##### 



EXHIBIT 13

UROPLASTY, INC. AND SUBSIDIARIES

Consolidated Financial Statements
March 31, 2002 and 2001

TABLE OF CONTENTS

|                             |                                                                        |  |         |         | 
|---------------------------- | ---------------------------------------------------------------------- |  | ------- | ------- | 
|                             |                                                                        |  | Page(s)
|Independent Auditors Report |                                                                        |  | 24      |        
|Financial Statements:        |                                                                        |  |         |        
|                             | Consolidated Balance Sheets                                            |  |         | 25 - 26 | 
|                             | Consolidated Statements of Operations                                  |  |         | 27      | 
|                             | Consolidated Statements of Shareholders Equity
and Comprehensive Loss |  |         | 28      | 
|                             | Consolidated Statements of Cash Flows                                  |  |         | 29      | 
|                             | Notes to Consolidated Financial Statements                             |  |         | 30 - 38 | 

Page 23



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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, 2002 and 2001, 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, 2002 and 2001, 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.

|                                                                                    |  |         
|----------------------------------------------------------------------------------- |  | --------
|                                                                                    |  | KPMG LLP
|                                                                                   
|Minneapolis, Minnesota
May 6, 2002, except as to note 4
which is as of May 13, 2002 |  |         

Page 24



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UROPLASTY, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
March 31, 2002 and 2001

|       |                                                                                             |                           |   |           |           |      |  |           |           | 
|------ | ------------------------------------------------------------------------------------------- | ------------------------- | - | --------- | --------- | ---- |  | --------- | --------- | 
|       |                                                                                             |                           |   | 2002      |           | 2001
|       |                                                                                             |                           |   |           |           |     
|Assets |                                                                                             |                           |   |           |           |      |  |          
|       | Current assets:                                                                             |                           |   |           |           |      |  |           |          
|       |                                                                                             | Cash and cash equivalents |   | $         | 1,046,121 |      |  |           | 1,012,397 | 
|       |                                                                                             | Accounts receivable, net  |   |           | 845,431   |      |  |           | 983,450   | 
|       |                                                                                             | Inventories               |   |           | 632,102   |      |  |           | 752,436   | 
|       |                                                                                             | Deferred offering costs   |   |           | 112,544   |      |  |           |          | 
|       |                                                                                             | Other                     |   |           | 130,518   |      |  |           | 258,997   | 
|       |                                                                                             |                           |   |           |           |      |  |          
|       | Total current assets                                                                        |                           |   | 2,766,716 |           |      |  | 3,007,280 |          
|       | Property, plant, and equipment, net                                                         |                           |   | 764,855   |           |      |  | 902,189   |          
|       | Intangible assets, net of accumulated
amortization of $173,376 in 2002
and $145,021 in 2001 |                           |   | 72,877    |           |      |  | 101,232   |          
|       |                                                                                             |                           |   |           |           |      |  |          
|       | Total assets                                                                                |                           | $ | 3,604,448 |           |      |  | 4,010,701 |          
|       |                                                                                             |                           |   |           |           |      |  |          

See accompanying notes to consolidated financial statements.

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UROPLASTY, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
March 31, 2002 and 2001

|                                     |                                            |                                                                                                                                                          |                                |           |            |         |      |           |            |         | 
|------------------------------------ | ------------------------------------------ | -------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------ | --------- | ---------- | ------- | ---- | --------- | ---------- | ------- | 
|                                     |                                            |                                                                                                                                                          |                                |           | 2002       |         | 2001
|                                     |                                            |                                                                                                                                                          |                                |           |            |         |     
|Liabilities and Shareholders Equity |                                            |                                                                                                                                                          |                                |           |            |         |      |          
|                                     | Current liabilities:                       |                                                                                                                                                          |                                |           |            |         |      |           |           
|                                     |                                            | Accounts payable                                                                                                                                         |                                | $         | 230,631    |         |      |           | 213,288    |        
|                                     |                                            | Accrued liabilities:                                                                                                                                     |                                |           |            |         |      |           |            |        
|                                     |                                            |                                                                                                                                                          | Compensation and payroll taxes |           |            | 103,367 |      |           |            | 141,708 | 
|                                     |                                            |                                                                                                                                                          | Foreign sales tax              |           |            | 19,146  |      |           |            | 55,502  | 
|                                     |                                            |                                                                                                                                                          | Royalties                      |           |            | 25,096  |      |           |            | 30,960  | 
|                                     |                                            |                                                                                                                                                          | Other                          |           |            | 251,869 |      |           |            | 365,827 | 
|                                     |                                            | Current maturities  long-term debt                                                                                                                      |                                |           | 42,311     |         |      |           | 46,557     |        
|                                     |                                            |                                                                                                                                                          |                                |           |            |         |      |          
|                                     | Total current liabilities                  |                                                                                                                                                          |                                | 672,420   |            |         |      | 853,842   |           
|                                     | Long-term debt  less current maturities:  |                                                                                                                                                          |                                |           |            |         |      |           |           
|                                     |                                            | Notes payable                                                                                                                                            |                                |           | 399,222    |         |      |           | 431,381    |        
|                                     |                                            | Capital lease obligations                                                                                                                                |                                |           |           |         |      |           | 6,954      |        
|                                     |                                            |                                                                                                                                                          |                                |           |            |         |      |          
|                                     | Total liabilities                          |                                                                                                                                                          |                                | 1,071,642 |            |         |      | 1,292,177 |           
|                                     |                                            |                                                                                                                                                          |                                |           |            |         |      |          
|                                     | Shareholders equity:                      |                                                                                                                                                          |                                |           |            |         |      |           |           
|                                     |                                            | Common stock $.01 par value; 6,666,666
shares authorized, 2,047,332 and
2,013,333 shares issued and
outstanding at March 31, 2002 and
2001, respectively |                                |           | 20,473     |         |      |           | 20,133     |        
|                                     |                                            | Additional paid-in capital                                                                                                                               |                                |           | 6,149,571  |         |      |           | 6,039,676  |        
|                                     |                                            | Accumulated deficit                                                                                                                                      |                                |           | (3,204,370 | )       |      |           | (2,954,456 | )      
|                                     |                                            | Vendor deposit                                                                                                                                           |                                |           | (51,000    | )       |      |           |           |        
|                                     |                                            | Accumulated other comprehensive loss                                                                                                                     |                                |           | (381,868   | )       |      |           | (386,829   | )      
|                                     |                                            |                                                                                                                                                          |                                |           |            |         |      |          
|                                     | Total shareholders equity                 |                                                                                                                                                          |                                | 2,532,806 |            |         |      | 2,718,524 |           
|                                     |                                            |                                                                                                                                                          |                                |           |            |         |      |          
|                                     | Commitments and contingencies (note 5)     |                                                                                                                                                          |                                |           |            |         |      |           |           
|                                     | Total liabilities and shareholders equity |                                                                                                                                                          | $                              | 3,604,448 |            |         |      | 4,010,701 |           
|                                     |                                            |                                                                                                                                                          |                                |           |            |         |      |          

