<HTML>
<HEAD>
<TITLE>FORM S-1</TITLE>
</HEAD>
<BODY bgcolor="#FFFFFF">
<!-- PAGEBREAK -->
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="center" style="font-size: 10pt;">
<B>As filed with the Securities and Exchange Commission on
June&nbsp;3, 2005</B>
</DIV>

<DIV align="right" style="font-size: 10pt;">
<B>Registration
No.&nbsp;333-&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</B>
</DIV>

<DIV align="center" style="font-size: 6pt;">
<DIV style="width: 100%; border-top: 2.0pt solid black; font-size: 1pt">&nbsp;</DIV>
</DIV>

<DIV align="center" style="font-size: 3pt;">
<DIV style="width: 100%; border-top: 1.0pt solid black; font-size: 1pt">&nbsp;</DIV>
</DIV>

<DIV align="center" style="font-size: 14pt; margin-top: 4pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>SECURITIES AND EXCHANGE COMMISSION</B>
</DIV>

<DIV align="center" style="font-size: 12pt;">
<B>Washington, D.C. 20549</B>
</DIV>

<DIV align="center" style="font-size: 18pt;">
<B>Form S-1</B>
</DIV>

<DIV align="center" style="font-size: 12pt;">
<B>REGISTRATION STATEMENT</B>
</DIV>

<DIV align="center" style="font-size: 12pt;">
<B>UNDER</B>
</DIV>

<DIV align="center" style="font-size: 12pt;">
<B>THE SECURITIES ACT OF 1933</B>
</DIV>

<DIV align="center" style="font-size: 20pt;">
<B>ELECTRO-OPTICAL SCIENCES, INC.</B>
</DIV>

<DIV align="center" style="font-size: 8pt;">
<I>(Exact name of registrant as specified in its charter)</I>
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 9pt; ">

<TR style="font-size: 1pt;">
    <TD width="33%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="32%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="29%">&nbsp;</TD>
</TR>

<TR>
    <TD align="center" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <B>Delaware</B></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    <B>3841</B></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    <B>13-3986004</B></TD>
</TR>

<TR>
    <TD align="center" valign="top">
    <I>(State or other jurisdiction of<BR>
    incorporation or organization)</I></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    <I>(Primary standard industrial<BR>
    classification code number)</I></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    <I>(I.R.S. Employer<BR>
    Identification Number)</I></TD>
</TR>

</TABLE>
</CENTER>

<DIV align="center" style="font-size: 10pt; margin-top: 9pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>3 West Main Street, Suite&nbsp;201</B>
</DIV>

<DIV align="center" style="font-size: 10pt;">
<B>Irvington, New York 10533</B>
</DIV>

<DIV align="center" style="font-size: 10pt;">
<B>(914)&nbsp;591-3783</B>
</DIV>

<DIV align="center" style="font-size: 3pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<DIV style="width: 26%; border-top: 1.0pt solid black; font-size: 1pt">&nbsp;</DIV>
</DIV>

<DIV align="center" style="font-size: 8pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<I>(Address, including zip code, and telephone number,</I>
</DIV>

<DIV align="center" style="font-size: 8pt;">
<I>including area code, of registrant&#146;s principal executive
offices)</I>
</DIV>

<DIV align="center" style="font-size: 3pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<DIV style="width: 26%; border-top: 1.0pt solid black; font-size: 1pt">&nbsp;</DIV>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Joseph V. Gulfo, M.D.</B>
</DIV>

<DIV align="center" style="font-size: 10pt;">
<B>President and Chief Executive Officer</B>
</DIV>

<DIV align="center" style="font-size: 10pt;">
<B>Electro-Optical Sciences, Inc.</B>
</DIV>

<DIV align="center" style="font-size: 10pt;">
<B>3 West Main Street, Suite&nbsp;201</B>
</DIV>

<DIV align="center" style="font-size: 10pt;">
<B>Irvington, New York 10533</B>
</DIV>

<DIV align="center" style="font-size: 10pt;">
<B>(914)&nbsp;591-3783</B>
</DIV>

<DIV align="center" style="font-size: 8pt;">
<I>(Name, address, including zip code, and telephone number,
including area code, of agent for service)</I>
</DIV>

<DIV align="center" style="font-size: 3pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<DIV style="width: 26%; border-top: 1.0pt solid black; font-size: 1pt">&nbsp;</DIV>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B><I>Copies to:</I></B>
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; ">

<TR style="font-size: 1pt;">
    <TD width="54%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="43%">&nbsp;</TD>
</TR>

<TR>
    <TD align="center" valign="top">
    <B>Valerie A. Price, Esq.<BR>
    Dreier LLP<BR>
    499 Park Avenue<BR>
    New York, New York 10022<BR>
    (212) 328-6144 (phone)<BR>
    (212) 652-3789 (facsimile)</B></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    <B>David C. Peck, Esq.<BR>
    Greenberg Traurig, LLP<BR>
    200 Park Avenue<BR>
    New York, New York 10166<BR>
    (212) 801-9200 (phone)<BR>
    (212) 801-6400 (facsimile)</B></TD>
</TR>

</TABLE>
</CENTER>

<DIV align="left" style="font-size: 10pt; margin-top: 9pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B>Approximate date of proposed sale to the public:</B> As soon
as practicable after the effective date of this Registration
Statement.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to
Rule&nbsp;415 under the Securities Act of 1933, as amended (the
&#147;Securities Act&#148;) check the following
box.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face="wingdings">&#111;
</FONT>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
If this form is filed to register additional securities for an
offering pursuant to Rule&nbsp;462(b) under the Securities Act,
check the following box and list the Securities Act registration
statement number of the earlier effective registration statement
for the same
offering.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face="wingdings">&#111;
</FONT>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
If this form is a post-effective amendment filed pursuant to
Rule&nbsp;462(c) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face="wingdings">&#111;
</FONT>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
If this form is a post-effective amendment filed pursuant to
Rule&nbsp;462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face="wingdings">&#111;
</FONT>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
If delivery of the prospectus is expected to be made pursuant to
Rule&nbsp;434, check the following
box.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face="wingdings">&#111;
</FONT>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>CALCULATION OF REGISTRATION FEE</B>
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 3pt; ">

<TR style="font-size: 1pt;">
    <TD width="40%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD><!-- Right VRule -->
    <TD width="2%">&nbsp;</TD>
    <TD width="24%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD><!-- Right VRule -->
    <TD width="2%">&nbsp;</TD>
    <TD width="26%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD><!-- Right VRule -->
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD style="border-top: 1pt solid #000000;">&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD style="border-top: 1pt solid #000000;border-right:1.5pt solid #000000;">&nbsp;</TD>
    <TD style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD style="border-top: 1pt solid #000000;border-right:1.5pt solid #000000;">&nbsp;</TD>
    <TD style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD style="border-top: 1pt solid #000000;border-right:1.5pt solid #000000;">&nbsp;</TD>
</TR>

<TR style="font-size: 8pt;">
    <TD align="center" nowrap><B>Title of Each Class of</B></TD>
    <TD style="border-right:1.5pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" nowrap><B>Proposed Maximum Aggregate</B></TD>
    <TD style="border-right:1.5pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" nowrap><B>Amount of</B></TD>
    <TD style="border-right:1.5pt solid #000000;">&nbsp;</TD>
</TR>

<TR style="font-size: 8pt;">
    <TD align="center" nowrap><B>Securities to be Registered</B></TD>
    <TD style="border-right:1.5pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" nowrap><B>Offering Price(1)</B></TD>
    <TD style="border-right:1.5pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" nowrap><B>Registration Fee</B></TD>
    <TD style="border-right:1.5pt solid #000000;">&nbsp;</TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD style="border-top: 1pt solid #000000;border-right:1.5pt solid #000000;">&nbsp;</TD>
    <TD style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD style="border-top: 1pt solid #000000;border-right:1.5pt solid #000000;">&nbsp;</TD>
    <TD style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD style="border-top: 1pt solid #000000;border-right:1.5pt solid #000000;">&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Common stock, par value $0.001 per share</DIV>
    </TD>
    <TD style="border-right:1.5pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="bottom">
    $33,000,000</TD>
    <TD style="border-right:1.5pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="bottom">
    $3,884.10</TD>
    <TD style="border-right:1.5pt solid #000000;">&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

