                                               
|Translation adjustment                          |                          |  |             |  |              |   |        |  |              |   |           |  |          |   |           |  
|                                               
|                                               
|                                               
|                                               
|                                                |                          |  |              |  |              |   |         |  |              |   |            |  |          |   |            |  
|                                               
|                                               
|                                               
|                                               
|                                                | Total comprehensive loss |  |              |  |              |   |         |  |              |   |            |  |          |   |            |   | 
|                                                |                          |  |              |  |              |   |         |  |              |   |            |  |          |   |            |  
|Balance at March 31, 2001                       |                          |  | 6,041,071    |  |              | $ | 60,411  |  |              | $ | 5,999,398  |  |          | $ | (2,954,456 | )
|                                                |                          |  |              |  |              |   |         |  |              |   |            |  |          |   |            |  

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                                                |                          |   |             |   |               |   |               |   |  |   |            |            |  
|----------------------------------------------- | ------------------------ | - | ----------- | - | ------------- | - | ------------- | - |  | - | ---------- | ---------- | -
|                                                |                          |   |             |   |               |   | Accumulated  
|                                                |                          |   | Note        |   | Other         |   | Total        
|                                                |                          |   | Receivable  |   | Comprehensive |   | Shareholders'
|                                                |                          |   | Shareholder |   | Loss          |   | Equity       
|                                                |                          |   |             |   |               |   |              
|Balance at March 31, 1999                       |                          | $ | (5,000      | ) |               | $ | (196,827      | ) |  | $ | 5,716,729  |           
|                                               
|                                               
|                                               
|                                               
|Exercise of stock options                       |                          |   |            |   |               |   |              |   |  |   | 26,451     |           
|                                               
|                                               
|                                               
|                                               
|Payment received on note
receivable             |                          |   | 5,000       |   |               |   |              |   |  |   | 5,000      |           
|                                               
|                                               
|                                               
|                                               
|Net loss                                        |                          |   |            |   |               |   |              |   |  |   | (1,348,834 | )         
|                                               
|                                               
|                                               
|                                               
|Unrealized gain on
marketable securities        |                          |   |            |   |               |   | 4,664         | ) |  |   | 4,664      |           
|                                               
|                                               
|                                               
|                                               
|Translation adjustment                          |                          |   |            |   |               |   | (158,994      | ) |  |   | (158,994   | )         
|                                                |                          |   |             |   |               |   |               |   |  |   |            |           
|                                                | Total comprehensive loss |   |             |   |               |   |               |   |  |   |            | (1,503,164 | )
|                                                |                          |   |             |   |               |   |               |   |  |   |            |           
|Balance at March 31, 2000                       |                          |   |            |   |               |   | (351,157      | ) |  |   | 4,245,016  |           
|                                               
|                                               
|                                               
|                                               
|Exercise of stock options                       |                          |   |            |   |               |   |              |   |  |   | 32,900     |           
|                                               
|                                               
|                                               
|                                               
|Stock based consulting
and compensation expense |                          |   |            |   |               |   |              |   |  |   | 157,179    |           
|                                               
|                                               
|                                               
|                                               
|Net loss                                        |                          |   |            |   |               |   |              |   |  |   | (1,680,899 | )         
|                                               
|                                               
|                                               
|                                               
|Translation adjustment                          |                          |   |            |   |               |   | (35,672       | ) |  |   | (35,672    | )         
|                                                |                          |   |             |   |               |   |               |   |  |   |            |           
|                                                | Total comprehensive loss |   |             |   |               |   |               |   |  |   |            | (1,716,571 | )
|                                                |                          |   |             |   |               |   |               |   |  |   |            |           
|Balance at March 31, 2001                       |                          | $ |            |   |               | $ | (386,829      | ) |  | $ | 2,718,524  |           
|                                                |                          |   |             |   |               |   |               |   |  |   |            |           

See accompanying notes to consolidated financial statements.

F-6



---



##### Table of Contents






UROPLASTY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years ended March 31, 2001 and 2000