See accompanying notes to consolidated financial statements.

Page 26



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##### 



UROPLASTY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended March 31, 2002 and 2001

|                                            |                                |   |           |           |      |  |            |           |  
|------------------------------------------- | ------------------------------ | - | --------- | --------- | ---- |  | ---------- | --------- | -
|                                            |                                |   | 2002      |           | 2001
|                                            |                                |   |           |           |     
|Net sales                                   |                                | $ | 4,973,976 |           |      |  | 5,668,483  |          
|Cost of goods sold                          |                                |   | 1,456,809 |           |      |  | 1,313,183  |          
|                                            |                                |   |           |           |      |  |            |          
|Gross profit                                |                                |   | 3,517,167 |           |      |  | 4,355,300  |          
|                                            |                                |   |           |           |      |  |            |          
|Operating expenses                          |                                |   |           |           |      |  |            |          
|                                            | General and administrative     |   |           | 1,154,419 |      |  |            | 1,389,943 |  
|                                            | Research and development       |   |           | 1,685,000 |      |  |            | 2,150,177 |  
|                                            | Selling and marketing          |   |           | 1,106,640 |      |  |            | 2,185,809 |  
|                                            |                                |   |           |           |      |  |            |          
|                                            |                                |   | 3,946,059 |           |      |  | 5,725,929  |          
|                                            |                                |   |           |           |      |  |            |          
|Operating loss                              |                                |   | (428,892  | )         |      |  | (1,370,629 | )        
|                                            |                                |   |           |           |      |  |            |          
|Other income (expense)                      |                                |   |           |           |      |  |            |          
|                                            | Interest income                |   |           | 19,452    |      |  |            | 54,617    |  
|                                            | Interest expense               |   |           | (25,769   | )    |  |            | (27,335   | )
|                                            | Foreign currency exchange loss |   |           | (14,373   | )    |  |            | (336,958  | )
|                                            | Settlement (note 5)            |   |           | 200,000   |      |  |            |          |  
|                                            | Other                          |   |           | (332      | )    |  |            | (594      | )
|                                            |                                |   |           |           |      |  |            |          
|                                            |                                |   | 178,978   |           |      |  | (310,270   | )        
|                                            |                                |   |           |           |      |  |            |          
|Loss before income taxes                    |                                |   | (249,914  | )         |      |  | (1,680,899 | )        
|Income taxes                                |                                |   |          |           |      |  |           |          
|Net loss                                    |                                | $ | (249,914  | )         |      |  | (1,680,899 | )        
|                                            |                                |   |           |           |      |  |            |          
|Net loss per common share:                  |                                |   |           |           |      |  |            |          
|                                            | Basic                          |   | $         | (0.12     | )    |  |            | (0.84     | )
|                                            | Diluted                        |   | $         | (0.12     | )    |  |            | (0.84     | )
|Weighted average common shares outstanding: |                                |   |           |           |      |  |            |          
|                                            | Basic                          |   |           | 2,033,925 |      |  |            | 1,996,683 |  
|                                            | Diluted                        |   |           | 2,033,925 |      |  |            | 1,996,683 |  

See accompanying notes to consolidated financial statements.

Page 27



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UROPLASTY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY AND COMPREHENSIVE LOSS
Years ended March 31, 2002 and 2001