</TABLE>
</CENTER>

<DIV style="margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="4%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>(1)&nbsp;</TD>
    <TD align="left">
    Estimated solely for purposes of determining the registration
    fee pursuant to Rule&nbsp;457(o) under the Securities Act.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B>The registrant hereby amends this registration statement on
such date or dates as may be necessary to delay its effective
date until the registrant shall file a further amendment which
specifically states that this registration statement shall
thereafter become effective in accordance with Section&nbsp;8(a)
of the Securities Act or until the registration statement shall
become effective on such date as the Securities and Exchange
Commission, acting pursuant to said Section&nbsp;8(a), may
determine.</B>
</DIV>

<DIV align="center" style="font-size: 3pt; margin-top: 8pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<DIV style="width: 100%; border-top: 1.0pt solid black; font-size: 1pt">&nbsp;</DIV>
</DIV>

<DIV align="center" style="font-size: 4pt;">
<DIV style="width: 100%; border-top: 2.0pt solid black; font-size: 1pt">&nbsp;</DIV>
</DIV>
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<TABLE width="100%" cellpadding="5" style="border: 3pt double #000000; margin-bottom: 6pt; font-size: 10pt"><TR><TD>
<FONT style="font-size: 8pt" color="#E8112D" face="helvetica,arial">The
information in this prospectus is not complete and may be
changed. We may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is
effective. This prospectus is not an offer to sell these
securities and it is not soliciting an offer to buy these
securities in any state where the offer and sale is not
permitted.</FONT><FONT style="font-size: 8pt" face="helvetica,arial">
<BR>


</FONT>
</TD></TR></TABLE>

<DIV align="center" style="font-size: 10pt; margin-top: 1pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B><FONT color="#E8112D">SUBJECT TO COMPLETION, DATED
JUNE&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;, 2005</FONT></B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>PROSPECTUS</B>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<IMG src="y09078eoslogo.gif" alt="(EOS LOGO)">
</DIV>

<DIV align="center" style="font-size: 14pt; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face="wingdings">l</FONT>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Shares</B>
</DIV>

<DIV align="center" style="font-size: 24pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Electro-Optical Sciences, Inc.</B>
</DIV>

<DIV align="center" style="font-size: 14pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Common Stock</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
This is the initial public offering
of &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face="wingdings">l</FONT>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
of common stock of Electro-Optical Sciences, Inc.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We expect the public offering price to be between
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face="wingdings">l</FONT>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;and
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face="wingdings">l</FONT>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;per
share. There presently is no public market for our securities
and we cannot ensure you that a market will develop. We have
applied to list our common stock on the NASDAQ National Market
under the symbol &#147;MELA.&#148;
</DIV>

<DIV align="left" style="font-size: 12pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B>Investing in our common stock is highly speculative and
involves a high degree of risk. See &#147;Risk Factors&#148;
beginning on Page&nbsp;7.</B>
</DIV>

<DIV align="center" style="font-size: 3pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<DIV style="width: 26%; border-top: 1.0pt solid black; font-size: 1pt">&nbsp;</DIV>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B>Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or passed upon the adequacy or accuracy of this
prospectus. Any representation to the contrary is a criminal
offense.</B>
</DIV>

<DIV align="center" style="font-size: 3pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<DIV style="width: 26%; border-top: 1.0pt solid black; font-size: 1pt">&nbsp;</DIV>
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="73%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Per Share</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Total</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Public offering price</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;&nbsp;&nbsp;<FONT face="wingdings">l</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;&nbsp;&nbsp;<FONT face="wingdings">l</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Underwriting discounts and commissions</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;&nbsp;&nbsp;<FONT face="wingdings">l</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;&nbsp;&nbsp;<FONT face="wingdings">l</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Proceeds, before expenses, to Electro-Optical Sciences,
    Inc.&nbsp;</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;&nbsp;&nbsp;<FONT face="wingdings">l</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;&nbsp;&nbsp;<FONT face="wingdings">l</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

</TABLE>
</CENTER>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
To the extent the underwriters sell more
than &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face="wingdings">l</FONT>&nbsp;shares
of common stock, the underwriters have the option to purchase up
to an
additional &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face="wingdings">l</FONT>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
from us at the public offering price less the underwriting
discount, within 45&nbsp;days from the date of this prospectus
to cover over-allotments. The underwriters will also receive a
non-accountable expense allowance in the amount of one percent
(1%) of the total public offering price (excluding the
over-allotment option). In addition, upon completion of this
offering, the underwriters will receive warrants to purchase up
to an aggregate
of &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face="wingdings">l</FONT>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
of our common stock at an exercise price equal to 125% of the
public offering price per share. The warrants will be
exercisable commencing on the first anniversary of the date of
this prospectus and ending on the fifth anniversary of the date
of this prospectus.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The underwriters expect to deliver the shares on or
about &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face="wingdings">l</FONT>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;,
2005.
</DIV>

<DIV style="margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 18pt;">

<TR>
    <TD width="50%"></TD>
    <TD width="50%"></TD>
</TR>

<TR valign="top">
    <TD align="left"><B>Ladenburg Thalmann&nbsp;&#38; Co. Inc.</B></TD>
    <TD align="right"><B>Stanford Group Company</B></TD>
</TR>

</TABLE>

<DIV align="center" style="font-size: 10pt; margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
The date of this prospectus
is &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face="wingdings">l</FONT>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;,
2005.
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>TABLE OF CONTENTS</B>
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 12pt; ">

<TR style="font-size: 1pt;">
    <TD width="93%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Prospectus Summary</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Risk Factors</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>7</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Special Note Regarding Forward-Looking Statements</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>29</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Use of Proceeds</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>30</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Dividend Policy</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>30</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Capitalization</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>31</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Dilution</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>32</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Selected Financial Data</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>34</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Management&#146;s Discussion and Analysis of Financial Condition
    and Results of Operations</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>36</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Our Business</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>43</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Management</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>62</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Related Party Transactions</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>72</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Principal Stockholders</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>73</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Description of Capital Stock</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>75</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Shares Eligible for Future Sale</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>79</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Material US Federal Income and Estate Tax Considerations for
    Non-US Holders</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>81</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Underwriting</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>84</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Legal Matters</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>86</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Experts</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>86</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Where You Can Find More Information</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>87</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Index to Financial Statements</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>F-1</TD>
    <TD>&nbsp;</TD>
</TR>

</TABLE>
</CENTER>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
You should rely only on the information contained in this
prospectus. We have not authorized anyone to provide you with
information different from that contained in this prospectus. We
are offering to sell shares of our common stock and seeking
offers to buy shares of our common stock only in jurisdictions
where offers and sales are permitted. The information contained
in this prospectus is accurate only as of the date of this
prospectus, regardless of the time of delivery of this
prospectus or any sale of the common stock.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
For investors outside the US: Neither we nor any of the
underwriters have done anything that would permit this offering
or possession or distribution of this prospectus in any
jurisdiction where action for that purpose is required, other
than in the US. You are required to inform yourselves about, and
to observe any restrictions relating to, this offering and the
distribution of this prospectus.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We obtained statistical data and certain other industry
forecasts used throughout this prospectus from market research,
publicly available information and industry publications.
Industry publications generally state that they obtain their
information from sources that they believe to be reliable, but
they do not guarantee the accuracy and completeness of the
information. Similarly, while we believe that the statistical
and industry data and forecasts and market research used herein
are reliable, we have not independently verified such data, and
we do not make any representation as to the accuracy of the
information. We have not sought the consent of the sources to
refer to their reports in this prospectus.
</DIV>

<P align="center" style="font-size: 10pt;">

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>
<DIV style="width: 100%; border: 1px solid black; padding: 12px;">