|                                                      |                                                                   |                                                                     |            |            |          |      |            |            |          |  
|----------------------------------------------------- | ----------------------------------------------------------------- | ------------------------------------------------------------------- | ---------- | ---------- | -------- | ---- | ---------- | ---------- | -------- | -
|                                                      |                                                                   |                                                                     |            | 2001       |          | 2000
|                                                      |                                                                   |                                                                     |            |            |          |     
|Cash flows from operating activities:                
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Net loss                                                          |                                                                     | $          | (1,680,899 | )        |      | $          | (1,348,834 | )       
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Adjustments to reconcile net loss to net cash used in operations:
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                                   | Depreciation and amortization                                       |            |            | 171,955  |      |            |            | 201,704  |  
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                                   | Amortization of premium and discounts on marketable
securities, net |            |            |         |      |            |            | 19,589   |  
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Stock-based consulting expense                                    |                                                                     |            | 37,186     |          |      |            |           |         
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Stock-based compensation expense                                  |                                                                     |            | 119,993    |          |      |            |           |         
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Changes in operating assets and liabilities:                     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                                   | Accounts receivable                                                 |            |            | (28,925  |      |            |            | (128,620 | )
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                                   | Inventories                                                         |            |            | (16,806  |      |            |            | 19,183   |  
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                                   | Other current assets                                                |            |            | 141,880  |      |            |            | (109,147 | )
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                                   | Accounts payable                                                    |            |            | (134,888 |      |            |            | 52,909   |  
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                                   | Accrued liabilities                                                 |            |            | 165,846  |      |            |            | 73,235   |  
|                                                      |                                                                   |                                                                     |            |            |          |      |            |           
|Net cash used in operating activities                 |                                                                   |                                                                     | (1,224,658 | )          |          |      | (1,219,981 | )         
|                                                      |                                                                   |                                                                     |            |            |          |      |            |           
|Cash flows from investing activities:                
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Payments for property, plant and equipment                        |                                                                     |            | (69,423    | )        |      |            | (205,037   | )       
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Proceeds from sale of property, plant and equipment               |                                                                     |            | 200        | )        |      |            | 10,440     |         
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Payments relating to intangible assets                            |                                                                     |            | (19,684    | )        |      |            | (23,693    | )       
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Redemption of marketable securities                               |                                                                     |            | 750,000    |          |      |            | 1,500,000  |         
|                                                      |                                                                   |                                                                     |            |            |          |      |            |           
|Net cash provided by investing activities             |                                                                   |                                                                     | 661,093    |            |          |      | 1,281,710  |           
|                                                      |                                                                   |                                                                     |            |            |          |      |            |           
|Cash flows from financing activities:                
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Repayment of long-term debt                                       |                                                                     |            | (47,328    | )        |      |            | (50,772    | )       
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Proceeds from issuance of notes payable                           |                                                                     |            |           |          |      |            | 23,923     |         
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Net proceeds from issuance of stock                               |                                                                     |            | 32,900     |          |      |            | 26,451     |         
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Payment received on note receivable                               |                                                                     |            |           |          |      |            | 5,000      |         
|                                                      |                                                                   |                                                                     |            |            |          |      |            |           
|Net cash (used in) provided by financing activities   |                                                                   |                                                                     | (14,428    | )          |          |      | 4,602      |           
|                                                      |                                                                   |                                                                     |            |            |          |      |            |           
|Effect of exchange rates on cash and cash equivalents |                                                                   |                                                                     | 37,297     |            |          |      | (102,222   | )         
|                                                      |                                                                   |                                                                     |            |            |          |      |            |           
|Net decrease in cash and cash equivalents             |                                                                   |                                                                     | (540,696   | )          |          |      | (35,891    | )         
|                                                     
|                                                     
|                                                     
|                                                     
|Cash and cash equivalents at beginning of year        |                                                                   |                                                                     | 1,553,093  |            |          |      | 1,588,984  |           
|                                                      |                                                                   |                                                                     |            |            |          |      |            |           
|Cash and cash equivalents at end of year              |                                                                   | $                                                                   | 1,012,397  |            |          | $    | 1,553,093  |           
|                                                      |                                                                   |                                                                     |            |            |          |      |            |           
|Supplemental disclosure of Cash Flow information:    
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Cash paid during the year for interest                            |                                                                     | $          | 30,663     |          |      | $          | 31,952     |         
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Cash paid during the year for income taxes                        |                                                                     |            |           |          |      |            | 54,325     |         

See accompanying notes to consolidated financial statements.

F-7



---



##### Table of Contents






UROPLASTY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2001 and 2000

1. Summary of Significant Accounting Policies

Nature of Business.Uroplasty, Inc. and subsidiaries (the Company or UPI)
is a manufacturer and distributor of urological and plastic surgery implantable
medical devices. The primary focus of the Companys business is the marketing
of an implantable device for the treatment of stress urinary incontinence and
vesicoureteral reflux. Currently, all sales of the Companys products are to
customers outside the United States by the Companys foreign subsidiaries.

The Company incurred losses of $1,680,899 and $1,348,834 and generated negative
cash flows from operating activities of $1,224,658 and $1,219,981 for the years
ended March 31, 2001 and 2000, respectively.

The Company is currently selling its products outside of the United States and
is undertaking clinical trials in the United States. Based on the Companys
current plans, it is anticipated that the Company will launch its products in
the US after obtaining FDA approval. Completing clinical trials and obtaining
FDA approval is a costly and time consuming process. To conserve cash the
Company reduced its work force during the year ended March 31, 2001.
Management believes that this work force reduction combined with the Companys
ability to manage cash, if required, through a less aggressive clinical trial
schedule should provide adequate cash flows to fund the Companys obligations
through mid 2002. In the event the Company were not to generate adequate cash
flows from operations or financing activities, the Companys US market launch
could be delayed. Ultimately, the Company will need to achieve profitability
and positive cash flows from operations or obtain additional debt or equity
financing to fund its operations.