|                                                             |  |              |           |         |  |             |        |         |  |            |           |                    |  |        |            |   |  |  |         |             |  |       |          |   |  |  |            |  
|------------------------------------------------------------ |  | ------------ | --------- | ------- |  | ----------- | ------ | ------- |  | ---------- | --------- | ------------------ |  | ------ | ---------- | - |  |  | ------- | ----------- |  | ----- | -------- | - |  |  | ---------- | -
|                                                             |  |              |           |         |  |             |        |         |  | Additional |           |                    |  |        |            |   |  |  |         | Accumulated |  | Total
|                                                             |  | Common Stock |           | Paid-in |  | Accumulated |        | Vendor  |  | Other      |           | Shareholders'     
|                                                             |  | Shares       |           | Amount  |  | Capital     |        | Deficit |  | Deposits   |           | Comprehensive Loss |  | Equity
|                                                             |  |              |           |         |  |             |        |         |  |            |           |                    |  |       
|Balance at March 31, 2000                                    |  |              | 1,991,400 |         |  | $           | 19,914 |         |  |            | 5,849,816 |                    |  |        | (1,273,557 | ) |  |  |        |             |  |       | (351,157 | ) |  |  | 4,245,016  |  
|Exercise of stock options                                    |  |              | 21,933    |         |  |             | 219    |         |  |            | 32,681    |                    |  |        |           |   |  |  |        |             |  |       |         |   |  |  | 32,900     |  
|Non-employee stock-based
consulting and
compensation expense |  |              |          |         |  |             |       |         |  |            | 157,179   |                    |  |        |           |   |  |  |        |             |  |       |         |   |  |  | 157,179    |  
|Net loss                                                     |  |              |          |         |  |             |       |         |  |            |          |                    |  |        | (1,680,899 | ) |  |  |        |             |  |       |         |   |  |  | (1,680,899 | )
|Translation adjustment                                       |  |              |          |         |  |             |       |         |  |            |          |                    |  |        |           |   |  |  |        |             |  |       | (35,672  | ) |  |  | (35,672    | )
|                                                             |  |              |           |         |  |             |        |         |  |            |           |                    |  |        |            |   |  |  |         |             |  |       |          |   |  |  |            |  
|Total comprehensive loss                                     |  |              |           |         |  |             |        |         |  |            |           |                    |  |        |            |   |  |  |         |             |  |       |          |   |  |  | (1,716,571 | )
|                                                             |  |              |           |         |  |             |        |         |  |            |           |                    |  |        |            |   |  |  |         |             |  |       |          |   |  |  |            |  
|Balance at March 31, 2001                                    |  |              | 2,013,333 |         |  |             | 20,133 |         |  |            | 6,039,676 |                    |  |        | (2,954,456 | ) |  |  |        |             |  |       | (386,829 | ) |  |  | 2,718,524  |  
|Exercise of stock options                                    |  |              | 4,333     |         |  |             | 43     |         |  |            | 12,957    |                    |  |        |           |   |  |  |        |             |  |       |         |   |  |  | 13,000     |  
|Employee retirement
savings plan contribution                |  |              | 9,666     |         |  |             | 97     |         |  |            | 37,603    |                    |  |        |            |   |  |  |         |             |  |       |          |   |  |  | 37,700     |  
|Non-employee stock-based
consulting and
compensation expense |  |              |          |         |  |             |       |         |  |            | 8,535     |                    |  |        |           |   |  |  |        |             |  |       |         |   |  |  | 8,535      |  
|Vendor deposit                                               |  |              | 20,000    |         |  |             | 200    |         |  |            | 50,800    |                    |  |        |           |   |  |  | (51,000 | )           |  |       |         |   |  |  |           |  
|Net loss                                                     |  |              |          |         |  |             |       |         |  |            |          |                    |  |        | (249,914   | ) |  |  |        |             |  |       |         |   |  |  | (249,914   | )
|Translation adjustment                                       |  |              |          |         |  |             |       |         |  |            |          |                    |  |        |           |   |  |  |        |             |  |       | 4,961    |   |  |  | 4,961      |  
|                                                             |  |              |           |         |  |             |        |         |  |            |           |                    |  |        |            |   |  |  |         |             |  |       |          |   |  |  |            |  
|Total comprehensive loss                                     |  |              |           |         |  |             |        |         |  |            |           |                    |  |        |            |   |  |  |         |             |  |       |          |   |  |  | (244,953   | )
|                                                             |  |              |           |         |  |             |        |         |  |            |           |                    |  |        |            |   |  |  |         |             |  |       |          |   |  |  |            |  
|Balance at March 31, 2002                                    |  |              | 2,047,332 |         |  | $           | 20,473 |         |  |            | 6,149,571 |                    |  |        | (3,204,370 | ) |  |  | (51,000 | )           |  |       | (381,868 | ) |  |  | 2,532,806  |  
|                                                             |  |              |           |         |  |             |        |         |  |            |           |                    |  |        |            |   |  |  |         |             |  |       |          |   |  |  |            |  

See accompanying notes to consolidated financial statements.

Page 28



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UROPLASTY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended March 31, 2002 and 2001

