##### 



Exhibit 13

UROPLASTY, INC. AND SUBSIDIARIES

Consolidated Financial Statements
March 31, 2003 and 2002

TABLE OF CONTENTS

|                             |                                                                                 |  |         |         | 
|---------------------------- | ------------------------------------------------------------------------------- |  | ------- | ------- | 
|                             |                                                                                 |  | Page(s)
|Independent Auditors Report |                                                                                 |  | 28      |        
|Financial Statements:        |                                                                                 |  |         |        
|                             | Consolidated Balance Sheets                                                     |  |         | 29 - 30 | 
|                             | Consolidated Statements of Operations                                           |  |         | 31      | 
|                             | Consolidated Statements of Shareholders Equity and Comprehensive
Income (Loss) |  |         | 32      | 
|                             | Consolidated Statements of Cash Flows                                           |  |         | 33      | 
|                             | Notes to Consolidated Financial Statements                                      |  |         | 34 - 42 | 

Page 27



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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, 2003 and 2002, and the related consolidated
statements of operations, shareholders equity and comprehensive income (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, 2003 and 2002, 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 2, 2003

Page 28



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##### 



UROPLASTY, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
March 31, 2003 and 2002

|       |                                                                                             |                           |   |           |           |      |  |           |           | 
|------ | ------------------------------------------------------------------------------------------- | ------------------------- | - | --------- | --------- | ---- |  | --------- | --------- | 
|       |                                                                                             |                           |   | 2003      |           | 2002
|       |                                                                                             |                           |   |           |           |     
|Assets |                                                                                             |                           |   |           |           |      |  |          
|       | Current assets:                                                                             |                           |   |           |           |      |  |           |          
|       |                                                                                             | Cash and cash equivalents |   | $         | 3,375,981 |      |  |           | 1,046,121 | 
|       |                                                                                             | Accounts receivable, net  |   |           | 969,556   |      |  |           | 845,431   | 
|       |                                                                                             | Inventories               |   |           | 455,114   |      |  |           | 632,102   | 
|       |                                                                                             | Deferred offering costs   |   |           |          |      |  |           | 112,544   | 
|       |                                                                                             | Other                     |   |           | 188,192   |      |  |           | 130,518   | 
|       |                                                                                             |                           |   |           |           |      |  |           |           | 
|       | Total current assets                                                                        |                           |   | 4,988,843 |           |      |  | 2,766,716 |          
|       | Property, plant, and equipment, net                                                         |                           |   | 833,234   |           |      |  | 764,855   |          
|       | Intangible assets, net of accumulated
amortization of $198,714 in 2003
and $173,376 in 2002 |                           |   | 48,214    |           |      |  | 72,877    |          
|       |                                                                                             |                           |   |           |           |      |  |           |           | 
|       | Total assets                                                                                |                           | $ | 5,870,291 |           |      |  | 3,604,448 |          
|       |                                                                                             |                           |   |           |           |      |  |           |           | 

See accompanying notes to consolidated financial statements.

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UROPLASTY, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
March 31, 2003 and 2002

|                                     |                                            |                                                                                                                                                           |                                |           |            |         |      |           |            |         | 
|------------------------------------ | ------------------------------------------ | --------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------ | --------- | ---------- | ------- | ---- | --------- | ---------- | ------- | 
|                                     |                                            |                                                                                                                                                           |                                |           | 2003       |         | 2002
|                                     |                                            |                                                                                                                                                           |                                |           |            |         |     
|Liabilities and Shareholders Equity |                                            |                                                                                                                                                           |                                |           |            |         |      |          
|                                     | Current liabilities:                       |                                                                                                                                                           |                                |           |            |         |      |           |           
|                                     |                                            | Accounts payable                                                                                                                                          |                                | $         | 199,673    |         |      |           | 230,631    |        
|                                     |                                            | Accrued liabilities:                                                                                                                                      |                                |           |            |         |      |           |            |        
|                                     |                                            |                                                                                                                                                           | Compensation and payroll taxes |           |            | 152,250 |      |           |            | 103,367 | 
|                                     |                                            |                                                                                                                                                           | Foreign sales tax              |           |            | 15,604  |      |           |            | 19,146  | 
|                                     |                                            |                                                                                                                                                           | Royalties                      |           |            | 26,419  |      |           |            | 25,096  | 
|                                     |                                            |                                                                                                                                                           | Clinical expense               |           |            | 48,228  |      |           |            | 57,250  | 
|                                     |                                            |                                                                                                                                                           | Audit and tax-consulting fees  |           |            | 29,771  |      |           |            | 48,048  | 
|                                     |                                            |                                                                                                                                                           | Retirement plans expense       |           |            | 30,644  |      |           |            | 67,348  | 
|                                     |                                            |                                                                                                                                                           | Other                          |           |            | 47,021  |      |           |            | 79,223  | 
|                                     |                                            | Current maturities  long-term debt                                                                                                                       |                                |           | 37,502     |         |      |           | 42,311     |        
|                                     |                                            |                                                                                                                                                           |                                |           |            |         |      |           |            |        
|                                     | Total current liabilities                  |                                                                                                                                                           |                                | 587,112   |            |         |      | 672,420   |           
|                                     | Long-term debt  less current maturities:  |                                                                                                                                                           |                                | 462,787   |            |         |      | 399,222   |           
|                                     |                                            |                                                                                                                                                           |                                |           |            |         |      |           |            |        
|                                     | Total liabilities                          |                                                                                                                                                           |                                | 1,049,899 |            |         |      | 1,071,642 |           
|                                     |                                            |                                                                                                                                                           |                                |           |            |         |      |           |            |        
|                                     | Shareholders equity:                      |                                                                                                                                                           |                                |           |            |         |      |           |           
|                                     |                                            | Common stock $.01 par value; 20,000,000
shares authorized, 4,488,971 and
2,047,332 shares issued and
outstanding at March 31, 2003 and
2002, respectively |                                |           | 44,890     |         |      |           | 20,473     |        
|                                     |                                            | Additional paid-in capital                                                                                                                                |                                |           | 8,457,901  |         |      |           | 6,149,571  |        
|                                     |                                            | Accumulated deficit                                                                                                                                       |                                |           | (3,163,156 | )       |      |           | (3,204,370 | )      
|                                     |                                            | Vendor deposit                                                                                                                                            |                                |           | (112,000   | )       |      |           | (51,000    | )      
|                                     |                                            | Accumulated other comprehensive loss                                                                                                                      |                                |           | (407,243   | )       |      |           | (381,868   | )      
|                                     |                                            |                                                                                                                                                           |                                |           |            |         |      |           |            |        
|                                     | Total shareholders equity                 |                                                                                                                                                           |                                | 4,820,392 |            |         |      | 2,532,806 |           
|                                     |                                            |                                                                                                                                                           |                                |           |            |         |      |           |            |        
|                                     | Commitments and contingencies (note 4)     |                                                                                                                                                           |                                |           |            |         |      |           |           
|                                     | Total liabilities and shareholders equity |                                                                                                                                                           | $                              | 5,870,291 |            |         |      | 3,604,448 |           
|                                     |                                            |                                                                                                                                                           |                                |           |            |         |      |           |            |        