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. The allowance for doubtful accounts was zero at both March 31,
2001 and 2000. The Company is in compliance with SAB No. 101 and its adoption
did not to have any impact on net loss or stockholders equity.

Restructuring Costs.In order to reduce costs, thirteen positions worldwide
were canceled in the fourth quarter of fiscal 2001, either by terminating
employment agreements or attrition. Two manufacturing positions were
eliminated, three administrative positions, four positions in research and
development and four sales and marketing positions. An increased focusing on
the Companys goals and increased efficiencies should streamline the
operations. No activities will be discontinued. The total severance payments
recorded in the fourth quarter fiscal 2001 for terminated employees were
$178,249. Substantially all termination obligations were paid in fiscal 2001.

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.

Marketable Securities.The Companys marketable debt securities are classified
as available-for-sale and are carried at fair value.

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. Due
to historical net losses of the Company a valuation allowance is established to
offset the net deferred tax asset.

Use of Estimates.The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
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.

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, 2001 and 2000:

F-8



---



##### Table of Contents



|                |  |      |         |      |  |   |         | 
|--------------- |  | ---- | ------- | ---- |  | - | ------- | 
|                |  | 2001 |         | 2000
|                |  |      |         |     
|Raw materials   |  | $    | 82,827  |      |  | $ | 127,169 | 
|               
|               
|               
|               
|Work-in-process |  |      | 337,077 |      |  |   | 392,341 | 
|               
|               
|               
|               
|Finished goods  |  |      | 332,532 |      |  |   | 216,120 | 
|                |  |      |         |      |  |   |         | 
|                |  | $    | 752,436 |      |  | $ | 735,630 | 
|                |  |      |         |      |  |   |         | 

Property, Plant, and Equipment.Property, plant, and equipment are carried at
cost and consist of the following at March 31, 2001 and 2000:

|                              |  |      |           |      |  |   |           |  
|----------------------------- |  | ---- | --------- | ---- |  | - | --------- | -
|                              |  | 2001 |           | 2000
|                              |  |      |           |     
|Land                          |  | $    | 107,136   |      |  | $ | 117,045   |  
|                             
|                             
|                             
|                             
|Building                      |  |      | 467,123   |      |  |   | 510,327   |  
|                             
|                             
|                             
|                             
|Equipment                     |  |      | 992,934   |      |  |   | 998,453   |  
|                              |  |      |           |      |  |   |           |  
|                              |  |      | 1,567,193 |      |  |   | 1,625,825 |  
|                             
|                             
|                             
|                             
|Less accumulated depreciation |  |      | (665,004  | )    |  |   | (528,707  | )
|                              |  |      |           |      |  |   |           |  
|                              |  | $    | 902,189   |      |  | $ | 1,097,118 |  
|                              |  |      |           |      |  |   |           |  

Depreciation is provided for using both straight-line and accelerated methods
over useful lives of four 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.

Research and Development.Research and development costs are expensed as
incurred and consist of the following for the years ended March 31, 2001 and
2000:

|                                     |  |      |           |      |  |   |           | 
|------------------------------------ |  | ---- | --------- | ---- |  | - | --------- | 
|                                     |  | 2001 |           | 2000
|                                     |  |      |           |     
|FDA regulatory costs                 |  | $    | 703,985   |      |  | $ | 589,348   | 
|                                    
|                                    
|                                    
|                                    
|Other research and development costs |  |      | 1,446,192 |      |  |   | 1,094,830 | 
|                                     |  |      |           |      |  |   |           | 
|                                     |  | $    | 2,150,177 |      |  | $ | 1,684,178 | 
|                                     |  |      |           |      |  |   |           | 

Foreign Currency Translation.The financial statements of the Companys
foreign subsidiaries were translated in accordance with the provisions of SFAS
No. 52 Foreign Currency Translation. Under this Statement, 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 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.

F-9



---



##### Table of Contents



Stock-Based Compensation.The Company applies the intrinsic-value method to
account for employee stock based compensation. As such, compensation expense,
if any, is recorded on the date of grant if the current market price of the
underlying stock exceeds the exercise price. For non-employees the Company uses
the fair-value method.

Reconciliation of Earnings and Share Amounts Used in EPS Calculation.Basic
loss per common share is calculated by dividing net loss by the
weighted-average common shares outstanding during the period. Diluted loss per
common share for the fiscal years ended March 31, 2001 and 2000 was calculated
using the treasury-stock method to compute the weighted average common stock
outstanding assuming the conversion of dilutive potential common shares.