|                                                      |                                                                                 |                                  |           |          |          |      |            |            |          |  
|----------------------------------------------------- | ------------------------------------------------------------------------------- | -------------------------------- | --------- | -------- | -------- | ---- | ---------- | ---------- | -------- | -
|                                                      |                                                                                 |                                  |           | 2002     |          | 2001
|                                                      |                                                                                 |                                  |           |          |          |     
|Cash flows from operating activities:                 |                                                                                 |                                  |           |          |          |      |            |           
|                                                      | Net loss                                                                        |                                  | $         | (249,914 | )        |      |            | (1,680,899 | )       
|                                                      | Adjustments to reconcile net loss to net cash provided by (used in) operations: |                                  |           |          |          |      |            |            |         
|                                                      |                                                                                 | Depreciation and amortization    |           |          | 194,796  |      |            |            | 171,955  |  
|                                                      |                                                                                 | Loss on disposal of assets       |           |          | 2,120    |      |            |            |         |  
|                                                      |                                                                                 | Stock-based consulting expense   |           |          | 8,535    |      |            |            | 37,186   |  
|                                                      |                                                                                 | Stock-based compensation expense |           |          |         |      |            |            | 119,993  |  
|                                                      | Changes in operating assets and liabilities:                                    |                                  |           |          |          |      |            |            |         
|                                                      |                                                                                 | Accounts receivable              |           |          | 138,019  |      |            |            | (28,925  | )
|                                                      |                                                                                 | Inventories                      |           |          | 120,334  |      |            |            | (16,806  | )
|                                                      |                                                                                 | Other current assets             |           |          | 128,479  |      |            |            | 141,880  |  
|                                                      |                                                                                 | Accounts payable                 |           |          | (13,965  | )    |            |            | (134,888 | )
|                                                      |                                                                                 | Accrued liabilities              |           |          | (215,708 | )    |            |            | 165,846  |  
|                                                      |                                                                                 |                                  |           |          |          |      |            |            |         
|Net cash provided by (used in) operating activities   |                                                                                 |                                  | 112,696   |          |          |      | (1,224,658 | )         
|                                                      |                                                                                 |                                  |           |          |          |      |            |            |         
|Cash flows from investing activities:                 |                                                                                 |                                  |           |          |          |      |            |           
|                                                      | Payments for property, plant and equipment                                      |                                  |           | (39,544  | )        |      |            | (69,423    | )       
|                                                      | Proceeds from sale of property, plant and equipment                             |                                  |           | 2,225    |          |      |            | 200        |         
|                                                      | Payments relating to intangible assets                                          |                                  |           |         |          |      |            | (19,684    | )       
|                                                      | Redemption of marketable securities                                             |                                  |           |         |          |      |            | 750,000    |         
|                                                      |                                                                                 |                                  |           |          |          |      |            |            |         
|Net cash (used in) provided by investing activities   |                                                                                 |                                  | (37,319   | )        |          |      | 661,093    |           
|                                                      |                                                                                 |                                  |           |          |          |      |            |            |         
|Cash flows from financing activities:                 |                                                                                 |                                  |           |          |          |      |            |           
|                                                      | Repayment of long-term debt                                                     |                                  |           | (40,439  | )        |      |            | (47,328    | )       
|                                                      | Proceeds from issuance of notes payable                                         |                                  |           | 8,000    |          |      |            |           |         
|                                                      | Net proceeds from issuance of stock                                             |                                  |           | 13,000   |          |      |            | 32,900     |         
|                                                      | Deferred offering costs                                                         |                                  |           | (22,347  | )        |      |            |           |         
|                                                      |                                                                                 |                                  |           |          |          |      |            |            |         
|Net cash used in financing activities                 |                                                                                 |                                  | (41,786   | )        |          |      | (14,428    | )         
|                                                      |                                                                                 |                                  |           |          |          |      |            |            |         
|Effect of exchange rates on cash and cash equivalents |                                                                                 |                                  | 133       |          |          |      | 37,297     |           
|                                                      |                                                                                 |                                  |           |          |          |      |            |            |         
|Net increase (decrease) in cash and cash equivalents  |                                                                                 |                                  | 33,724    |          |          |      | (540,696   | )         
|Cash and cash equivalents at beginning of year        |                                                                                 |                                  | 1,012,397 |          |          |      | 1,553,093  |           
|                                                      |                                                                                 |                                  |           |          |          |      |            |            |         
|Cash and cash equivalents at end of year              |                                                                                 | $                                | 1,046,121 |          |          |      | 1,012,397  |           
|                                                      |                                                                                 |                                  |           |          |          |      |            |            |         
|Supplemental disclosure of cash flow information:     |                                                                                 |                                  |           |          |          |      |            |           
|                                                      | Cash paid during the year for interest                                          |                                  | $         | 28,806   |          |      |            | 30,663     |         
|                                                      | Cash paid during the year for income taxes                                      |                                  |           |         |          |      |            |           |         

Supplemental disclosure of non-cash financing and investing activities:

The Company issued 9,666 shares of common stock valued at $37,700 as payment for the Companys 401(k) plan profit sharing contribution during
the fiscal year ended March 31, 2002.

During the fiscal year ended March 31, 2002, the Company issued 20,000 shares of its common stock to a vendor valued at $51,000 at March 31,
2002 related to a deposit on a mold for one of the Companys products.

At March 31, 2002, the Company had incurred $112,544 of costs related to the rights offering, which are included in deferred offering costs.
As of that same date $22,347 of these costs were paid.

See accompanying notes to consolidated financial statements.

Page 29



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##### 



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, otolaryngology 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 $249,914 and $1,680,899 for the years ended
March 31, 2002 and 2001, respectively, and generated cash flow from operating
activities of $112,696 for the year ended March 31, 2002 and generated negative
cash flow from operating activities of $1,224,658 for the year ended March 31,
2001.

The Company is currently selling its products outside the United States and is
undertaking IDE clinical trials in the United States. Based on the Companys
current plans, it is anticipated the Company will launch its products in the
U.S. after obtaining FDA approval. Completing clinical trials and obtaining FDA
approval is a costly and time-consuming process.

As a result of the Companys cost reduction activities, the funds generated
from sale of the Companys products outside the U.S. and the expected proceeds
from the May 2002 Shareholders rights offering (see note 4), management
believes that current resources will be adequate to meet the Companys cash
flow needs through fiscal 2003 and 2004, including research and development
activities associated with existing products and markets, and IDE clinical
work. In the event the Company were not to generate adequate cash flows from
operations or financing activities, the Company believes it has sufficient cash
resources through fiscal 2003, however, the Companys U.S. 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. Upon shipment, the risks and rewards of ownership are passed on
to the buyer. There are no customer acceptance provisions or Company
installation obligations. The Company sells its products to distributors who
sell to other distributors and end users, and to end users in the United
Kingdom. Sales to distributors were $3,100,000 and $3,300,000 in fiscal 2002
and 2001, respectively, or 63% and 58%, respectively, of net sales. Payment
terms range from prepayment to 60 days. The distributor payment terms are not
contingent on the distributor selling the product to other distributors or end
users. Customers do not have the right to return unsold product to the Company
except for warranty claims. The Company offers customary product warranties.
The allowance for doubtful accounts was $32,000 and zero at March 31, 2002
and 2001, respectively.