See accompanying notes to consolidated financial statements.

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##### 



UROPLASTY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended March 31, 2003 and 2002

|                                            |                                       |   |           |           |      |  |           |           |  
|------------------------------------------- | ------------------------------------- | - | --------- | --------- | ---- |  | --------- | --------- | -
|                                            |                                       |   | 2003      |           | 2002
|                                            |                                       |   |           |           |     
|Net sales                                   |                                       | $ | 5,343,656 |           |      |  | 4,973,976 |          
|Cost of goods sold                          |                                       |   | 1,599,978 |           |      |  | 1,456,809 |          
|                                            |                                       |   |           |           |      |  |           |          
|Gross profit                                |                                       |   | 3,743,678 |           |      |  | 3,517,167 |          
|                                            |                                       |   |           |           |      |  |           |          
|Operating expenses                          |                                       |   |           |           |      |  |           |          
|                                            | General and administrative            |   |           | 1,220,271 |      |  |           | 1,154,419 |  
|                                            | Research and development              |   |           | 2,067,725 |      |  |           | 1,685,000 |  
|                                            | Selling and marketing                 |   |           | 1,142,834 |      |  |           | 1,106,640 |  
|                                            |                                       |   |           |           |      |  |           |          
|                                            |                                       |   | 4,430,830 |           |      |  | 3,946,059 |          
|                                            |                                       |   |           |           |      |  |           |          
|Operating loss                              |                                       |   | (687,152  | )         |      |  | (428,892  |          
|                                            |                                       |   |           |           |      |  |           |          
|Other income (expense)                      |                                       |   |           |           |      |  |           |          
|                                            | Interest income                       |   |           | 42,497    |      |  |           | 19,452    |  
|                                            | Interest expense                      |   |           | (24,057   | )    |  |           | (25,769   | )
|                                            | Foreign currency exchange gain (loss) |   |           | 530,083   |      |  |           | (14,373   | )
|                                            | Legal settlement (note 4)             |   |           | 180,000   |      |  |           | 200,000   |  
|                                            | Other                                 |   |           | (157      | )    |  |           | (332      | )
|                                            |                                       |   |           |           |      |  |           |          
|                                            |                                       |   | 728,366   |           |      |  | 178,978   |          
|                                            |                                       |   |           |           |      |  |           |          
|Income (loss) before income taxes           |                                       |   | 41,214    |           |      |  | (249,914  | )        
|Income tax expense                          |                                       |   |          |           |      |  |          |          
|                                            |                                       |   |           |           |      |  |           |          
|Net income (loss)                           |                                       | $ | 41,214    |           |      |  | (249,914  | )        
|                                            |                                       |   |           |           |      |  |           |          
|Net income (loss) per common share:         |                                       |   |           |           |      |  |           |          
|                                            | Basic                                 |   | $         | 0.01      |      |  |           | (0.11     | )
|                                            | Diluted                               |   | $         | 0.01      |      |  |           | (0.11     | )
|Weighted average common shares outstanding: |                                       |   |           |           |      |  |           |          
|                                            | Basic                                 |   |           | 3,762,165 |      |  |           | 2,290,971 |  
|                                            | Diluted                               |   |           | 3,847,555 |      |  |           | 2,290,971 |  

See accompanying notes to consolidated financial statements.