|            |                |                  |  |              |            |            |  |              |   |              |  |   |            |  
|----------- | -------------- | ---------------- |  | ------------ | ---------- | ---------- |  | ------------ | - | ------------ |  | - | ---------- | -
|            |                |                  |  | Basic loss   |            |            |  |              |   | Diluted loss
|            |                |                  |  | per share    |            | Effect of  |  | per share   
|            |                |                  |  | to common    |            | dilutive   |  | to common   
|            |                |                  |  | shareholders |            | securities |  | shareholders
|            |                |                  |  |              |            |            |  |             
|Year ended:
|           
|           
|           
|           
|            | March 31, 2001
|           
|           
|           
|           
|            |                | Net loss         |  | $            | (1,680,899 | )          |  |              |  |              |  | $ | (1,680,899 | )
|           
|           
|           
|           
|            |                | Shares           |  |              | 5,990,051  |            |  |              |  |              |  |   | 5,990,051  |  
|            |                |                  |  |              |            |            |  |              |   |              |  |  
|            |                | Per share amount |  | $            | (0.28      | )          |  |              |  |              |  | $ | (0.28      | )
|           
|           
|           
|           
|Year ended:
|           
|           
|           
|           
|            | March 31, 2000
|           
|           
|           
|           
|            |                | Net loss         |  | $            | (1,348,834 | )          |  |              |  |              |  | $ | (1,348,834 | )
|           
|           
|           
|           
|            |                | Shares           |  |              | 5,926,936  |            |  |              |  |              |  |   | 5,926,936  |  
|            |                |                  |  |              |            |            |  |              |   |              |  |  
|            |                | Per share amount |  | $            | (0.23      | )          |  |              |  |              |  | $ | (0.23      | )

Options and warrants to purchase 1,199,200 shares of common stock at per share
amounts ranging from $.50 to $3.50 per share were outstanding during 2001 but
were not included in the computation of diluted earnings per share because net
loss realized during the year would cause the potential common shares to have
an anti-dilutive effect. The options expire from April 2001 to June 2006.
During 2000 options and warrants to purchase 881,662 shares of common stock at
per share amounts ranging from $.50 to $3.56 per share were outstanding during
2000 but were not included in the computation of diluted earnings per share
because net loss realized during the year would cause the potential common
shares to have an anti-dilutive effect.

New Accounting Pronouncements. Statement of Financial Accounting Standard
(SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities,
established accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. The statement requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. SFAS No. 133, as amended
by SFAS No. 137, is effective for the Company as of April 1, 2001. The Company
has evaluated SFAS No. 133 and determined that the pronouncement will not
impact the Companys consolidated financial statements.

2. Marketable Securities

The amortized cost, gross unrealized holding gains, gross unrealized holding
losses and fair value for available-for-sale securities by major security type
and class of security were as follows:

F-10



---



##### Table of Contents



|                    |                 |                   |  |           |         |         |  |            |   |            |  |  |   |  |  |  |         | 
|------------------- | --------------- | ----------------- |  | --------- | ------- | ------- |  | ---------- | - | ---------- |  |  | - |  |  |  | ------- | 
|                    |                 |                   |  |           |         |         |  | Gross      |   | Gross     
|                    |                 |                   |  |           |         |         |  | Unrealized |   | Unrealized
|                    |                 |                   |  | Amortized |         | Holding |  | Holding    |   | Fair      
|                    |                 |                   |  | Cost      |         | Gains   |  | Losses     |   | Value     
|                    |                 |                   |  |           |         |         |  |            |   |           
|                   
|                   
|                   
|                   
|Available-for-sale:
|                   
|                   
|                   
|                   
|                    | Corporate bonds
|                   
|                   
|                   
|                   
|                    |                 | At March 31, 2000 |  | $         | 750,000 |         |  |            |  |            |  |  |  |  |  |  | 750,000 | 
|                   
|                   
|                   
|                   
|                    |                 | At March 31, 2001 |  |           |        |         |  |            |  |            |  |  |  |  |  |  |        | 

Sales of marketable securities in fiscal 2000 and 2001 resulted in no gain or
loss as sale represented a debt security redemption at face value.

3. Notes Payable

Notes payable consist of the following at March 31, 2001 and 2000:

|                                                                                       |  |      |         |      |  |   |         | 
|-------------------------------------------------------------------------------------- |  | ---- | ------- | ---- |  | - | ------- | 
|                                                                                       |  | 2001 |         | 2000
|                                                                                       |  |      |         |     
|Mortgage note, monthly payments of $2,121
plus variable rate interest through November
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|2017 (rate at March 31, 20015.6%)                                                     |  | $    | 427,178 |      |  | $ | 494,445 | 
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|Note payable, monthly payments of $385 plus
fixed rate interest through August 2008   
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|(rate until August 20035.6%)                                                          |  |      | 34,277  |      |  |   | 42,495  | 
|                                                                                       |  |      |         |      |  |   |         | 
|                                                                                       |  |      | 461,455 |      |  |   | 536,940 | 
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|Less current maturities                                                                |  |      | 30,074  |      |  |   | 32,853  | 
|                                                                                       |  |      |         |      |  |   |         | 
|                                                                                       |  | $    | 431,381 |      |  | $ | 504,087 | 
|                                                                                       |  |      |         |      |  |   |         | 