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.

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. The Companys significant accounting policies and
estimates include revenue recognition, accounts receivable, valuation of
inventory, foreign currency translation/transactions, and the determination of
recoverability of long-lived and intangible assets.

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, 2002 and 2001:

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|                |  |      |         |      |  |  |         | 
|--------------- |  | ---- | ------- | ---- |  |  | ------- | 
|                |  | 2002 |         | 2001
|                |  |      |         |     
|Raw materials   |  | $    | 91,050  |      |  |  | 82,827  | 
|Work-in-process |  |      | 134,490 |      |  |  | 337,077 | 
|Finished goods  |  |      | 406,562 |      |  |  | 332,532 | 
|                |  |      |         |      |  |  |         | 
|                |  | $    | 632,102 |      |  |  | 752,436 | 
|                |  |      |         |      |  |  |         | 

Property, Plant, and Equipment.Property, plant, and equipment are carried at
cost and consist of the following at March 31, 2002 and 2001:

|                              |  |      |           |      |  |  |           |  
|----------------------------- |  | ---- | --------- | ---- |  |  | --------- | -
|                              |  | 2002 |           | 2001
|                              |  |      |           |     
|Land                          |  | $    | 106,581   |      |  |  | 107,136   |  
|Building                      |  |      | 464,702   |      |  |  | 467,123   |  
|Equipment                     |  |      | 999,772   |      |  |  | 992,934   |  
|                              |  |      |           |      |  |  |           |  
|                              |  |      | 1,571,055 |      |  |  | 1,567,193 |  
|Less accumulated depreciation |  |      | (806,200  | )    |  |  | (665,004  | )
|                              |  |      |           |      |  |  |           |  
|                              |  | $    | 764,855   |      |  |  | 902,189   |  
|                              |  |      |           |      |  |  |           |  

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, 2002 and
2001:

|                                     |  |      |           |      |  |  |           | 
|------------------------------------ |  | ---- | --------- | ---- |  |  | --------- | 
|                                     |  | 2002 |           | 2001
|                                     |  |      |           |     
|FDA regulatory costs                 |  | $    | 843,077   |      |  |  | 703,985   | 
|Other research and development costs |  |      | 841,923   |      |  |  | 1,446,192 | 
|                                     |  |      |           |      |  |  |           | 
|                                     |  | $    | 1,685,000 |      |  |  | 2,150,177 | 
|                                     |  |      |           |      |  |  |           | 

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.

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.

The Company accounts for stock-based instruments granted to non-employees under
the fair value method of SFAS No. 123 and Emerging Issues Task Force (EITF)
96-18, Accounting for Equity Instruments That Are Issued to Other Than

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Employees for Acquiring, or in Conjunction with Selling, Goods or Services.
Under SFAS No. 123, options are recorded at their fair value on the measurement
date, which is typically the vesting date.

Reconciliation of Loss 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, 2002 and 2001 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, 2002 |                  |  |              |            |            |  |              |   |              |  |  |           
|               | Net loss         |  | $            | (249,914   | )          |  |              |  |              |  |  | (249,914   | )
|               | Shares           |  |              | 2,033,925  |            |  |              |  |              |  |  | 2,033,925  |  
|               |                  |  |              |            |            |  |              |   |              |  |  |           
|               | Per share amount |  | $            | (0.12      | )          |  |              |  |              |  |  | (0.12      | )
|               |                  |  |              |            |            |  |              |   |              |  |  |           
|Year ended:    |                  |  |              |            |            |  |              |   |              |  |  |           
|March 31, 2001 |                  |  |              |            |            |  |              |   |              |  |  |           
|               | Net loss         |  | $            | (1,680,899 | )          |  |              |  |              |  |  | (1,680,899 | )
|               | Shares           |  |              | 1,996,683  |            |  |              |  |              |  |  | 1,996,683  |  
|               |                  |  |              |            |            |  |              |   |              |  |  |           
|               | Per share amount |  | $            | (0.84      | )          |  |              |  |              |  |  | (0.84      | )
|               |                  |  |              |            |            |  |              |   |              |  |  |           

The following options and warrants outstanding at March 31, 2002 and 2001 to
purchase shares of common stock were excluded from diluted loss per share as
their impact would be anti-dilutive as follows:

|            |                |  |                  |         |                 |  |   |            | 
|----------- | -------------- |  | ---------------- | ------- | --------------- |  | - | ---------- | 
|            |                |  | Number of        |         | Range of       
|            |                |  | Options/Warrants |         | exercise prices
|            |                |  |                  |         |                
|Year ended: |                |  |                  |         |                 |  |   |           
|            | March 31, 2002 |  |                  | 520,071 |                 |  | $ | 1.50-10.50 | 
|            | March 31, 2001 |  |                  | 399,733 |                 |  | $ | 1.50-10.50 | 