<DIV align="center" style="font-size: 10pt; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>PROSPECTUS SUMMARY</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>This summary highlights information contained elsewhere in
this prospectus. It does not contain all of the information you
should consider before buying shares of our common stock. You
should read this entire prospectus carefully, especially the
&#147;Risk Factors&#148; section and our financial statements
and the related notes appearing at the end of this prospectus,
before deciding to invest in shares of our common stock. Unless
otherwise stated or the context otherwise requires, reference in
this prospectus to &#147;EOS,&#148; &#147;we,&#148;
&#147;us,&#148; &#147;our&#148; and similar references refer to
Electro-Optical Sciences, Inc.</I>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Our Business</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We are a medical device company focused on the design and
development of a non-invasive, point-of-care instrument to
assist in the early diagnosis of melanoma. Our flagship product,
MelaFind&#174;, features a hand-held imaging device that emits
multiple wavelengths of light to capture images of suspicious
pigmented skin lesions and extract data. The data are then
analyzed against our proprietary database of melanomas and
benign lesions using our sophisticated algorithms in order to
provide information to the physician and produce a
recommendation of whether the lesion should be biopsied.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The components of the MelaFind&#174; system include:
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    a <I>hand-held imaging device,</I> which employs high precision
    optics and multi-spectral illumination (multiple colors of light
    including near infra-red);</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    our <I>proprietary database </I>of pigmented skin lesions, which
    we believe to be the largest in the US;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    our <I>lesion classifiers,</I> which are sophisticated
    mathematical algorithms that extract lesion feature information
    and classify lesions;&nbsp;and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    a <I>central server </I>in our offices that is intended to
    perform quality control functions and provide reports to the
    physician and in commercial use, will be connected to
    physicians&#146; offices via the internet.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We have entered into a binding Protocol Agreement with the US
Food and Drug Administration (FDA), which is an agreement for
the conduct of the pivotal trial in order to establish the
safety and effectiveness of MelaFind&#174;. We believe the
presence of the Protocol Agreement significantly enhances our
ability to expedite the FDA approval process. Management
estimates that the study will commence in early 2006 at over 20
US clinical study sites, and anticipates premarket approval
(PMA)&nbsp;to commercialize MelaFind&#174; in 2007.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>The Market Opportunity</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Cancers of the skin have a higher incidence than all other
cancers combined, and the rates are rising dramatically. There
are millions of people worldwide who are diagnosed with skin
cancer; with many sadly succumbing to its effects. Melanoma is
responsible for approximately 80% of skin cancer fatalities and
is the deadliest of all skin cancers as there is currently no
cure for advanced stage melanoma. However, early detection of
melanoma can lead to virtually a 100% cure rate. Therefore, the
need for medical practitioners to be able to examine individuals
during a routine annual exam, resulting in early detection and
treatment of skin cancer cannot be overstated. Advanced stage
melanoma is costly to treat and is responsible for approximately
90% of the total spending on melanoma treatment in the US,
costing up to $170,000&nbsp;per patient. If diagnosed early,
however, melanoma is almost always cured by simple resection at
a cost of approximately $1,800&nbsp;per patient.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Melanoma is currently the subject of significant attention in
the medical community. In part, this attention is due to the
fact that it is the fastest growing cancer. It is also the most
common cancer in young adults ages&nbsp;20-30, and currently
there are more new cases of melanoma than HIV/ AIDS. In women
ages&nbsp;20-29, melanoma is the primary cause of cancer death.
In women ages&nbsp;30-35, melanoma is the second leading cause
of death after breast cancer. Recent published papers identify a
strong correlation between breast cancer and melanoma.
</DIV>
</DIV>

<P align="center" style="font-size: 10pt;">1

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>
<DIV style="width: 100%; border: 1px solid black; padding: 12px;">

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Because early detection is critical to survival, the American
Cancer Society recommends that individuals 40&nbsp;years and
older have complete skin examinations on an annual basis.
According to the 2000 US Census data, over 100&nbsp;million
Americans in the US are over age&nbsp;40. Furthermore, there are
more than 20&nbsp;million individuals in the US who have
dysplastic nevi, a type of pigmented skin lesion that when
present is associated with an increased risk of melanoma. These
individuals warrant more frequent observation.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Limitations of Current Melanoma Diagnosis</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Melanomas are mainly diagnosed by dermatologists and/or primary
care physicians using only visual clinical evaluation.
Physicians assess pigmented skin lesions using the
&#147;ABCDE&#148; criteria, Asymmetry, Border irregularity,
Color variation, Diameter greater than 6 mm, and
Evolving&nbsp;&#151; change in ABCD over time. This assessment
is subjective and results in missed melanomas, as well as a
ratio of benign lesions biopsied to melanomas confirmed that is
highly variable and as high as 40 to 1 for dermatologists and as
high as 50 to 1 for primary care physicians.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Dermatologists who specialize in the management of pigmented
skin lesions may also use dermoscopy, a method of viewing
lesions under magnification. Approximately 25% of dermatologists
use dermoscopy. Although dermoscopy provides more information
than unaided visual examination, mastery of the technique
necessitates many years of training and experience. Proper use
of dermoscopy can reduce the number of unnecessary biopsies of
benign lesions, but even dermoscopy experts biopsy 3-10 benign
lesions for every melanoma detected.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In contrast, MelaFind&#174; delivers an objective assessment
based on numerical scores assigned to the suspicious skin lesion
under evaluation and does not require extensive physician
training to operate. Further, visual clinical evaluation is
limited to the surface appearance of the suspicious pigmented
skin lesion, whereas MelaFind&#174; utilizes information derived
from up to 2.5 mm deep into the skin. In clinical trials to
date, this objective assessment has resulted in a ratio of
benign lesions biopsied to melanomas confirmed as low as almost
2 to 1.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Clinical Results to Date</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
To date, MelaFind&#174; has been studied on over 5,000 skin
lesions from over 3,500&nbsp;patients at over 20 clinical
centers. Our clinical studies have demonstrated that
MelaFind&#174; missed fewer melanomas and produced fewer false
positives than were experienced by study dermatologists, who are
skin cancer specialists. The performance of a diagnostic is
measured in terms of &#147;sensitivity&#148; (the ability to
detect disease when disease is present) and
&#147;specificity&#148; (the ability to exclude disease when
disease is not present). In the largest blinded trial that we
have performed to date on 352 suspicious pigmented skin lesions,
MelaFind&#174; did not miss a melanoma (measured sensitivity of
100%) and achieved 48.4% specificity, compared to the study
dermatologists&#146; sensitivity of 96.4% and specificity of
28.4%.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We believe that with the assistance provided by MelaFind&#174;,
physicians could diagnose more melanomas at the earliest,
curable stage, which would reduce both treatment costs and the
number of unnecessary biopsies, and improve quality of life.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Our Strategy</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Our objective is for MelaFind&#174; to become an integral part
of the standard of care in melanoma detection. To achieve this
objective, we are pursuing the following strategy:
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp; </TD>
    <TD align="left">
    <B>Pursue timely FDA approval of MelaFind&#174;:</B> We have
    entered into a binding Protocol Agreement with the FDA for the
    conduct of the pivotal trial of MelaFind&#174;. Management
    estimates that the study will commence in early 2006 at over 20
    US clinical study sites, and anticipates PMA approval to
    commercialize MelaFind&#174; in 2007.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp; </TD>
    <TD align="left">
    <B>Establish MelaFind&#174; as the leading technology for
    assisting in the detection of melanoma:</B> We have invested
    considerable capital and expertise into developing our core
    technology platform, which is</TD>
</TR>

</TABLE>
</DIV>

<P align="center" style="font-size: 10pt;">2

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>
<DIV style="width: 100%; border: 1px solid black; padding: 12px;">