Future payments of long-term debt for the years ended March 31, are as follows:

|           |  |   |         | 
|---------- |  | - | ------- | 
|2002       |  | $ | 30,074  | 
|          
|          
|          
|          
|2003       |  |   | 30,074  | 
|          
|          
|          
|          
|2004       |  |   | 30,074  | 
|          
|          
|          
|          
|2005       |  |   | 30,074  | 
|          
|          
|          
|          
|2006       |  |   | 30,074  | 
|          
|          
|          
|          
|Thereafter |  |   | 311,085 | 
|           |  |   |         | 
|           |  | $ | 461,455 | 
|           |  |   |         | 

4. Capital Lease Obligations

The Company leases various equipment under noncancelable capital leases. The
leases call for aggregate monthly payments of $1,613 with various expiration
dates through November 2002. Equipment includes $71,225 and $74,619 of cost
and $43,324 and $31,331 of accumulated amortization as of March 31, 2001 and
2000, respectively, related to these leases.

F-11



---



##### Table of Contents



Future minimum capital lease payments are as follows as of March 31, 2001:

|                                                         |  |   |        |  
|-------------------------------------------------------- |  | - | ------ | -
|2002                                                     |  | $ | 19,351 |  
|                                                        
|                                                        
|                                                        
|                                                        
|2003                                                     |  |   | 7,825  |  
|                                                         |  |   |        |  
|                                                         |  |   | 27,176 |  
|                                                        
|                                                        
|                                                        
|                                                        
|Amount representing interest                             |  |   | (3,741 | )
|                                                         |  |   |        |  
|Present value of capital lease payments                  |  |   | 23,437 |  
|                                                        
|                                                        
|                                                        
|                                                        
|Current maturities                                       |  |   | 16,483 |  
|                                                         |  |   |        |  
|Obligations under capital leases less current maturities |  | $ | 6,954  |  
|                                                         |  |   |        |  

5. Shareholders Equity

Stock Options.Pursuant to the Companys two stock option plans, the Company
has reserved 1,800,000 shares of its 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 three years. 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.

Stock option activity under these plans is summarized as follows:

|                          |  |             |           |                |  |          |      | 
|------------------------- |  | ----------- | --------- | -------------- |  | -------- | ---- | 
|                          |  |             |           |                |  | Weighted
|                          |  |             |           |                |  | Average 
|                          |  | Shares      |           | Exercise Price
|                          |  | Outstanding |           | Per Share     
|                          |  |             |           |               
|Balance at March 31, 1999 |  |             | 564,200   |                |  | $        | 1.42 | 
|                         
|                         
|                         
|                         
|Granted                   |  |             | 563,600   |                |  |          | 2.52 | 
|                         
|                         
|                         
|                         
|Exercised                 |  |             | (51,900   | )              |  |          | 0.50 | 
|                         
|                         
|                         
|                         
|Cancelled                 |  |             | (22,500   | )              |  |          | 1.98 | 
|                          |  |             |           |                |  |          |      | 
|Balance at March 31, 2000 |  |             | 1,053,400 |                |  |          | 2.04 | 
|                         
|                         
|                         
|                         
|Granted                   |  |             | 197,000   |                |  |          | 1.51 | 
|                         
|                         
|                         
|                         
|Exercised                 |  |             | (65,800   | )              |  |          | 0.50
|                         
|                         
|                         
|                         
|Cancelled                 |  |             | (135,400  | )              |  |          | 2.38 | 
|                          |  |             |           |                |  |          |      | 
|Balance at March 31, 2001 |  |             | 1,049,200 |                |  | $        | 1.99 | 
|                          |  |             |           |                |  |          |      | 

The following table summarizes information concerning currently outstanding and
exercisable options by price.

F-12



---



##### Table of Contents



|            |      |             |           |         |           |             |          |      |  |  |         |         | 
|----------- | ---- | ----------- | --------- | ------- | --------- | ----------- | -------- | ---- |  |  | ------- | ------- | 
|Outstanding |      | Exercisable
|            |      |            
|            |      |             |           |         |           |             | Weighted
|            |      |             |           |         |           |             | Average 
|            |      |             | Number    |         | Remaining
|            |      |             | of Shares |         | Life in   |             | Number  
|Price       |      | Outstanding |           | Years   |           | Exercisable
|            |      |             |           |         |           |            
|$0.50       |      |             | 95,000    |         |           |             | 3.26     |      |  |  | 95,000  |        
|           
|           
|           
|           
|            | 1.00 |             |           | 241,000 |           |             |          | 1.29 |  |  |         | 241,000 | 
|           
|           
|           
|           
|            | 1.75 |             |           | 10,000  |           |             |          | 4.33 |  |  |         | 10,000  | 
|           
|           
|           
|           
|            | 2.25 |             |           | 105,000 |           |             |          | 4.30 |  |  |         | 35,000  | 
|           
|           
|           
|           
|            | 2.32 |             |           | 60,000  |           |             |          | 3.83 |  |  |         | 20,000  | 
|           
|           
|           
|           
|            | 2.50 |             |           | 458,200 |           |             |          | 3.36 |  |  |         | 215,469 | 
|           
|           
|           
|           
|            | 3.19 |             |           | 10,000  |           |             |          | 1.42 |  |  |         | 10,000  | 
|           
|           
|           
|           
|            | 3.25 |             |           | 55,000  |           |             |          | 1.84 |  |  |         | 55,000  | 
|           
|           
|           
|           
|            | 3.50 |             |           | 15,000  |           |             |          | 4.25 |  |  |         | 10,000  | 
|            |      |             |           |         |           |             |          |      |  |  |         |        
|            |      |             | 1,049,200 |         |           |             |          |      |  |  | 691,469 |        
|            |      |             |           |         |           |             |          |      |  |  |         |        