Page 31



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##### 



UROPLASTY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY AND COMPREHENSIVE INCOME (LOSS)
Years ended March 31, 2003 and 2002

|                                                             |  |              |           |         |  |             |        |         |  |               |           |               |  |        |            |   |  |  |          |       |  |             |          |   |  |  |           |  
|------------------------------------------------------------ |  | ------------ | --------- | ------- |  | ----------- | ------ | ------- |  | ------------- | --------- | ------------- |  | ------ | ---------- | - |  |  | -------- | ----- |  | ----------- | -------- | - |  |  | --------- | -
|                                                             |  |              |           |         |  |             |        |         |  |               |           |               |  |        |            |   |  |  |          |       |  | Accumulated |          |   |  | 
|                                                             |  |              |           |         |  |             |        |         |  | Additional    |           |               |  |        |            |   |  |  |          | Other |  | Total      
|                                                             |  | Common Stock |           | Paid-in |  | Accumulated |        | Vendor  |  | Comprehensive |           | Shareholders'
|                                                             |  | Shares       |           | Amount  |  | Capital     |        | Deficit |  | Deposits      |           | Income (Loss) |  | Equity
|                                                             |  |              |           |         |  |             |        |         |  |               |           |               |  |       
|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 |  
|Rights offering, net                                         |  |              | 2,394,639 |         |  |             | 23,947 |         |  |               | 2,219,022 |               |  |        |           |   |  |  |         |       |  |             |         |   |  |  | 2,242,969 |  
|Employee retirement
savings plan
contribution                |  |              | 27,000    |         |  |             | 270    |         |  |               | 27,000    |               |  |        |           |   |  |  |         |       |  |             |         |   |  |  | 27,270    |  
|Non-employee stock-based
consulting and
compensation expense |  |              |          |         |  |             |       |         |  |               | 1,508     |               |  |        |           |   |  |  |         |       |  |             |         |   |  |  | 1,508     |  
|Vendor deposit                                               |  |              | 20,000    |         |  |             | 200    |         |  |               | 60,800    |               |  |        |           |   |  |  | (61,000  | )     |  |             |         |   |  |  |          |  
|Net income                                                   |  |              |          |         |  |             |       |         |  |               |          |               |  |        | 41,214     |   |  |  |         |       |  |             |         |   |  |  | 41,214    |  
|Translation adjustment                                       |  |              |          |         |  |             |       |         |  |               |          |               |  |        |           |   |  |  |         |       |  |             | (25,375  | ) |  |  | (25,375   | )
|                                                             |  |              |           |         |  |             |        |         |  |               |           |               |  |        |            |   |  |  |          |       |  |             |          |   |  |  |           |  
|Total comprehensive
income                                   |  |              |           |         |  |             |        |         |  |               |           |               |  |        |            |   |  |  |          |       |  |             |          |   |  |  | 15,839    |  
|                                                             |  |              |           |         |  |             |        |         |  |               |           |               |  |        |            |   |  |  |          |       |  |             |          |   |  |  |           |  
|Balance at March 31, 2003                                    |  |              | 4,488,971 |         |  | $           | 44,890 |         |  |               | 8,457,901 |               |  |        | (3,163,156 | ) |  |  | (112,000 | )     |  |             | (407,243 | ) |  |  | 4,820,392 |  
|                                                             |  |              |           |         |  |             |        |         |  |               |           |               |  |        |            |   |  |  |          |       |  |             |          |   |  |  |           |  

See accompanying notes to consolidated financial statements.

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UROPLASTY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended March 31, 2003 and 2002