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD></TD>
    <TD align="left">
    protected by six US patents. We will continue to refine and
    optimize this technology to ensure that MelaFind&#174; is the
    leading system for assisting in the detection of melanoma.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp; </TD>
    <TD align="left">
    <B>Obtain third party payor reimbursement to support our
    recurring revenue pricing model:</B> We intend to offer
    MelaFind&#174; on a per patient basis, creating a recurring
    revenue stream. To do so, we will seek to obtain third party
    reimbursement as well as private pay alternatives. We are
    working with experts to create an evidence-based medicine
    evaluation model consistent with those used to support positive
    coverage decisions by the federal Centers for
    Medicare&nbsp;&#38; Medicaid Services (CMS)&nbsp;and private
    payors for similar products. The value drivers in the model
    include the treatment and diagnostic cost savings associated
    with early detection&nbsp;(approximately $168,000&nbsp;per
    patient) and fewer biopsies. We believe that the use of
    MelaFind&#174; could result in substantial savings to the US
    healthcare system.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp; </TD>
    <TD align="left">
    <B>Commercialize MelaFind&#174; using multiple sales and
    marketing strategies:</B> Our sales and marketing effort will
    focus initially on &#147;high volume/key opinion leader&#148;
    dermatologists with specialties in the diagnosis and treatment
    of melanoma. To enter the larger US markets of general
    dermatologists, plastic surgeons, and primary care physicians,
    and for international markets, we intend to establish
    partnerships with pharmaceutical and/or diagnostic device
    companies with an established presence in these markets.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Company Information</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We were incorporated under the laws of the State of New York in
1989 and subsequently reincorporated under the laws of the State
of Delaware in 1997. Our executive offices are located at 3 West
Main Street, Suite&nbsp;201, Irvington, New York 10533. Our
telephone number is (914)&nbsp;591-3783. Our websites include
www.eo-sciences.com and www.melafind.com. The information
contained on our websites is not a part of this prospectus and
should not be relied upon. We have included our website
addresses in this document as inactive textual references only.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
This prospectus contains references to our US registered
trademarks: MelaFind&#174;, DIFOTI&#174;, and the corporate logo
for &#147;eos&nbsp;&#151; electro-optical sciences, inc.&#148;
All other trademarks, tradenames and service marks appearing in
this prospectus are the property of their respective owners.
</DIV>
</DIV>

<P align="center" style="font-size: 10pt;">3

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>
<DIV style="width: 100%; border: 1px solid black; padding: 12px;">

<DIV align="center" style="font-size: 10pt; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>THE OFFERING</B>
</DIV>

<DIV style="margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt;">

<TR>
    <TD width="28%"></TD>
    <TD width="1%"></TD>
    <TD width="71%"></TD>
</TR>

<TR>
    <TD valign="top">
    Common stock offered by us</TD>
    <TD></TD>
    <TD valign="top">
    &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face="wingdings">l</FONT>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares</TD>
</TR>

<TR>
    <TD style="font-size: 3pt">&nbsp;</TD>
</TR>

<TR>
    <TD valign="top">
    Common stock outstanding after the offering</TD>
    <TD></TD>
    <TD valign="top">
    &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face="wingdings">l</FONT>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares</TD>
</TR>

<TR>
    <TD style="font-size: 3pt">&nbsp;</TD>
</TR>

<TR>
    <TD valign="top">
    Use of proceeds</TD>
    <TD></TD>
    <TD valign="top">
    We estimate that our net proceeds from this offering will be
    approximately
    $&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face="wingdings">l</FONT>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;million
    at an assumed initial public offering price of
    $&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face="wingdings">l</FONT>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;per
    share, which is the mid-point of our filing range, after
    deducting estimated underwriting discounts and commissions and
    offering expenses payable by us. We intend to use these net
    proceeds to fund our research and development activities,
    including our clinical studies, to build our sales and marketing
    capabilities, and for general corporate purposes, including
    working capital needs, facilities expansion and potential
    acquisitions. See &#147;Use of Proceeds.&#148;</TD>
</TR>

<TR>
    <TD style="font-size: 3pt">&nbsp;</TD>
</TR>

<TR>
    <TD valign="top">
    Risk factors</TD>
    <TD></TD>
    <TD valign="top">
    You should read the &#147;Risk Factors&#148; section of this
    prospectus for a discussion of factors to consider carefully
    before deciding to invest in shares of our common stock.</TD>
</TR>

<TR>
    <TD style="font-size: 3pt">&nbsp;</TD>
</TR>

<TR>
    <TD valign="top">
    Proposed NASDAQ National Market symbol</TD>
    <TD></TD>
    <TD valign="top">
    MELA</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The number of shares of our common stock to be outstanding after
this offering is based on 6,513,164&nbsp;shares outstanding as
of May&nbsp;15, 2005, and unless otherwise indicated, excludes:
</DIV>

<DIV style="margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    899,875&nbsp;shares of common stock issuable as of the date of
    this prospectus upon the exercise of outstanding stock options
    under our 2003 Stock Incentive Plan and our 1996 Stock Option
    Plan, respectively, at a weighted average exercise price of
    approximately $0.63&nbsp;per share, which amount is 54,391
    shares less than the number of shares issuable under such option
    plans as of March&nbsp;31, 2005 due to the effect of a
    formula-based option granted to our President and Chief
    Executive Officer&nbsp;&#151; see &#147;Management&nbsp;&#151;
    Employment Agreement&#148;;</TD>
</TR>

<TR>
    <TD style="font-size: 1pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    up to 1,000,000&nbsp;shares of common stock reserved for future
    grants under our 2005 Stock Incentive Plan;</TD>
</TR>

<TR>
    <TD style="font-size: 1pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    75,000&nbsp;shares of common stock issuable upon exercise of
    outstanding warrants to purchase common stock at an exercise
    price of $7.00&nbsp;per share;</TD>
</TR>

<TR>
    <TD style="font-size: 1pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    73,280&nbsp;shares of common stock issuable upon exercise of
    outstanding warrants to purchase our series&nbsp;C convertible
    preferred stock (assuming conversion of our series&nbsp;C
    convertible preferred stock) at an exercise price of
    $4.52&nbsp;per share;&nbsp;and</TD>
</TR>

<TR>
    <TD style="font-size: 1pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face="wingdings">l</FONT>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
    of common stock issuable upon exercise of warrants to be issued
    to the underwriters upon completion of this offering at an
    exercise price equal to 125% of the public offering price per
    share.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 1pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Unless we specifically state otherwise, all information in this
prospectus assumes:
</DIV>

<DIV style="margin-top: 1pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    that all outstanding shares of our series&nbsp;A convertible
    preferred stock, series&nbsp;B convertible preferred stock and
    series&nbsp;C convertible preferred stock are converted into
    shares of our common stock immediately prior to completion of
    this offering;</TD>
</TR>

<TR>
    <TD style="font-size: 2pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    that all outstanding warrants to purchase our common stock with
    an exercise price of $13.00&nbsp;per share have been exchanged
    for our common stock based on an exchange rate of one share of
    common stock for every two shares of common stock purchasable
    under such warrants in a cashless exchange. See the full
    discussion in &#147;Related Party Transactions&nbsp;&#151;
    Warrants to Purchase Common Stock&#148;;</TD>
</TR>

<TR>
    <TD style="font-size: 2pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    no exercise of the underwriters&#146; over-allotment option;</TD>
</TR>

<TR>
    <TD style="font-size: 2pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    the adoption of our fourth amended and restated certificate of
    incorporation and third amended and restated bylaws;&nbsp;and</TD>
</TR>

<TR>
    <TD style="font-size: 2pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    a 1-for-2 reverse stock split of our common stock which was
    approved by our board of directors on May&nbsp;13, 2005,
    effective upon the earlier of the conversion of our preferred
    stock or September&nbsp;30, 2005.</TD>
</TR>

</TABLE>
</DIV>

<P align="center" style="font-size: 10pt;">4
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>
<DIV style="width: 100%; border: 1px solid black; padding: 12px;">