Warrants.In connection with the June 18, 1998 private placement, warrants to
purchase 150,000 shares of common stock were issued at an exercise price of
$2.38 per share. At March 31, 2001 all of these warrants were outstanding and
scheduled to expire on June 18, 2003.

Stock Option Plans.The Company applies APB Opinion No. 25, Accounting for
Stock Issued to Employees, in accounting for its stock incentive plans for
employees and, accordingly, no compensation cost has been recognized in the
financial statements for employee and director stock options granted under its
stock option plans. Had the Company determined compensation cost based on the
fair value at the grant date for its stock options under SFAS 123, Accounting
for Stock-Based Compensation, the Companys net loss would have decreased to
the pro forma amounts shown below:

|                                   |             |  |      |            |      |  |   |            |  
|---------------------------------- | ----------- |  | ---- | ---------- | ---- |  | - | ---------- | -
|                                   |             |  | 2001 |            | 2000
|                                   |             |  |      |            |     
|Net loss:                         
|                                  
|                                  
|                                  
|                                  
|                                   | As reported |  | $    | (1,680,899 | )    |  | $ | (1,348,834 | )
|                                  
|                                  
|                                  
|                                  
|                                   | Pro forma   |  | $    | (1,954,978 | )    |  | $ | (1,412,557 | )
|                                  
|                                  
|                                  
|                                  
|Net loss per common share  basic:
|                                  
|                                  
|                                  
|                                  
|                                   | As reported |  |      | (0.28      | )    |  |   | (0.23      | )
|                                  
|                                  
|                                  
|                                  
|                                   | Pro forma   |  |      | (0.33      | )    |  |   | (0.24      | )

Pro forma net loss only reflects options granted in 1996 and thereafter.
Therefore, the full impact of calculating compensation cost for stock options
under SFAS No. 123 is not reflected in the pro forma net loss amounts presented
above because compensation cost is reflected over the options vesting period
and compensation cost for options granted prior to April 1, 1995 is not
considered.

The per share weighted-average fair value of stock options granted during 2001
and 2000 was $1.62 and $1.49, respectively on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions:

|                        |  |      |       |      |  |  |       |  
|----------------------- |  | ---- | ----- | ---- |  |  | ----- | -
|                        |  | 2001 |       | 2000
|                        |  |      |       |     
|Expected dividend yield |  |      | 0.00  | %    |  |  | 0.00  | %
|                       
|                       
|                       
|                       
|Risk-free interest rate |  |      | 6.10  | %    |  |  | 5.90  | %
|                       
|                       
|                       
|                       
|Expected volatility     |  |      | 89.00 | %    |  |  | 89.00 | %
|                       
|                       
|                       
|                       
|Expected life, in years |  |      | 5.00  |      |  |  | 3.00  |  

F-13



---



##### Table of Contents



6. Commitments and Contingencies

License Agreement.In December 1995, the Company obtained a license from a
British surgeon, which became superseded by a subsequent Agreement entered into
by the parties in October 1998. Pursuant to this subsequent Agreement, the
Company received an absolute assignment of a patent relating to the
Macroplastique Implantation System 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 fiscal year
ended March 31, 2001 and March 31, 2000 was $20,105 and $2,683, respectively.

Savings and Retirement Plans.The Company sponsors various plans for eligible
employees in the United States, the United Kingdom, and The Netherlands. The
total contribution expense associated with these plans was $124,692 and $53,787
for the years ended March 31, 2001 and 2000, respectively.

Operating Lease Commitments.The Company leases office, warehouse, and
production space under three operating leases and leases various automobiles
for its European employees. Future 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:

|     |  |   |         |  |  |  |  | 
|---- |  | - | ------- |  |  |  |  | 
|2002 |  | $ | 275,281 | 
|    
|    
|    
|    
|2003 |  |   | 148,239 | 
|    
|    
|    
|    
|2004 |  |   | 18,786  | 
|    
|    
|    
|    
|2005 |  |   | 5,911   | 
|     |  |   |         | 
|     |  | $ | 448,217 | 
|     |  |   |         | 

Total rent expense paid for operating leases was $362,684 and $353,993 in 2001
and 2000, respectively.

Royalties.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 2010. Total
expense recognized under the agreement was $179,403 and $196,991 for the years
ended March 31, 2001 and 2000, respectively.