|                                                                        |                                                                                          |                                |           |           |          |      |           |          |          |  
|----------------------------------------------------------------------- | ---------------------------------------------------------------------------------------- | ------------------------------ | --------- | --------- | -------- | ---- | --------- | -------- | -------- | -
|                                                                        |                                                                                          |                                |           | 2003      |          | 2002
|                                                                        |                                                                                          |                                |           |           |          |     
|Cash flows from operating activities:                                   |                                                                                          |                                |           |           |          |      |           |         
|                                                                        | Net income (loss)                                                                        |                                | $         | 41,214    |          |      |           | (249,914 | )       
|                                                                        | Adjustments to reconcile net income (loss) to net cash provided
by (used in) operations: |                                |           |           |          |      |           |          |         
|                                                                        |                                                                                          | Depreciation and amortization  |           |           | 217,768  |      |           |          | 194,796  |  
|                                                                        |                                                                                          | Loss on disposal of assets     |           |           |         |      |           |          | 2,120    |  
|                                                                        |                                                                                          | Stock-based consulting expense |           |           | 1,508    |      |           |          | 8,535    |  
|                                                                        | Changes in operating assets and liabilities:                                             |                                |           |           |          |      |           |          |         
|                                                                        |                                                                                          | Accounts receivable            |           |           | (124,125 | )    |           |          | 138,019  |  
|                                                                        |                                                                                          | Inventories                    |           |           | 176,988  |      |           |          | 120,334  |  
|                                                                        |                                                                                          | Other current assets           |           |           | (57,674  | )    |           |          | 128,479  |  
|                                                                        |                                                                                          | Accounts payable               |           |           | 86,509   |      |           |          | (13,965  | )
|                                                                        |                                                                                          | Accrued liabilities            |           |           | (49,541  | )    |           |          | (215,708 | )
|                                                                        |                                                                                          |                                |           |           |          |      |           |         
|Net cash provided by operating activities                               |                                                                                          |                                | 292,647   | )         |          |      | 112,696   |         
|                                                                        |                                                                                          |                                |           |           |          |      |           |         
|Cash flows from investing activities:                                   |                                                                                          |                                |           |           |          |      |           |         
|                                                                        | Payments for property, plant and equipment                                               |                                |           | (71,726   | )        |      |           | (39,544  | )       
|                                                                        | Proceeds from sale of property, plant and equipment                                      |                                |           |          |          |      |           | 2,225    |         
|                                                                        | Payments relating to intangible assets                                                   |                                |           | (675      | )        |      |           |         |         
|                                                                        |                                                                                          |                                |           |           |          |      |           |         
|Net cash used in investing activities                                   |                                                                                          |                                | (72,401   | )         |          |      | (37,319   | )       
|                                                                        |                                                                                          |                                |           |           |          |      |           |         
|Cash flows from financing activities:                                   |                                                                                          |                                |           |           |          |      |           |         
|                                                                        | Repayment of long-term debt                                                              |                                |           | (37,842   | )        |      |           | (40,439  | )       
|                                                                        | Proceeds from issuance of notes payable                                                  |                                |           |          |          |      |           | 8,000    |         
|                                                                        | Net proceeds from issuance of stock                                                      |                                |           | 2,265,316 |          |      |           | 13,000   |         
|                                                                        | Deferred offering costs                                                                  |                                |           |          |          |      |           | (22,347  | )       
|                                                                        |                                                                                          |                                |           |           |          |      |           |         
|Net cash provided by (used in) financing activities                     |                                                                                          |                                | 2,227,474 |           |          |      | (41,786   | )       
|                                                                        |                                                                                          |                                |           |           |          |      |           |         
|Effect of exchange rates on cash and cash equivalents                   |                                                                                          |                                | (117,860  | )         |          |      | 133       |         
|                                                                        |                                                                                          |                                |           |           |          |      |           |         
|Net increase in cash and cash equivalents                               |                                                                                          |                                | 2,329,860 |           |          |      | 33,724    |         
|Cash and cash equivalents at beginning of year                          |                                                                                          |                                | 1,046,121 |           |          |      | 1,012,397 |         
|                                                                        |                                                                                          |                                |           |           |          |      |           |         
|Cash and cash equivalents at end of year                                |                                                                                          | $                              | 3,375,981 |           |          |      | 1,046,121 |         
|                                                                        |                                                                                          |                                |           |           |          |      |           |         
|Supplemental disclosure of cash flow information:                       |                                                                                          |                                |           |           |          |      |           |         
|                                                                        | Cash paid during the year for interest                                                   |                                | $         | 25,860    |          |      |           | 28,806   |         
|                                                                        | Cash paid during the year for income taxes                                               |                                |           |          |          |      |           |         |         
|Supplemental disclosure of non-cash financing and investing activities: |                                                                                          |                                |           |           |          |      |           |         
|                                                                        | Shares issued for 401(k) plan profit sharing contribution                                |                                |           | 27,270    |          |      |           | 37,700   |         
|                                                                        | Restricted shares issued for mold purchase                                               |                                |           | 61,000    |          |      |           | 51,000   |         

See accompanying notes to consolidated financial statements.

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UROPLASTY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2003 and 2002

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, colon rectal
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 is currently selling its products outside of the United States and
is undertaking an FDA approved IDE clinical trial for Macroplastique in the
minimally invasive outpatient treatment of stress urinary incontinence in adult
females. 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 $2.4 million gross proceeds of a Rights Offering
completed July 2002, management believes current resources and the funds
generated from sale of the Companys products outside the U.S. will be adequate
to meet the Companys cash flow needs, including research and development
activities associated with existing products and markets through fiscal 2004.
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 $3,300,000 and $3,100,000 in fiscal 2003
and 2002, respectively, or 62% and 63%, 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 $46,000 and $32,000 at March 31, 2003
and 2002, 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.

Product Warranty. The Company, in general, warrants its new products to be
free from defects in material and workmanship under normal use and service for
a period of twelve months after date of sale. The Company warrants its products
to be free from defects in material and workmanship under normal use until its
stated expiration date. Under the

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terms of these warranties, the Company is obligated to repair or replace the
products it deems to be defective due to material or workmanship. The Company
does not have an accrual for warranty costs, as warranty claims are infrequent
and immaterial.

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, 2003 and 2002:

|                |  |      |         |      |  |  |         | 
|--------------- |  | ---- | ------- | ---- |  |  | ------- | 
|                |  | 2003 |         | 2002
|                |  |      |         |     
|Raw materials   |  | $    | 78,910  |      |  |  | 91,050  | 
|Work-in-process |  |      | 163,989 |      |  |  | 134,490 | 
|Finished goods  |  |      | 212,215 |      |  |  | 406,562 | 
|                |  |      |         |      |  |  |         | 
|                |  | $    | 455,114 |      |  |  | 632,102 | 
|                |  |      |         |      |  |  |         | 

Property, Plant, and Equipment.Property, plant, and equipment are carried at
cost and consist of the following at March 31, 2003 and 2002:

|                              |  |      |            |      |  |  |           |  
|----------------------------- |  | ---- | ---------- | ---- |  |  | --------- | -
|                              |  | 2003 |            | 2002
|                              |  |      |            |     
|Land                          |  | $    | 133,560    |      |  |  | 106,581   |  
|Building                      |  |      | 582,334    |      |  |  | 464,702   |  
|Equipment                     |  |      | 1,191,982  |      |  |  | 999,772   |  
|                              |  |      |            |      |  |  |           |  
|                              |  |      | 1,907,876  |      |  |  | 1,571,055 |  
|Less accumulated depreciation |  |      | (1,074,642 | )    |  |  | (806,200  | )
|                              |  |      |            |      |  |  |           |  
|                              |  | $    | 833,234    |      |  |  | 764,855   |  
|                              |  |      |            |      |  |  |           |  

Depreciation is provided for using both straight-line and accelerated methods
over useful lives of three to seven years for equipment and 40 years for the
building. Maintenance and repairs are charged to expense as incurred.
Renewals and betterments are capitalized and depreciated over their estimated
useful service lives.