New Accounting Pronouncements.In August 2001, the Financial Accounting
Standards Board issued Statement No. 144, Accounting for the Impairment or
disposal of Long-Lived Assets. Statement No. 144 addresses the financial
accounting and reporting for the impairment or disposal of long-lived assets
and supersedes Statement No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of. However, this statement
retains the fundamental provisions of Statement No. 121 for (a) recognition and
measurement of the impairment of long-lived assets to be held and used and (b)
measurement of long-lived assets to be disposed of by sale. Statement No. 144
also supersedes the accounting and reporting provisions of APB Opinion No. 30,
Reporting the Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions, for the disposal of a segment of a business. However,
this Statement retains the requirement of APB No. 30 to report discontinued
operations separately from continuing operations and extends that reporting to
a component of an entity that either has been disposed of or is classified as
held for sale. This statement also amends ARB No. 51, Consolidated Financial
Statements, to eliminate the exception to consolidation for a temporarily
controlled subsidiary. The Company will adopt the provision of Statement No.
144 effective April 1, 2002. The Company has evaluated Statement No. 144 and
determined that the pronouncement will have no material impact on the Companys
consolidated financial statements.



|2. |  | Notes Payable
|-- |  | -------------

Notes payable consist of the following at March 31, 2002 and 2001:

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##### 



|                                                                                                                            |  |      |         |      |  |  |         | 
|--------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------- | ---- |  |  | ------- | 
|                                                                                                                            |  | 2002 |         | 2001
|                                                                                                                            |  |      |         |     
|Mortgage note, monthly payments of $2,110
plus variable rate interest through November
2017 (rate at March 31, 2002  5.3%) |  | $    | 399,640 |      |  |  | 427,178 | 
|Note payable, monthly payments of $383 plus
fixed rate interest through August 2008
(rate until August 2003  5.6%)         |  |      | 29,500  |      |  |  | 34,277  | 
|                                                                                                                            |  |      |         |      |  |  |         | 
|                                                                                                                            |  |      | 429,140 |      |  |  | 461,455 | 
|Less current maturities                                                                                                     |  |      | 29,918  |      |  |  | 30,074  | 
|                                                                                                                            |  |      |         |      |  |  |         | 
|                                                                                                                            |  | $    | 399,222 |      |  |  | 431,381 | 
|                                                                                                                            |  |      |         |      |  |  |         | 

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

|           |  |   |         | 
|---------- |  | - | ------- | 
|2003       |  | $ | 29,918  | 
|2004       |  |   | 29,918  | 
|2005       |  |   | 29,918  | 
|2006       |  |   | 29,918  | 
|2007       |  |   | 29,918  | 
|Thereafter |  |   | 279,550 | 
|           |  |   |         | 
|           |  | $ | 429,140 | 
|           |  |   |         | 



|3. |  | Capital Lease Obligations
|-- |  | -------------------------

The Company leases various equipment under noncancelable capital leases. The
leases call for aggregate monthly payments of $2,017 with various expiration
dates through November 2002. Equipment includes $69,166 and $61,305 of cost
and $49,469 and $39,356 of accumulated amortization as of March 31, 2002 and
2001, respectively, related to these leases.

Future minimum capital lease payments are as follows as of March 31, 2002:

|                                                         |  |   |        |  
|-------------------------------------------------------- |  | - | ------ | -
|2003                                                     |  | $ | 13,541 |  
|Amount representing interest                             |  |   | (1,148 | )
|                                                         |  |   |        |  
|Present value of capital lease payments                  |  |   | 12,393 |  
|Current maturities                                       |  |   | 12,393 |  
|                                                         |  |   |        |  
|Obligations under capital leases less current maturities |  | $ |       |  
|                                                         |  |   |        |  



|4. |  | Shareholders Equity
|-- |  | --------------------

Stock.The Company effected a 1-for-3 reverse stock split on April 2, 2002.
The accompanying financial statements have been adjusted to reflect the reverse
stock split.

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Common Shareholders on May 13, 2002 received one subscription right for each
two shares of common stock owned. Each subscription right allows the holder to
acquire for $3.00 an aggregate of 3 shares of common stock and one common stock
purchase warrant. Each warrant entitles the holder for a term of two years from
the end of the Rights Offering to purchase one share of common stock for $2.00
per share. At March 31, 2002, the Company had incurred $112,544 of costs
related to this offering, which are included in deferred offering costs.

Stock Options.Pursuant to the Companys two stock option plans, the Company
has reserved 766,666 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, 2000 |  |             | 351,133 |                |  | $        | 6.12 | 
|Granted                   |  |             | 65,666  |                |  |          | 4.53 | 
|Exercised                 |  |             | (21,933 | )              |  |          | 1.50 | 
|Cancelled                 |  |             | (45,133 | )              |  |          | 7.14 | 
|                          |  |             |         |                |  |          |      | 
|Balance at March 31, 2001 |  |             | 349,733 |                |  |          | 5.97 | 
|Granted                   |  |             | 161,000 |                |  |          | 2.40 | 
|Exercised                 |  |             | (4,333  | )              |  |          | 3.00 | 
|Cancelled                 |  |             | (36,329 | )              |  |          | 5.40 | 
|                          |  |             |         |                |  |          |      | 
|Balance at March 31, 2002 |  |             | 470,071 |                |  | $        | 4.82 | 
|                          |  |             |         |                |  |          |      | 