Under the terms of a settlement agreement for a patent suit brought by a
competitor in 1991, UPI is obligated to pay the plaintiff a royalty equal to
five percent of the net sales of certain products in the United States, or a
minimum of $50,000 per year as long as the products are being marketed abroad.
Total expense recognized under the agreement was $50,000 for each of the years
ended March 31, 2001 and 2000.

Legal Proceedings.On July 21, 1998, the Company announced that the United
States Patent and Trademark Office (USPTO) had informed the Company that the
USPTO will, as requested by the Company, initiate an interference proceeding
(the Interference Proceeding) between the Company and Carbon Medical
Technologies, Inc. (CMT), formerly Advanced UroScience, Inc., White Bear
Lake, Minnesota, to determine which company was the first to invent pyrolytic
carbon-coated micro beads for use in treating urinary incontinence. The USPTO
has not, as of June 14, 2001, formally declared the Interference Proceeding.

At such time as the Interference Proceeding is formally declared, it could take
the USPTO twenty-four months or more to reach a final decision concerning this
matter. Although the USPTO originally granted the applicable patent to CMT,
the Interference Proceeding may result in a determination that either
Uroplasty, Inc. or CMT is the proper holder, or that a patent should not have
been granted. An interference proceeding, like other patent litigation, can be
complex, time consuming and expensive.

Later in 1998, the Company commenced a related lawsuit against CMT for
misappropriation of trade secrets (Misappropriation Lawsuit) pertaining to
the pyrolytic carbon-coated micro beads, among other things. CMT, subsequent to
December 31, 1998, brought a counterclaim against the Company with respect to
such matter. In October 1999, the

F-14



---



##### Table of Contents



Company announced that the U.S. District Court for Minnesota had granted a
motion by CMT to dismiss the Misappropriation Lawsuit, which the Company
appealed.

Subsequently, the U.S. Court of Appeals, Eighth Circuit, notified the Company
that pursuant to the Companys request, the Companys appeal was transferred to
the Federal Circuit, and in May 2000 the Company filed its appeal of the
District Courts order granting summary judgment with the U.S. Court of Appeals
for the Federal Circuit.

In February 2001, the United States Court of Appeals for the Federal Circuit
(the Circuit Court) granted the Companys appeal of the dismissal of the
Misappropriation Lawsuit. The Circuit Court vacated the dismissal by the U.S.
District Court for Minnesota due to lack of jurisdiction and remanded the case;
a motion to dismiss the Misappropriation Lawsuit brought by CMT is now pending
in Ramsey County District Court in Minnesota.

Employment Agreements.The Company has entered into employment agreements in
fiscal 2000 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.
Also in connection with the execution of these Agreements, the officers were
granted varying amounts of stock options to purchase the Companys common stock
at the fair market value at date of grant of $2.50 per share. In all cases the
options are exercisable for five years or until one year after employment
termination (subject to certain termination provisions), whichever date is
earlier, and vest in three equal amounts on each one year anniversary date
subsequent to the option grant date.

7. Income Taxes

The components of income tax expense (benefit) for each of the years in the
two-year period ended March 31, 2001 consist of the following:

|                                   |          |                |   |      |   |      |         |   |         |  
|---------------------------------- | -------- | -------------- | - | ---- | - | ---- | ------- | - | ------- | -
|                                   |          |                |   | 2001 |   | 2000
|                                   |          |                |   |      |   |     
|Income tax provision:             
|                                  
|                                  
|                                  
|                                  
|                                   | Current:
|                                  
|                                  
|                                  
|                                  
|                                   |          | U.S. and state |   | $    |  |      |         | $ |        |  
|                                  
|                                  
|                                  
|                                  
|                                   |          | Foreign        |   |      |  |      |         |   | (25,106 | )
|                                   |          |                |   |      |   |      |         |  
|Total income tax expense (benefit) |          | $              |  |      |   | $    | (25,106 | )
|                                   |          |                |   |      |   |      |         |  

Effective tax rates differ from statutory federal income tax rates for the year
ended March 31, 2001 and 2000 as follows:

|                                           |  |      |       |      |  |  |       |   
|------------------------------------------ |  | ---- | ----- | ---- |  |  | ----- | --
|                                           |  | 2001 |       | 2000
|                                           |  |      |       |     
|Statutory federal income tax rate          |  |      | (34.0 | )%   |  |  | (34.0 | )%
|                                          
|                                          
|                                          
|                                          
|State income taxes, net of federal benefit |  |      | (1.4  | )    |  |  | (1.4  | ) 
|                                          
|                                          
|                                          
|                                          
|Valuation allowance increase               |  |      | 34.9  |      |  |  | 36.8  |   
|                                          
|                                          
|                                          
|                                          
|Other permanent differences                |  |      | 1.6   |      |  |  | (2.1  | ) 
|                                          
|                                          
|                                          
|                                          
|Impact of foreign operations               |  |      | (1.1  | )    |  |  | (1.1  | ) 
|                                           |  |      |       |      |  |  |       |   
|                                           |  |      |      | %    |  |  | (1.8  | )%
|                                           |  |      |       |      |  |  |       |   