Research and Development.Research and development costs are expensed as
incurred and consist of the following for the years ended March 31, 2003 and
2002:

|                                     |  |      |           |      |  |  |           | 
|------------------------------------ |  | ---- | --------- | ---- |  |  | --------- | 
|                                     |  | 2003 |           | 2002
|                                     |  |      |           |     
|FDA regulatory costs                 |  | $    | 1,084,749 |      |  |  | 843,077   | 
|Other research and development costs |  |      | 982,976   |      |  |  | 841,923   | 
|                                     |  |      |           |      |  |  |           | 
|                                     |  | $    | 2,067,725 |      |  |  | 1,685,000 | 
|                                     |  |      |           |      |  |  |           | 

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.

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Exchange gains and losses are recognized primarily as a result of fluctuations
in currency rates between the U.S. dollar (the functional reporting currency)
and the euro and British pound (currencies of the Companys subsidiaries), as
well as their effect on the dollar denominated intercompany obligations between
the Company and its foreign subsidiaries. At March 31, 2003 and 2002, the
Company had $0.4 million and $4.0 million denominated intercompany debt at its
foreign Dutch subsidiary. These intercompany balances are revolving in nature
and are not deemed to be long-term balances. The Company recognized net foreign
currency gains (losses) of $530,083 and $(14,373) for the years ended March 31,
2003 and 2002, respectively. The currency gain is primarily the result of a
weakened U.S. dollar compared to the euro and the currency loss the result of a
strengthened U.S. dollar compared to the euro. In January 2003 the Company
recapitalized one of the Dutch subsidiaries with an investment of 1.5 million
euros ($1.6 million). The proceeds from the investment were used to reduce the
dollar denominated intercompany debt at the Dutch subsidiary. This will result
in less volatility for changes in currency exchange rates in the Companys
statement of operations.

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.

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

Stock Option Plans.Had the Company determined compensation cost based on the
fair value at the grant date for its stock options under SFAS 123, Accounting
for Stock-Based Compensation, the Companys net income (loss) would have
increased to the pro forma amounts shown below:

|                                                                                                                |         |   |          |       |      |  |          |       |  
|--------------------------------------------------------------------------------------------------------------- | ------- | - | -------- | ----- | ---- |  | -------- | ----- | -
|                                                                                                                |         |   | 2003     |       | 2002
|                                                                                                                |         |   |          |       |     
|Net income (loss) - As reported                                                                                 |         | $ | 41,214   |       |      |  | (249,914 | )    
|Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards |         |   | (370,451 | )     |      |  | (426,415 | )    
|                                                                                                                |         |   |          |       |      |  |          |      
|Net loss - Pro forma                                                                                            |         |   | (329,237 | )     |      |  | (676,329 | )    
|                                                                                                                |         |   |          |       |      |  |          |      
|Net income (loss) per common share  As reported:                                                               |         |   |          |       |      |  |          |      
|                                                                                                                | Basic   |   | $        | 0.01  |      |  |          | (0.11 | )
|                                                                                                                | Diluted |   | $        | 0.01  |      |  |          | (0.11 | )
|Net loss per common share  Pro forma:                                                                          |         |   |          |       |      |  |          |      
|                                                                                                                | Basic   |   | $        | (0.09 | )    |  |          | (0.29 | )
|                                                                                                                | Diluted |   | $        | (0.09 | )    |  |          | (0.29 | )

The per share weighted-average fair value of stock options granted during 2003
and 2002 was $1.04 and $1.69, respectively on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions:

|                        |  |      |      |      |  |  |      |  
|----------------------- |  | ---- | ---- | ---- |  |  | ---- | -
|                        |  | 2003 |      | 2002
|                        |  |      |      |     
|Expected dividend yield |  |      | 0.00 | %    |  |  | 0.00 | %
|Risk-free interest rate |  |      | 3.00 | %    |  |  | 3.96 | %
|Expected volatility     |  |      | 168  | %    |  |  | 88   | %
|Expected life, in years |  |      | 5.00 |      |  |  | 5.00 |  

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Reconciliation of Income (Loss) and Share Amounts Used in EPS Calculation.
Basic income (loss) per common share is calculated by dividing net income
(loss) by the weighted-average common shares outstanding during the period.
Diluted income (loss) per common share for the fiscal years ended March 31,
2003 and 2002 was calculated using the treasury-stock method to compute the
weighted average common stock outstanding assuming the conversion of dilutive
potential common shares.