<DIV align="center" style="font-size: 10pt; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>SUMMARY FINANCIAL DATA</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The following summary financial data for the fiscal years ended
December&nbsp;31, 2002, 2003 and 2004 have been derived from our
historical audited financial statements. The summary financial
data for the three month periods ended March&nbsp;31, 2004 and
2005 have been derived from our unaudited financial statements.
The unaudited summary financial data include, in our opinion,
all adjustments, consisting only of normal, recurring
adjustments, necessary to present fairly the financial position
and results of operations for the periods presented. Our
historical results for any prior or interim period are not
necessarily indicative of results to be expected for a full
fiscal year or for any future period. The summary financial data
shown below include revenues and related expenses for our
DIFOTI&#174; product, a non-invasive imaging device for the
detection of dental cavities. We decided to discontinue all
operations associated with our DIFOTI&#174; product, effective
as of April&nbsp;5, 2005, in order to focus our resources on the
development and commercialization of MelaFind&#174;. See the
footnote to the Financial Statements relating to subsequent
events included elsewhere in this prospectus. You should read
this information together with our financial statements and the
related notes appearing at the end of this prospectus and the
&#147;Management&#146;s Discussion and Analysis of Financial
Condition and Results of Operations&#148; section of this
prospectus.
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="3%">&nbsp;</TD>
    <TD width="35%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
</TR>


<TR style="font-size: 8pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="11">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>Three Months Ended</B></TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap><B>Year Ended December&nbsp;31,</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>March&nbsp;31,</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2002</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2003</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2004</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2004</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2005</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>


<TR style="font-size: 8pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>(unaudited)</B></TD><TD></TD>
</TR>


<TR style="font-size: 8pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="18" align="center" nowrap><B>(In thousands, except share and per share data)</B></TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <B>Statement of Operations Data:</B></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Revenue from DIFOTI&#174; sales, net</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>143</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>375</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>364</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>91</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>88</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Revenue from grants</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>547</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Total revenues</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>690</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>375</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>364</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>91</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>88</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Cost of goods sold</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>650</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>83</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>166</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>20</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>8</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Gross profit</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>40</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>292</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>198</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>71</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>80</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Operating expenses:</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Research and development</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>404</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>828</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,892</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>307</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>636</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Selling, general and administrative</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>769</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,339</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,858</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>533</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>713</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Total operating expenses</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,173</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2,167</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3,750</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>840</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,349</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Loss from operations</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(1,133</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(1,875</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(3,552</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(769</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(1,269</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Interest (income)/expense</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>8</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>75</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>67</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(26</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Net loss</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(1,141</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(1,950</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(3,619</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(770</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(1,243</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Preferred stock deemed dividends</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>214</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>322</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>676</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>111</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>362</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Preferred stock accretion</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>180</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>25</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>323</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>7</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>421</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Stock distribution on series&nbsp;B preferred shares</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>102</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Net loss attributable to common stockholders</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(1,535</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(2,399</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(4,618</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(888</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(2,026</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Basic and diluted net loss per share</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(1.00</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(1.49</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(2.61</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(0.53</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(1.12</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Basic and diluted weighted average shares outstanding</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,534,760</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,614,897</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,766,608</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,684,760</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,809,758</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Pro forma basic and diluted net loss per common share
    (unaudited)(1)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(0.91</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(0.19</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Pro forma basic and diluted weighted average number of common
    shares outstanding (unaudited)(1)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3,967,024</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>6,513,164</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

</TABLE>
</CENTER>
</DIV>

<P align="center" style="font-size: 10pt;">5

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>
<DIV style="width: 100%; border: 1px solid black; padding: 12px;">

<DIV align="left" style="font-size: 3pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<DIV style="width: 18%; border-top: 1.0pt solid black; font-size: 1pt">&nbsp;</DIV>
</DIV>

<DIV style="margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="4%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>(1)&nbsp;</TD>
    <TD align="left">
    Pro forma basic and diluted net loss per common share reflects
    the effect of the assumed conversion of the company&#146;s
    preferred stock, as if this offering had occurred at the date of
    original issuance into 3,398,105&nbsp;shares of our common stock
    for the year ended December&nbsp;31, 2004 and three months ended
    March&nbsp;31, 2005 which will occur upon closing of this public
    offering. Additionally, it is assumed that 2,610,643 warrants to
    purchase the company&#146;s common stock will be exchanged for a
    total of 1,305,321&nbsp;shares of the company&#146;s common
    stock based on an exchange ratio of one share of our common
    stock for every two shares of our common stock purchasable under
    the warrants and will occur prior to the closing of this
    offering. The net loss attributable to our common stockholders
    used in the computation of basic and diluted net loss per share
    to compute the unaudited pro forma net loss attributable to
    common stockholders, has been adjusted to reverse the accretion
    on our preferred stock and also excludes the preferred stock
    dividends for the respective period.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The following table presents summary balance sheet data, derived
from our historical audited financial statements, as of
December&nbsp;31, 2003 and December&nbsp;31, 2004. The table
also presents summary balance sheet data, derived from our
historical unaudited financial statements, as of March&nbsp;31,
2005:
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    On an actual basis;&nbsp;and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    On an as adjusted basis to give effect to (1)&nbsp;the
    conversion of all outstanding shares of our convertible
    preferred stock into an aggregate of 3,398,105&nbsp;shares of
    common stock upon the completion of this offering; (2)&nbsp;the
    exchange of 2,610,643 warrants to purchase the company&#146;s
    common stock for a total of 1,305,321&nbsp;shares of the
    company&#146;s common stock based on an exchange ratio of one
    share of our common stock for every two shares of our common
    stock purchaseable under the warrants that is assumed to occur
    prior to the closing of this offering; and (3)&nbsp;the sale
    of&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face="wingdings">l</FONT>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
    of common stock in this offering at an assumed initial public
    offering price of
    $&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face="wingdings">l</FONT>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;per
    share, after deducting estimated underwriting discounts and
    commissions and offering expenses paid and payable by us.</TD>
</TR>

</TABLE>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="58%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
</TR>


<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>As of December&nbsp;31,</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>As of March&nbsp;31, 2005</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2003</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2004</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="7">&nbsp;</TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Pro Forma</B></TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Actual</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Actual</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Actual</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>As Adjusted</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>


<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>(unaudited)</B></TD><TD></TD>
</TR>


<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="14" align="center" nowrap><B>(In thousands)</B></TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <B>Balance sheet data:</B></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Cash, cash equivalents and marketable securities</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>117</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>6,703</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>5,300</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="wingdings">l</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Working capital</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(433</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>6,122</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>4,919</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="wingdings">l</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Total assets</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>432</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>7,096</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5,734</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="wingdings">l</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Total liabilities</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>650</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>691</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>493</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="wingdings">l</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Redeemable convertible preferred stock</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>4,067</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>8,585</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>9,006</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="wingdings">l</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Total stockholders&#146; (deficiency)/equity</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(4,285</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(2,180</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(3,765</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="wingdings">l</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