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

| |  |       |       |             |  |           |         |             |  |          |      |  |  |  |         | 
| |  | ----- | ----- | ----------- |  | --------- | ------- | ----------- |  | -------- | ---- |  |  |  | ------- | 
| |  |       |       |             |  |           |         |             |  | Weighted |      |  |  | 
| |  |       |       |             |  |           |         |             |  | average  |      |  |  | 
| |  |       |       |             |  | Number    |         | remaining   |  |          |      | 
| |  |       |       |             |  | of shares |         | life in     |  | Number  
| |  | Price |       | outstanding |  | years     |         | exercisable
| |  |       |       |             |  |           |         |            
| |  | $     | 1.50  |             |  |           | 26,666  |             |  |          | 2.67 |  |  |  | 26,666  | 
| |  |       | 2.40  |             |  |           | 160,654 |             |  |          | 4.50 |  |  |  | 107,318 | 
| |  |       | 3.00  |             |  |           | 64,330  |             |  |          | 0.39 |  |  |  | 64,330  | 
| |  |       | 5.25  |             |  |           | 3,333   |             |  |          | 3.33 |  |  |  | 3,333   | 
| |  |       | 6.75  |             |  |           | 35,000  |             |  |          | 3.30 |  |  |  | 23,333  | 
| |  |       | 6.96  |             |  |           | 19,999  |             |  |          | 2.83 |  |  |  | 13,332  | 
| |  |       | 7.50  |             |  |           | 136,757 |             |  |          | 2.47 |  |  |  | 98,319  | 
| |  |       | 9.57  |             |  |           | 3,333   |             |  |          | 0.42 |  |  |  | 3,333   | 
| |  |       | 9.75  |             |  |           | 14,999  |             |  |          | 0.83 |  |  |  | 14,999  | 
| |  |       | 10.50 |             |  |           | 5,000   |             |  |          | 3.17 |  |  |  | 5,000   | 
| |  |       |       |             |  |           |         |             |  |          |      |  |  |  |         | 
| |  |       |       |             |  |           | 470,071 |             |  |          |      |  |  |  | 359,963 | 
| |  |       |       |             |  |           |         |             |  |          |      |  |  |  |         | 

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Warrants.In connection with the June 18, 1998 private placement, warrants to
purchase 50,000 shares of common stock were issued at an exercise price of
$7.14 per share. At March 31, 2002 all of these warrants were outstanding and
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 increased to
the pro forma amounts shown below:

|                                   |             |  |      |          |      |  |  |            |  
|---------------------------------- | ----------- |  | ---- | -------- | ---- |  |  | ---------- | -
|                                   |             |  | 2002 |          | 2001
|                                   |             |  |      |          |     
|Net loss:                          |             |  |      |          |      |  |  |           
|                                   | As reported |  | $    | (249,914 | )    |  |  | (1,680,899 | )
|                                   | Pro forma   |  |      | (676,329 | )    |  |  | (1,954,978 | )
|Net loss per common share  basic: |             |  |      |          |      |  |  |           
|                                   | As reported |  | $    | (0.12    | )    |  |  | (0.84      | )
|                                   | Pro forma   |  |      | (0.33    | )    |  |  | (0.98      | )

The per share weighted-average fair value of stock options granted during 2002
and 2001 was $1.69 and $4.86, respectively on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions:

|                        |  |      |       |      |  |  |       |  
|----------------------- |  | ---- | ----- | ---- |  |  | ----- | -
|                        |  | 2002 |       | 2001
|                        |  |      |       |     
|Expected dividend yield |  |      | 0.00  | %    |  |  | 0.00  | %
|Risk-free interest rate |  |      | 3.96  | %    |  |  | 6.10  | %
|Expected volatility     |  |      | 88.19 | %    |  |  | 89.00 | %
|Expected life, in years |  |      | 5.00  |      |  |  | 5.00  |  



|5. |  | 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, 2002 and 2001 was $15,672 and $20,105, 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 $154,851 and $179,403 for the years
ended March 31, 2002 and 2001, 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, 2002 and 2001.

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 $94,992 and $124,692
for the years ended March 31, 2002 and 2001, respectively. The Companys
retirement savings plan in the

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##### 



United States conforms to Section 401(k) of the Internal Revenue Code and
participation is available to substantially all employees. The Company may
also make discretionary contributions ratably to all eligible employees. The
Companys contributions in fiscal 2002 and 2001 in the United States were made
in the form of Company common stock and became fully vested when made.

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:

|     |  |   |         | 
|---- |  | - | ------- | 
|2003 |  | $ | 261,150 | 
|2004 |  |   | 129,254 | 
|2005 |  |   | 109,892 | 
|2006 |  |   | 75,935  | 
|2007 |  |   | 47,152  | 
|2008 |  |   | 6,156   | 
|     |  |   |         | 
|     |  | $ | 629,539 | 
|     |  |   |         | 

Total rent expense paid for operating leases was $338,487 and $362,684 in 2002
and 2001, respectively.

Legal Proceedings.In July 21, 1998, the Company announced the United States
Patent and Trademark Office (USPTO) had informed the Company the USPTO would,
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.

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 and CMT
subsequently brought a counterclaim against the Company with respect to such
matter.

Effective October 26, 2001, the Company and CMT entered into a Settlement
Agreement terminating the above-referenced legal proceedings; as a part of such
Agreement, the Company agreed to dismiss the Misappropriation Lawsuit and to
abandon the Interference Proceeding.

Proceeds from the Settlement, totaling $407,000, will be recognized upon the
receipt of cash. During the fiscal year ended March 31, 2002, the Company
received and recorded a $200,000 gain related to this settlement. In the first
quarter of fiscal 2003 the Company received and recorded a $207,000 gain.

Employment Agreements.The Company 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 $7.50 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.