|               |                  |  |               |           |            |  |              |        |               |  |  |           |  
|-------------- | ---------------- |  | ------------- | --------- | ---------- |  | ------------ | ------ | ------------- |  |  | --------- | -
|               |                  |  | Basic         |           |            |  |              |        | Diluted      
|               |                  |  | income (loss) |           |            |  |              |        | Income (loss)
|               |                  |  | per share     |           | Effect of  |  | per share   
|               |                  |  | to common     |           | dilutive   |  | to common   
|               |                  |  | shareholders  |           | securities |  | shareholders
|               |                  |  |               |           |            |  |             
|Year ended:    |                  |  |               |           |            |  |              |        |               |  |  |          
|March 31, 2003 |                  |  |               |           |            |  |              |        |               |  |  |          
|               | Net income       |  | $             | 41,214    |            |  |              |       |               |  |  | 41,214    |  
|               | Shares           |  |               | 3,762,165 |            |  |              | 85,390 |               |  |  | 3,847,555 |  
|               |                  |  |               |           |            |  |              |        |               |  |  |          
|               | Per share amount |  | $             | 0.01      |            |  |              |       |               |  |  | 0.01      |  
|               |                  |  |               |           |            |  |              |        |               |  |  |          
|Year ended:    |                  |  |               |           |            |  |              |        |               |  |  |          
|March 31, 2002 |                  |  |               |           |            |  |              |        |               |  |  |          
|               | Net loss         |  | $             | (249,914  | )          |  |              |       |               |  |  | (249,914  | )
|               | Shares           |  |               | 2,290,971 |            |  |              |       |               |  |  | 2,290,971 |  
|               |                  |  |               |           |            |  |              |        |               |  |  |          
|               | Per share amount |  | $             | (0.11     | )          |  |              |       |               |  |  | (0.11     | )
|               |                  |  |               |           |            |  |              |        |               |  |  |          

The following options and warrants outstanding at March 31, 2003 and 2002 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, 2003 |  |                  | 1,246,624 |                 |  | $ | 1.50 - 10.50 | 
|            | March 31, 2002 |  |                  | 520,071   |                 |  | $ | 1.50 - 10.50 | 

New Accounting Pronouncements.

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of FASB Statement No.
123. This statement provides alternative methods of transition for a voluntary
change to the fair value method of accounting for stock-based compensation. The
statement amends the disclosure requirements of FASB Statement No. 123 to
require prominent disclosure in both annual and interim financial statements
about the method of accounting for stock-based compensation and the effect of
the method used on reported results. The Company accounts for stock-based
compensation arrangements in accordance with the provisions of Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and
complies with the disclosure provisions of FASB Statement No. 123. The
transition provisions are effective for fiscal years ending after December 15,
2002. The disclosure provisions are effective for interim periods beginning
after December 15, 2002. The Company implemented the required disclosure
provisions in the Form 10-KSB for the period ended March 31, 2003. The adoption
of this statement did not have a material impact on the Companys consolidated
financial position, results of operations or cash flows as the Company did not
make the voluntary change to the fair value method of accounting for
stock-based compensation.

In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging, which amends and clarifies financial
accounting and reporting for derivative instruments. The Company is required
to adopt this statement for transactions occurring after June 2003 and is
currently analyzing the impact of its adoption on the Companys financial
statements.

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2.        Notes Payable

Notes payable consist of the following at March 31, 2003 and 2002:

|                                                                                                                          |  |      |         |      |  |  |         | 
|------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------- | ---- |  |  | ------- | 
|                                                                                                                          |  | 2003 |         | 2002
|                                                                                                                          |  |      |         |     
|Mortgage note, monthly payments of $2,644
plus variable rate interest through November
2017 (rate at March 31, 20034.7%) |  | $    | 469,075 |      |  |  | 399,640 | 
|Note payable, monthly payments of $480 plus
fixed rate interest through August 2008
(rate until August 20035.6%)         |  |      | 31,204  |      |  |  | 29,500  | 
|                                                                                                                          |  |      |         |      |  |  |         | 
|                                                                                                                          |  |      | 500,279 |      |  |  | 429,140 | 
|Less current maturities                                                                                                   |  |      | 37,492  |      |  |  | 29,918  | 
|                                                                                                                          |  |      |         |      |  |  |         | 
|                                                                                                                          |  | $    | 462,787 |      |  |  | 399,222 | 
|                                                                                                                          |  |      |         |      |  |  |         | 

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

|           |  |   |         | 
|---------- |  | - | ------- | 
|2004       |  | $ | 37,492  | 
|2005       |  |   | 37,492  | 
|2006       |  |   | 37,492  | 
|2007       |  |   | 37,492  | 
|Thereafter |  |   | 350,311 | 
|           |  |   |         | 
|           |  | $ | 500,279 | 
|           |  |   |         | 

3.        Shareholders Equity

Stock.The Company effected a 1-for-3 reverse stock split on April 2, 2002.
All historical share and per share amounts have been restated to reflect the
reverse stock split.

Rights Offering.In July 2002, the Company completed its rights offering to
its shareholders in which the Company sold 798,213 units with aggregate
proceeds of $2.4 million. Each unit consisted of three shares of common stock
and a warrant to acquire one additional share of common stock for $2.00 per
share. These warrants expire on July 31, 2004. The allocated relative fair
value of the shares issued in the offering was less than the Companys common
stock price on the offerings closing date, which resulted in a bonus element
to the stockholders who participated in the offering, similar to a stock
dividend. Therefore, the Company has retroactively increased the weighted
average shares outstanding for all periods to reflect the incremental 267,402
shares attributable to the bonus element.

Stock Options.Pursuant to the Companys three stock option plans, the Company
has reserved 1,416,666 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 five 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. On September 4, 2002 and November 4, 2002,
the Company granted 446,500 stock options to its Directors and employees. The
stock options vest over a period of five years. All vesting of these options
would accelerate when the Company receives written FDA market approval or in
case a change in control should occur.