</TABLE>
</CENTER>
</DIV>

<P align="center" style="font-size: 10pt;">6

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>RISK FACTORS</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Investing in our common stock involves a high degree of risk.
You should carefully consider the following risk factors, as
well as the other information in this prospectus, before
deciding whether to invest in shares of our common stock. If any
of the following risks actually occur, our business, financial
condition and results of operations would suffer. In that case,
the trading price of our common stock would likely decline and
you might lose all or part of your investment in our common
stock. The risks described below are not the only ones we face.
Additional risks that we currently do not know about or that we
currently believe to be immaterial may also impair our business,
financial conditions and results of operations.</I>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Risks Relating to Our Business</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>We currently do not have,
and may never develop, any commercialized products.</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We currently do not have any commercialized products or any
significant source of revenue. We have invested substantially
all of our time and resources over the last five years in
developing MelaFind&#174;. MelaFind&#174; will require
additional development, clinical evaluation, regulatory
approval, significant marketing efforts and substantial
additional investment before it can provide us with any revenue.
Our efforts may not lead to commercially successful products for
a number of reasons, including:
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    we may not be able to obtain regulatory approvals for
    MelaFind&#174;, or the approved indication may be narrower than
    we seek;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    MelaFind&#174; may not prove to be safe and effective in
    clinical trials;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    physicians may not receive any reimbursement from third-party
    payors, or the level of reimbursement may be insufficient to
    support widespread adoption of MelaFind&#174;;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    we may experience delays in our development program;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    any products that are approved may not be accepted in the
    marketplace by physicians or patients;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    we may not have adequate financial or other resources to
    complete the development and commercialization of MelaFind&#174;
    or other products;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    we may not be able to manufacture our products in commercial
    quantities or at an acceptable cost; and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    rapid technological change may make our technology and products
    obsolete.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We do not expect to be able to commercialize MelaFind&#174;
before 2007. If we are unable to develop, obtain regulatory
approval for or successfully commercialize MelaFind&#174;, we
will be unable to generate revenue.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>We have not received, and
may never receive, FDA approval to market MelaFind&#174;</I></B>.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We do not have the necessary regulatory approvals to market
MelaFind&#174; in the US or in any foreign market. We have not
filed, and currently do not have plans to file, for regulatory
approval in any foreign market. We plan initially to launch
MelaFind&#174;, once approved, in the US. The regulatory
approval process for MelaFind&#174; in the US involves, among
other things, successfully completing clinical trials and
obtaining PMA approval from the FDA. We commenced the PMA
application process for MelaFind&#174; by filing a proposed
outline for a Modular PMA on September&nbsp;30, 2002. The PMA
process requires us to prove the safety and effectiveness of
MelaFind&#174; to the FDA&#146;s satisfaction. This process is
expensive and uncertain, and requires detailed and comprehensive
scientific and human clinical data. FDA review may take years
after a PMA application is filed. The FDA may never grant
approval. The FDA can delay, limit or deny approval of a PMA
application for many reasons, including:
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    MelaFind&#174; may not be safe or effective to the FDA&#146;s
    satisfaction;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    the data from our pre-clinical studies and clinical trials may
    be insufficient to support approval;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    the manufacturing process or facilities we use may not meet
    applicable requirements; and</TD>
</TR>

</TABLE>

<P align="center" style="font-size: 10pt;">7

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    changes in FDA approval policies or adoption of new regulations
    may require additional data.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
No precedent has been established for FDA approval of a device
such as MelaFind&#174; to assist in determining the
appropriateness of biopsies of suspicious pigmented skin
lesions. Before submitting a PMA application (the final module),
we must successfully complete a pivotal clinical trial to
demonstrate that MelaFind&#174; is safe and effective. Product
development, including clinical trials, is a long, expensive and
uncertain process, and is subject to delays and failure at any
stage. Furthermore, the data obtained from the trial may be
inadequate to support approval of a PMA application. While we
obtained a Protocol Agreement from the FDA, FDA approval of a
Protocol Agreement does not mean that the FDA will consider the
data gathered in the trial sufficient to support approval of a
PMA application, even if the trial&#146;s intended endpoints are
achieved. There may be unexpected findings, particularly those
that may only become evident from the larger scale of the
pivotal clinical trial, as compared with the smaller scale tests
done to date. For example, we initiated a clinical trial and
encountered several technical problems which required us to
refine the MelaFind&#174; system. The data obtained in the
pivotal trial may not be sufficient to support the anticipated
indication for use, and may not support a more limited
indication for use. The occurrence of unexpected findings in
connection with the pivotal trial or any subsequent clinical
trial required by the FDA may prevent or delay obtaining PMA
approval, and may adversely affect coverage or reimbursement
determinations. The FDA may also determine that additional
clinical trials are necessary, in which case the PMA approval
may be delayed for several months or even years while the trials
are conducted and the data acquired are submitted in an
amendment to the PMA. If we are unable to complete the clinical
trials necessary to successfully support the MelaFind&#174; PMA
application, our ability to commercialize MelaFind&#174;, and
our business, financial condition, and results of operations
would be materially adversely affected, thereby threatening our
ability to continue operations.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>If MelaFind&#174;</I></B>
<B><I>is approved by the FDA, it may be approved only for narrow
indications.</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Even if approved, MelaFind&#174; may not be approved for the
indications that are necessary or desirable for successful
commercialization. Our preference is to obtain a broad
indication for use in diagnosing almost all pigmented melanomas
(other than those on palms, soles of the feet, in or near the
eye, and inaccessible areas such as the edge of the nose). The
final MelaFind&#174; lesion classifier should be able to
identify the maximum number of types of melanoma possible. The
indications for use must specify those lesion types for which
the classifier has not been trained. Approximately five percent
of melanoma lesions may be amelanotic, meaning they are not
pigmented. These lesions cannot be differentiated by
MelaFind&#174;, which will be restricted to pigmented lesions.
Approximately ten percent of pigmented melanoma lesions are of
the nodular type. If nodular melanoma lesions are not
sufficiently well-represented in the MelaFind&#174; training
database, the classifier may not differentiate nodular melanomas
from non-melanomas with sufficient sensitivity and specificity.
If we restrict the indications for use of MelaFind&#174; to
exclude certain melanoma lesion types, in addition to the other
restrictions, then the size of the market for MelaFind&#174; and
the rate of acceptance of MelaFind&#174; by physicians may be
adversely affected.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
If we wish to modify MelaFind&#174; after receiving FDA
approval, including changes in indications or other
modifications that could affect safety and effectiveness,
additional approvals could be required from the FDA. We may be
required to submit extensive pre-clinical and clinical data,
depending on the nature of the changes. Any request by the FDA
for additional data, or any requirement by the FDA that we
conduct additional clinical studies, could delay the
commercialization of MelaFind&#174; and require us to make
substantial additional research, development and other
expenditures. We may not obtain the necessary regulatory
approvals to market MelaFind&#174; in the US or anywhere else.
Any delay in, or failure to receive or maintain, approval for
MelaFind&#174; could prevent us from generating revenue or
achieving profitability, and our business, financial condition,
and results of operations would be materially adversely affected.
</DIV>