F-15



---



##### Table of Contents



Deferred taxes as of March 31, 2001 and 2000 consist of the following:

|                         |                                       |   |            |           |      |   |            |           | 
|------------------------ | ------------------------------------- | - | ---------- | --------- | ---- | - | ---------- | --------- | 
|                         |                                       |   | 2001       |           | 2000
|                         |                                       |   |            |           |     
|Deferred tax assets:    
|                        
|                        
|                        
|                        
|                         | Other reserves and accruals           |   | $          | 56,000    |      |   | $          | 48,000    | 
|                        
|                        
|                        
|                        
|                         | Deferred profit on intercompany sales |   |            | 67,000    |      |   |            | 67,000    | 
|                        
|                        
|                        
|                        
|                         | Net operating loss carryforwards      |   |            | 2,387,000 |      |   |            | 1,808,000 | 
|                         |                                       |   |            |           |      |   |            |          
|                         |                                       |   | 2,510,000  |           |      |   | 1,923,000  |          
|                        
|                        
|                        
|                        
|Less valuation allowance |                                       |   | (2,510,000 |           |      |   | (1,923,000 | )        
|                         |                                       |   |            |           |      |   |            |          
|                         |                                       | $ |           |           |      | $ |           |          
|                         |                                       |   |            |           |      |   |            |          

At March 31, 2001 the Company had U.S. net operating loss carryforwards (NOL)
of approximately $4,713,000 for U.S. income tax purposes, which begin to expire
in 2012, and foreign NOLs of approximately $1,736,000 of which $1,634,000
carries 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 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 assets and related valuation allowance increased by $587,000
from 2000 to 2001.

8. Business Segment Information

The Company sells Macroplastique and the related ancillary products for use in
augmenting soft tissues for the purpose of treating urinary incontinence and
vesicoureteral reflux. At this time, sales are only made outside the United
States because the Company does not have regulatory approval to market its
product in the United States. The Companys current objectives are to focus on
sales growth and market penetration of Macroplastique in the European market
for urinary incontinence and vesicoureteral reflux treatment, and to continue
the U.S. regulatory process for submission of Macroplastique as a treatment for
female stress urinary incontinence. The Company also sells the Macroplastique
product in a different configuration for plastic surgery applications under the
name Bioplastique in limited markets. In addition, the Company has been
selling some specialized wound care products in The Netherlands and United
Kingdom as a distributor. The Macroplastique product line accounts for 92% of
total sales during both the fiscal years ended March 31, 2001 and 2000.

Based upon the above, the Company has identified one reportable operating
segment consisting of medical products primarily for the urology market.

During fiscal 2001 and fiscal 2000 no customer exceeded 10% of the Companys
net sales.

Information regarding operations in different geographies for the years ended
March 31, 2001 and 2000 is as follows:

F-16



---



##### Table of Contents



|                                    |  |        |           |             |  |         |           |        |  |                  |           |              |  |   |        |  |  |   |            |   |  |   |           | 
|----------------------------------- |  | ------ | --------- | ----------- |  | ------- | --------- | ------ |  | ---------------- | --------- | ------------ |  | - | ------ |  |  | - | ---------- | - |  | - | --------- | 
|                                    |  | United |           | The         |  | United  |           |        |  |                  |           | Adjustments 
|                                    |  | States |           | Netherlands |  | Kingdom |           | Canada |  | and eliminations |           | Consolidated
|                                    |  |        |           |             |  |         |           |        |  |                  |           |             
|Fiscal 2001                        
|                                   
|                                   
|                                   
|                                   
|Sales to
unaffiliated customers     |  | $      |          |             |  | $       | 4,830,745 |        |  | $                | 2,168,680 |              |  | $ | 71,829 |  |  | $ | (1,402,771 | ) |  | $ | 5,668,483 | 
|                                   
|                                   
|                                   
|                                   
|Long-lived assets
at March 31, 2001 |  | $      | 1,520,215 |             |  | $       | 758,308   |        |  | $                | 6,482     |              |  | $ |       |  |  | $ | (1,281,584 | ) |  | $ | 1,003,42  | 
|                                   
|                                   
|                                   
|                                   
|Fiscal 2000                        
|                                   
|                                   
|                                   
|                                   
|Sales to
unaffiliated
customers     |  | $      |          |             |  | $       | 5,579,017 |        |  | $                | 2,059,671 |              |  | $ | 50,489 |  |  | $ | (2,129,158 | ) |  | $ | 5,560,019 | 
|                                   
|                                   
|                                   
|                                   
|Long-lived assets
at March 31, 2000 |  | $      | 1,546,024 |             |  | $       | 920,016   |        |  | $                | 13,507    |              |  | $ | 8,047  |  |  | $ | (1,281,584 | ) |  | $ | 1,206,010 | 

F-17