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Stock option activity under these plans is summarized as follows:

|                          |  |             |         |                |  |          |      | 
|------------------------- |  | ----------- | ------- | -------------- |  | -------- | ---- | 
|                          |  |             |         |                |  | Weighted
|                          |  |             |         |                |  | average 
|                          |  | Shares      |         | exercise price
|                          |  | outstanding |         | per share     
|                          |  |             |         |               
|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 | 
|Granted                   |  |             | 446,500 |                |  |          | 1.10 | 
|Exercised                 |  |             |        |                |  |          |     | 
|Cancelled                 |  |             | (74,660 | )              |  |          | 4.56 | 
|                          |  |             |         |                |  |          |      | 
|Balance at March 31, 2003 |  |             | 841,911 |                |  | $        | 2.87 | 
|                          |  |             |         |                |  |          |      | 

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
|      |   |             |         |           |         |            
|      | $ | 0.90        |         |           | 2,000   |             |  |          | 4.58 |  |         |  | 400     | 
|      |   | 1.10        |         |           | 441,500 |             |  |          | 4.42 |  |         |  | 88,300  | 
|      |   | 1.50        |         |           | 26,666  |             |  |          | 1.67 |  |         |  | 26,666  | 
|      |   | 2.40        |         |           | 158,322 |             |  |          | 3.50 |  |         |  | 131,654 | 
|      |   | 3.00        |         |           | 13,334  |             |  |          | 0.58 |  |         |  | 13,334  | 
|      |   | 5.25        |         |           | 3,333   |             |  |          | 2.33 |  |         |  | 3,333   | 
|      |   | 6.75        |         |           | 35,000  |             |  |          | 2.30 |  |         |  | 35,000  | 
|      |   | 6.96        |         |           | 19,999  |             |  |          | 1.83 |  |         |  | 19,999  | 
|      |   | 7.50        |         |           | 136,757 |             |  |          | 1.47 |  |         |  | 136,757 | 
|      |   | 10.50       |         |           | 5,000   |             |  |          | 2.17 |  |         |  | 5,000   | 
|      |   |             |         |           |         |             |  |          |      |  |         | 
|      |   |             | 841,911 |           |         |             |  |          |      |  | 460,443 | 
|      |   |             |         |           |         |             |  |          |      |  |         | 

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
$7.125 per share. At March 31, 2003 all of these warrants were outstanding and
expire on June 18, 2003. In connection with the fiscal 2003 Rights Offering,
warrants to purchase 798,213 shares of common stock were issued at an exercise
price of $2.00 per share. At March 31, 2003 all of these warrants were
outstanding and expire on July 12, 2004.

Vendor Deposits.In September 2001, the Company executed an agreement with a
vendor to manufacture a mold for one of the Companys products. As
consideration, the Company issued to the vendor 20,000 shares of its common
stock in September 2001. The Company amended the agreement in September 2002
and issued an additional 20,000 shares of common stock to be held in escrow
until completion of the mold. The Company recorded the fair value of the
restricted common stock aggregating $112,000, as of March 31, 2003, as a vendor
deposit in shareholders equity.

Consulting Agreements.On April 1, 2003, the Company executed a consulting
agreement with C.C.R.I. Corporation (Consultant) to provide investor relations
and development services. The Company pays the Consultant a monthly fee of
$4,000 plus expenses. The Consultant received 35,000 shares of restricted
common stock, and 50,000 warrants to

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purchase 50,000 shares of common stock at an exercise price of $3.00 per share,
and will receive 50,000 warrants to purchase 50,000 shares of common stock at
an exercise price of $5.00 per share on November 2, 2003 unless the agreement
is sooner terminated.

On April 1, 2003, the Company executed a consulting agreement with the
Executive Advisory Group (EAG) to perform services for and on behalf of the
Company. Mr. Sam B. Humphries, a Director, of the Company, is President of
EAG. The Company pays EAG a monthly fee of $4,000 plus expenses. EAG also
received 50,000 stock options exercisable at $2.80 per share.

4.        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 the fiscal
years ended March 31, 2003 and 2002 was $15,620 and $15,672, 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 $160,192 and $154,851 for the fiscal
years ended March 31, 2003 and 2002, respectively.

In 1992, the Company agreed to settle alleged patent infringement claims by
Collagen Corporation (now Inamed Corporation). Under the settlement agreement,
the Company pays Collagen a royalty of 5% of net sales in the U.S. of
Macroplastique products with a minimum of $50,000 per year. The agreement is
through May 1, 2006.

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 $177,507 and $94,992
for the fiscal years ended March 31, 2003 and 2002, respectively. The Companys
retirement savings plan in the United States conforms to Section 401(k) of the
Internal Revenue Code and participation is available to substantially all
employees. The Company may also make discretionary contributions ratably to
all eligible employees. The Companys contributions in fiscal 2003 and 2002 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. At March 31, 2003, 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:

|     |  |   |         | 
|---- |  | - | ------- | 
|2004 |  | $ | 274,335 | 
|2005 |  |   | 238,825 | 
|2006 |  |   | 180,057 | 
|2007 |  |   | 58,983  | 
|2008 |  |   | 9,894   | 
|     |  |   |         | 
|     |  | $ | 762,094 | 
|     |  |   |         | 

Total rent expense paid for operating leases was $306,301 and $338,487 in
fiscal 2003 and 2002, respectively.

Legal Proceedings.On October 26, 2001, the Company reached a litigation
settlement with a third party. Net proceeds from the Settlement, totaling
$388,000, were recognized upon receipt of cash. In May 2002, the Company
received the final payment and recorded a $180,000 gain related to this
settlement.