<P align="center" style="font-size: 10pt;">8

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD><B>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</B></TD>
    <TD>
    <B><I>MelaFind&#174;</I></B> <B><I>may not be commercially
    viable if we fail to obtain an adequate level of reimbursement
    by Medicare and other third party payors. The markets for
    MelaFind&#174;</I></B> <B><I>may also be limited by the
    indications for which its use may be reimbursed.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The availability of medical insurance coverage and reimbursement
for newly approved medical devices is uncertain. In the US,
physicians and other healthcare providers performing biopsies
for suspicious skin lesions are generally reimbursed for all or
part of the cost of the diagnosis and biopsy by Medicare,
Medicaid, or other third-party payors. The commercial success of
MelaFind&#174; in both domestic and international markets will
significantly depend on whether third-party coverage and
reimbursement are available for services involving
MelaFind&#174;. Medicare, Medicaid, health maintenance
organizations and other third-party payors are increasingly
attempting to contain healthcare costs by limiting both the
scope of coverage and the level of reimbursement of new medical
devices, and as a result, they may not cover or provide adequate
payment for the use of MelaFind&#174;. In order to obtain
satisfactory reimbursement arrangements, we may have to agree to
a fee or sales price lower than the fee or sales price we might
otherwise charge. Even if Medicare and other third-party payors
decide to cover procedures involving our product, we cannot be
certain that the reimbursement levels will be adequate.
Accordingly, even if MelaFind&#174; or future products we
develop are approved for commercial sale, unless government and
other third-party payors provide adequate coverage and
reimbursement for our products, some physicians may be
discouraged from using them, and our sales would suffer.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Medicare reimburses for medical devices in a variety of ways,
depending on where and how the device is used. However, Medicare
only provides reimbursement if CMS determines that the device
should be covered and that the use of the device is consistent
with the coverage criteria. A coverage determination can be made
at the local level by the Medicare administrative contractor
(formerly called carriers and fiscal intermediaries), a private
contractor that processes and pays claims on behalf of CMS for
the geographic area where the services were rendered, or at the
national level by CMS through a national coverage determination.
There are new statutory provisions intended to facilitate
coverage determinations for new technologies, but it is unclear
how these new provisions will be implemented. Coverage
presupposes that the device has been cleared or approved by the
FDA and further, that the coverage will be no broader than the
approved intended uses of the device as approved or cleared by
the FDA, but coverage can be narrower. A coverage determination
may be so limited that relatively few patients will qualify for
a covered use of the device. Should a very narrow coverage
determination be made for MelaFind&#174;, it may undermine the
commercial viability of MelaFind&#174;.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Obtaining a coverage determination, whether local or national,
is a time-consuming, expensive and highly uncertain proposition,
especially for a new technology, and inconsistent local
determinations are possible. On average, according to an
industry report, Medicare coverage determinations for medical
devices lag 15&nbsp;months to five years or more behind FDA
approval for that device. The Medicare statutory framework is
also subject to administrative rulings, interpretations and
discretion that affect the amount and timing of reimbursement
made under Medicare. Medicaid coverage determinations and
reimbursement levels are determined on a state by state basis,
because Medicaid, unlike Medicare, is administered by the states
under a state plan with the Secretary of the US Department of
Health and Human Services (HHS). Medicaid generally reimburses
at lower levels than Medicare. Moreover, Medicaid programs and
private insurers are frequently influenced by Medicare coverage
determinations.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD><B>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</B></TD>
    <TD>
    <B><I>Any adverse results in our clinical trials, or
    difficulties in conducting our clinical trials, could have a
    material adverse effect on our business.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Clinical studies in the US have been ongoing for over five
years, and we have a Protocol Agreement with the FDA, but we
have not conducted the pivotal clinical trial required for PMA
approval. We initiated a trial under the terms of the Protocol
Agreement at the end of 2004. However, technical operational
issues with the systems were experienced, requiring further
refinement. We currently anticipate commencing the pivotal
clinical trial in early 2006. The pivotal clinical trial and
supporting clinical studies will require the involvement of
larger numbers of clinical sites than we have previously engaged
at any single time, and the recruitment of large numbers of
patients. If the clinical sites, which enroll patients on a best
efforts basis, do not provide
</DIV>

<P align="center" style="font-size: 10pt;">9

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="left" style="font-size: 10pt;">
cases at rates anticipated for any reason (such as, for example,
lower than forecasted clinical site productivity), we may face
delays or may be unable to complete the development of
MelaFind&#174;.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Risk of delay in product
development.</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We could encounter delays in our pivotal trial or in obtaining
PMA approval because of a number of factors. We will require the
receipt of all information specified in our Protocol Agreement
on the required number of melanomas before the pivotal clinical
trial can be concluded. The MelaFind&#174; classifier will then
be utilized to evaluate the lesions acquired during the trial,
and the results will be analyzed to determine if we have
achieved the endpoints specified in the Protocol Agreement.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The final training of the classifier, required to be completed
before the classifier is utilized as described above, is
expected to take approximately two months. Accordingly, the
classifier must be ready for final training two months before
the end of the pivotal trial. For the classifier to be ready for
final training, approximately 300 melanoma lesions are targeted
to have been received. Therefore, in addition to acquiring the
melanoma lesions required to complete the pivotal trial
(approximately 100), we must have completed the acquisition of
approximately 300 training melanoma lesions on schedule.
Currently, approximately 225 melanoma lesions are in the
training database. The current classifier has been trained on
113 of these melanoma lesions.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Our schedule for the acquisition of these lesions is based upon
the projected numbers of imaging devices to be located at
participating sites, the projected productivity of those sites
in terms of melanomas and other lesions biopsied per month, and
the projected efficiency of the study pathologists in
classifying the lesion slides presented for
dermatohistopathological analysis and reporting their results.
If we are unable to produce and maintain a sufficient number of
imaging devices at participating sites, if the clinicians do not
maintain sufficient productivity, or if the pathologists do not
produce reports with sufficient efficiency, then our ability to
maintain our schedule will be adversely affected, the start or
conclusion of the pivotal trial may be delayed, and the
submission of the completed PMA will be delayed.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
To date, the lesion images in the training database have been
acquired using first-generation hand-held devices, which also
extract data from the lesions that are used by the classifiers.
Pre-commercialization hand-held devices are being developed for
use in the pivotal trial. If the lesion data obtained with
pre-commercialization devices are not consistent with data from
the first generation hand-held devices, the classifier will need
to be trained solely on lesions imaged using only one or the
other generation of hand-held devices. Were this need to arise,
significant delay and expense could be incurred, which could
jeopardize our ability to complete the development of
MelaFind&#174;.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD><B>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</B></TD>
    <TD>
    <B><I>We have incurred losses for a number of years, and
    anticipate that we will incur continued losses for the
    foreseeable future.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We began operations in December 1989. At that time we provided
research services, mostly to US government agencies, on
classified projects. We have financed our operations since 1999
primarily through private placements of our equity securities,
and have devoted substantially all of our resources to research
and development relating to MelaFind&#174;. Our net loss for the
three months ended March&nbsp;31, 2005 was $1.2&nbsp;million,
and as of March&nbsp;31, 2005, we had an accumulated deficit of
approximately $15.1&nbsp;million. We expect our research and
development expenses to increase in connection with our clinical
trials and other development activities related to
MelaFind&#174;. If we receive PMA approval for MelaFind&#174;
from the FDA, we expect to incur significant sales and marketing
expenses, and manufacturing expenses. Additionally, if we
complete our initial public offering, we expect that our general
and administrative expenses will increase due to the additional
operational and regulatory burdens applicable to public
companies. As a result, we expect to continue to incur
significant and increasing operating losses for the foreseeable
future. These losses, among other things, have had and will
continue to have an adverse effect on our stockholders&#146;
equity.
</DIV>

<P align="center" style="font-size: 10pt;">10

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD><B>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</B></TD>
    <TD>
    <B><I>We expect to operate in a highly competitive market, we
    may face competition from large, well-established medical device
    manufacturers with significant resources, and we may not be able
    to compete effectively.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We do not know of any product possessing the diagnostic
assistance capabilities of MelaFind&#174;. We believe that
electro-optical products designed to enhance the visualization
and analysis of potential melanomas have been approved or are
under development by: Welch Allyn, Inc.; Heine Optotechnik;
3Gen, LLC; Derma Medical Systems, Inc.; Medical High
Technologies S.p.A.; ZN Vision Technologies AG; Polartechnics,
Ltd.; Astron Clinica, Ltd.; LINOS Photonics, Inc.; and Biomips
Engineering. The broader market for precision optical imaging
devices used for medical diagnosis is intensely competitive,
subject to rapid change, and significantly affected by new
product introductions and other market activities of industry
participants. If our products are approved for marketing, we
will potentially be subject to competition from major optical
imaging companies, such as: General Electric Co.; Siemens AG;
Bayer AG; Eastman Kodak Company; Welch Allyn, Inc.; Olympus
Corporation; Carl Zeiss AG Deutschland; and others, each of
which manufactures and markets precision optical imaging
products for the medical market, and could decide to develop or
acquire a product to compete with MelaFind&#174;. These
companies enjoy numerous competitive advantages, including:
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    significantly greater name recognition;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    established relations with healthcare professionals, customers
    and third-party payors;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    established distribution networks;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    additional lines of products, and the ability to offer rebates,
    higher discounts or incentives to gain a competitive advantage;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    greater experience in conducting research and development,
    manufacturing, clinical trials, obtaining regulatory approval
    for products, and marketing approved products; and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    greater financial and human resources for product development,
    sales and marketing, and patent litigation.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
As a result, we may not be able to compete effectively against
these companies or their products.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD><B>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</B></TD>
    <TD>
    <B><I>Technological breakthroughs in the diagnosis or treatment
    of melanoma could render MelaFind&#174;</I></B>
    <B><I>obsolete.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The precision optical imaging field is subject to rapid
technological change and product innovation. MelaFind&#174; is
based on our proprietary technology, but a number of companies
and medical researchers are pursuing new technologies. Companies
in the medical device industry with significantly greater
financial, technical, research, marketing, sales and
distribution and other resources have expertise and interest in
the exploitation of computer-aided diagnosis, medical imaging,
and other technologies MelaFind&#174; utilizes. Some of these
companies are working on potentially competing products or
therapies, including confocal microscopy, various forms of
spectroscopy, other imaging modalities, and molecular and
genetic screening tests. In addition, the National Institutes of
Health and other supporters of cancer research are presumptively
seeking ways to improve the diagnosis or treatment of melanoma
by sponsoring corporate and academic research. There can be no
assurance that one or more of these companies will not succeed
in developing or marketing technologies and products or services
that demonstrate better safety or effectiveness, superior
clinical results, greater ease of use or lower cost than
MelaFind&#174;, or that such competitors will not succeed in
obtaining regulatory approval for introducing or commercializing
any such products or services prior to us. FDA approval of a
commercially viable alternative to MelaFind&#174; produced by a
competitor could significantly reduce market acceptance of
MelaFind&#174;. Any of the above competitive developments could
have a material adverse effect on our business, financial
condition, and results of operations. There is no assurance that
products, services, or technologies introduced prior to or
subsequent to the commercialization of MelaFind&#174; will not
render MelaFind&#174; less marketable or obsolete.
</DIV>