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|6. |  | Income Taxes
|-- |  | ------------

The components of income tax expense (benefit) for each of the years in the
two-year period ended March 31, 2002 consist of the following:

|                                   |          |                |   |      |   |      |   |  |   | 
|---------------------------------- | -------- | -------------- | - | ---- | - | ---- | - |  | - | 
|                                   |          |                |   | 2002 |   | 2001
|Income tax provision:              |          |                |   |      |   |      |   | 
|                                   | Current: |                |   |      |   |      |   |  |  
|                                   |          | U.S. and state |   | $    |  |      |   |  |  | 
|                                   |          | Foreign        |   |      |  |      |   |  |  | 
|                                   |          |                |   |      |   |      |   | 
|Total income tax expense (benefit) |          | $              |  |      |   |      |  | 
|                                   |          |                |   |      |   |      |   | 

Effective tax rates differ from statutory federal income tax rates for the year
ended March 31, 2002 and 2001 as follows:

|                                  |  |      |       |      |  |  |       |   
|--------------------------------- |  | ---- | ----- | ---- |  |  | ----- | --
|                                  |  | 2002 |       | 2001
|                                  |  |      |       |     
|Statutory federal income tax rate |  |      | (34.0 | )%   |  |  | (34.0 | )%
|Valuation allowance increase      |  |      | 33.6  | %    |  |  | 32.4  | % 
|Other                             |  |      | 0.4   | %    |  |  | 1.6   | % 
|                                  |  |      |       |      |  |  |       |   
|                                  |  |      |      |      |  |  |      |   
|                                  |  |      |       |      |  |  |       |   

Deferred taxes as of March 31, 2002 and 2001 consist of the following:

|                         |                                       |   |            |           |      |  |            |           | 
|------------------------ | ------------------------------------- | - | ---------- | --------- | ---- |  | ---------- | --------- | 
|                         |                                       |   | 2002       |           | 2001
|                         |                                       |   |            |           |     
|Deferred tax assets:     |                                       |   |            |           |      |  |            |          
|                         | Other reserves and accruals           |   | $          | 49,000    |      |  |            | 56,000    | 
|                         | Deferred profit on intercompany sales |   |            | 110,000   |      |  |            | 67,000    | 
|                         | Net operating loss carryforwards      |   |            | 2,532,000 |      |  |            | 2,387,000 | 
|                         |                                       |   |            |           |      |  |            |           | 
|                         |                                       |   | 2,691,000  |           |      |  | 2,510,000  |          
|Less valuation allowance |                                       |   | (2,691,000 | )         |      |  | (2,510,000 | )        
|                         |                                       |   |            |           |      |  |            |           | 
|                         |                                       | $ |           |           |      |  |           |          
|                         |                                       |   |            |           |      |  |            |           | 

At March 31, 2002 the Company had U.S. net operating loss carryforwards (NOL)
of approximately $5,412,000 for U.S. income tax purposes, which begin to expire
in 2012 through 2032, and foreign NOLs of approximately $1,476,000 which can
be carried forward indefinitely. U.S. net operating loss carryforwards cannot
be used to offset taxable income in foreign jurisdictions. In addition, U.S.
tax rules impose limitations on the use of net operating losses following
certain changes in ownership. Such a change in ownership may limit the amount
of these benefits that would be available to offset future taxable income each
year, starting with the year of ownership change.

A valuation allowance is provided when it is more likely than not a portion of
the deferred tax assets will not be realized. The Company has established a
valuation allowance for U.S. and 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 $181,000
and $587,000, respectively in 2002 and 2001.

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##### 





|7. |  | Restructuring Activities
|-- |  | ------------------------

In order to reduce costs, an aggregate of 21 positions worldwide were canceled
in fiscal 2001 and August 2001, either by terminating employment agreements or
through attrition. This has reduced salary costs and associated expenses by
approximately $75,000 a month. Broken down by department the reductions are as
follows: a $9,000 per month reduction in manufacturing, a $18,000 per month
reduction in general and administrative, a $24,000 per month reduction in
research and development and a $24,000 per month reduction in selling and
marketing. The total severance payments recorded in fiscal 2001 and 2002 were
approximately $200,000. There are no restructuring related cash obligations
remaining as of March 31, 2002. The Companys realized cost reductions were in
line with managements expectation. The Company believes increased focus on
strategic goals and increased efficiencies will allow the Company to compensate
for the eliminated positions.



|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 otolaryngology and 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 89% and 92% of total sales for the years ended March 31, 2002
and 2001, respectively.

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

During fiscal 2002 approximately 12% of the Companys net sales were to one
customer. During fiscal 2001 no customer exceeded 10% of the Companys net
sales.

Information regarding operations in different geographies for the years ended
March 31, 2002 and 2001 is as follows:

|                                    |  |        |           |             |  |         |           |        |  |              |           |              |  |  |        |  |  |             |            |   |  |  |           | 
|----------------------------------- |  | ------ | --------- | ----------- |  | ------- | --------- | ------ |  | ------------ | --------- | ------------ |  |  | ------ |  |  | ----------- | ---------- | - |  |  | --------- | 
|                                    |  |        |           |             |  |         |           |        |  |              |           |              |  |  |        |  |  | Adjustments |            |   |  | 
|                                    |  | United |           | The         |  | United  |           |        |  |              |           | and          |  |  |        | 
|                                    |  | States |           | Netherlands |  | Kingdom |           | Canada |  | eliminations |           | Consolidated
|                                    |  |        |           |             |  |         |           |        |  |              |           |             
|Fiscal 2002                         |  |        |           |             |  |         |           |        |  |              |           |              |  |  |        |  |  |             |            |   |  |  |           | 
|Sales to
unaffiliated
customers     |  | $      |          |             |  |         | 4,552,037 |        |  |              | 1,678,401 |              |  |  |       |  |  |             | (1,256,462 | ) |  |  | 4,973,976 | 
|Long-lived assets
At March 31, 2002 |  | $      | 177,758   |             |  |         | 641,627   |        |  |              | 18,347    |              |  |  |       |  |  |             |           |   |  |  | 837,732   | 
|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 | ) |  |  | 1,003,421 | 

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