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Employment Agreements.The Company entered into employment agreements with
certain Officers, the terms of which, among other things, specify a base salary
subject to annual adjustment by mutual agreement of the parties, and a
severance payment to the employee upon employment termination without cause.
Any severance amounts payable under the agreement shall be limited to the
employees base salary for not less than four months and not longer than twelve
months after employment termination, depending on the employees years of
service. Contemporaneously with the execution of the employment agreement,
each of the Officers executed an Employee Confidentiality, Inventions,
Non-Solicitation, and Non-Compete Agreement, certain terms of which specify the
Employee shall not disclose confidential information, shall assign to the
Company without charge all intellectual property relating to the Companys
business which is created or conceived during the term of employment, shall not
encourage Employees to leave the employment of the Company for any reason and
shall not compete with the Company during the term of employment and for a
period of eighteen months thereafter. Also in connection with the execution of
these Agreements, some 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.



|5. |  | Income Taxes
|-- |  | ------------

The components of income tax expense (benefit) for each of the years in the
two-year period ended March 31, 2003 consist of the following:

|                                   |          |                |   |      |   |      |   |  |   | 
|---------------------------------- | -------- | -------------- | - | ---- | - | ---- | - |  | - | 
|                                   |          |                |   | 2003 |   | 2002
|                                   |          |                |   |      |   |     
|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, 2003 and 2002 as follows:

|                                  |  |      |       |      |  |  |       |   
|--------------------------------- |  | ---- | ----- | ---- |  |  | ----- | --
|                                  |  | 2003 |       | 2002
|                                  |  |      |       |     
|Statutory federal income tax rate |  |      | (34.0 | )%   |  |  | (34.0 | )%
|Valuation allowance increase      |  |      | 29.0  |      |  |  | 33.6  |   
|Other                             |  |      | 5.0   |      |  |  | 0.4   |   
|                                  |  |      |       |      |  |  |       |   
|                                  |  |      |      |      |  |  |      |   
|                                  |  |      |       |      |  |  |       |   

Deferred taxes as of March 31, 2003 and 2002 consist of the following:

|                         |                                       |   |            |           |      |  |            |           | 
|------------------------ | ------------------------------------- | - | ---------- | --------- | ---- |  | ---------- | --------- | 
|                         |                                       |   | 2003       |           | 2002
|                         |                                       |   |            |           |     
|Deferred tax assets:     |                                       |   |            |           |      |  |            |          
|                         | Reserves and accruals                 |   | $          | 31,000    |      |  |            | 49,000    | 
|                         | Deferred profit on intercompany sales |   |            | 124,000   |      |  |            | 110,000   | 
|                         | Net operating loss carryforwards      |   |            | 2,621,000 |      |  |            | 2,532,000 | 
|                         |                                       |   |            |           |      |  |            |           | 
|                         |                                       |   | 2,776,000  |           |      |  | 2,691,000  |          
|Less valuation allowance |                                       |   | (2,776,000 | )         |      |  | (2,691,000 | )        
|                         |                                       |   |            |           |      |  |            |           | 
|                         |                                       | $ |           |           |      |  |           |          
|                         |                                       |   |            |           |      |  |            |           | 

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##### 



At March 31, 2003 the Company had U.S. net operating loss carryforwards (NOL)
of approximately $7,254,000 for U.S. income tax purposes, which expire in 2012
through 2022, and foreign NOLs of approximately $209,000, 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 $85,000
and $181,000, respectively, in 2003 and 2002.



|6. |  | 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 has not yet made submissions to the FDA for
regulatory approval to market its products in the United States. The Companys
current objectives are to focus on sales and marketing activities designed to
increase market penetration and sales of Macroplastique for SUI, VUR, and of
PTP Implants for fecal incontinence applications in countries outside the U.S.,
and to efficiently and effectively execute the Macroplastique human clinical
study for treatment of female SUI within the U.S. The Company also sells
injectable implant products outside the United States for soft-tissue
augmentation for specific indications in otolaryngology and plastic surgery
applications under the name Bioplastique in limited markets, and for fecal
incontinence applications under the name PTP Implants. In addition, the
Company sells specialized wound care products in The Netherlands and United
Kingdom as a distributor. The Macroplastique product line accounts for 85% and
89% of total sales for the years ended March 31, 2003 and 2002, respectively.

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

Both during fiscal 2003 and 2002, approximately 12% of the Companys net sales
were to one customer.

Information regarding operations in different geographies for the years ended
March 31, 2003 and 2002 is as follows:

|                                    |  |        |         |             |  |         |           |              |  |              |           |  |  |             |            |   |  |  |           | 
|----------------------------------- |  | ------ | ------- | ----------- |  | ------- | --------- | ------------ |  | ------------ | --------- |  |  | ----------- | ---------- | - |  |  | --------- | 
|                                    |  |        |         |             |  |         |           |              |  |              |           |  |  | Adjustments |            |   |  | 
|                                    |  | United |         | The         |  | United  |           | and          |  |              |           | 
|                                    |  | States |         | Netherlands |  | Kingdom |           | eliminations |  | Consolidated
|                                    |  |        |         |             |  |         |           |              |  |             
|Fiscal 2003                         |  |        |         |             |  |         |           |              |  |              |           |  |  |             |            |   |  |  |           | 
|Sales to
unaffiliated
customers     |  | $      |        |             |  |         | 4,648,981 |              |  |              | 1,841,460 |  |  |             | (1,146,785 | ) |  |  | 5,343,656 | 
|Long-lived assets
At March 31, 2003 |  | $      | 101,844 |             |  |         | 706,086   |              |  |              | 25,304    |  |  |             |           |   |  |  | 833,234   | 
|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 |  | $      | 104,881 |             |  |         | 641,627   |              |  |              | 18,347    |  |  |             |           |   |  |  | 764,855   | 

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