<P align="center" style="font-size: 10pt;">11

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD><B>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</B></TD>
    <TD>
    <B><I>We depend on clinical investigators and clinical sites to
    enroll patients in our clinical trials and other third parties
    to manage the trials and to perform related data collection and
    analysis, and, as a result, we may face costs and delays that
    are outside of our control.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We rely on clinical investigators and clinical sites, some of
which are private practices, and some of which are research
university or government-affiliated, to enroll patients in our
clinical trials. We rely on: pathologists and pathology
laboratories; a contract research organization to assist in
monitoring, collection of data, and ensuring FDA Good Clinical
Practices (GCP)&nbsp;are observed at our sites; a consultant
biostatistician; and other third parties to manage the trial and
to perform related data collection and analysis. However, we may
not be able to control the amount and timing of resources that
clinical sites and other third parties may devote to our
clinical trials. If these clinical investigators and clinical
sites fail to enroll a sufficient number of patients in our
clinical trials, or if the clinical sites fail to comply
adequately with the clinical protocols, we will be unable to
complete these trials, which could prevent us from obtaining
regulatory approvals for MelaFind&#174;. Our agreements with
clinical investigators and clinical sites for clinical testing
place substantial responsibilities on these parties and, if
these parties fail to perform as expected, our trials could be
delayed or terminated. If these clinical investigators, clinical
sites or other third parties do not carry out their contractual
duties or obligations or fail to meet expected deadlines, or if
the quality or accuracy of the clinical data they obtain are
compromised due to their failure to adhere to our clinical
protocols or for other reasons, our clinical trials may be
extended, delayed or terminated, and we may be unable to obtain
regulatory approval for, or successfully commercialize,
MelaFind&#174;.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In addition to the foregoing, our clinical trial may be delayed
or halted, or be inadequate to support approval of a PMA
application, for numerous other reasons, including, but not
limited to, the following:
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    the FDA, an Institutional Review Board (IRB), or other
    regulatory authorities place our clinical trial on hold;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    patients do not enroll in clinical trials at the rate we expect;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    patient follow-up is not at the rate we expect;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    IRBs and third-party clinical investigators may delay or reject
    our trial protocol;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    third-party organizations do not perform data collection and
    analysis in a timely or accurate manner;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    regulatory inspections of our clinical trials or manufacturing
    facilities may, among other things, require us to undertake
    corrective action or suspend or terminate our clinical trials,
    or invalidate our clinical trials;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    changes in governmental regulations or administrative actions;
    and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    the interim or final results of the clinical trial are
    inconclusive or unfavorable as to safety or effectiveness.</TD>
</TR>

</TABLE>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD><B>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</B></TD>
    <TD>
    <B><I>If MelaFind&#174;</I></B> <B><I>is approved for
    reimbursement, we anticipate experiencing significant pressures
    on pricing.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Even if Medicare covers a device for certain uses, that does not
mean that the level of reimbursement will be sufficient for
commercial success. We expect to experience pricing pressures in
connection with the commercialization of MelaFind&#174; and our
future products due to efforts by private and government-funded
payors to reduce or limit the growth of healthcare costs, the
increasing influence of health maintenance organizations, and
additional legislative proposals to reduce or limit increase in
public funding for healthcare services. Private payors,
including managed care payors, increasingly are demanding
discounted fee structures and the assumption by healthcare
providers of all or a portion of the financial risk. Efforts to
impose greater discounts and more stringent cost controls upon
healthcare providers by private and public payors are expected
to continue. Payors frequently review their coverage policies
for existing and new diagnostic tools and can, sometimes without
advance notice, deny or change their coverage policies.
Significant limits on the scope of services covered or on
reimbursement rates and fees on those services that are covered
could have a
</DIV>

<P align="center" style="font-size: 10pt;">12

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="left" style="font-size: 10pt;">
material adverse effect on our ability to commercialize
MelaFind&#174; and therefore, on our liquidity and our business,
financial condition, and results of operations.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In some foreign markets, which we may seek to enter in the
future, pricing and profitability of medical devices are subject
to government control. In the US, we expect that there will
continue to be federal and state proposals for similar controls.
Also, the trends toward managed healthcare in the US and
proposed legislation intended to control the cost of publicly
funded healthcare programs could significantly influence the
purchase of healthcare services and products, and may force us
to reduce prices for MelaFind&#174; or result in the exclusion
of MelaFind&#174; from reimbursement programs.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD><B>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</B></TD>
    <TD>
    <B><I>MelaFind&#174;</I></B> <B><I>may never achieve market
    acceptance even if we obtain regulatory approvals.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
To date, only those patients who were treated by physicians
involved in our clinical trials have been evaluated using
MelaFind&#174; and even if we obtain regulatory approval
patients with suspicious lesions and physicians evaluating
suspicious lesions may not endorse MelaFind&#174;. Physicians
tend to be slow to change their diagnostic and medical treatment
practices because of perceived liability risks arising from the
use of new products and the uncertainty of third party
reimbursement. Physicians may not utilize MelaFind&#174; until
there is long-term clinical evidence to convince them to alter
their existing methods of diagnosing or evaluating suspicious
lesions and there are recommendations from prominent physicians
that MelaFind&#174; is effective. We cannot predict the speed at
which physicians may adopt the use of MelaFind&#174;. If
MelaFind&#174; receives the appropriate regulatory approvals but
does not achieve an adequate level of acceptance by patients,
physicians and healthcare payors, we may not generate
significant product revenue and we may not become profitable.
The degree of market acceptance of MelaFind&#174; will depend on
a number of factors, including:
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    perceived effectiveness of MelaFind&#174;;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    convenience of use;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    cost of the use of MelaFind&#174;;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    availability and adequacy of third-party coverage or
    reimbursement;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    approved indications and product labeling;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    publicity concerning MelaFind&#174; or competitive products;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    potential advantages over alternative diagnostic methodologies;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    introduction and acceptance of competing products or
    technologies; and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    extent and success of our sales, marketing and distribution
    efforts.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The identification and screening of melanomas is now dominated
by visual clinical evaluation, with a minority of dermatologists
using dermoscopy. Even if MelaFind&#174; proves to be as
effective as visual inspection by an expert dermatologist, and
if all approvals are obtained, the success of MelaFind&#174;
will depend upon the acceptance by dermatologists and other
physicians who perform skin examinations and treat skin
disorders, including industry opinion leaders, that the
diagnostic information provided by MelaFind&#174; is medically
useful and reliable. We will be subject to intense scrutiny
before physicians will be comfortable incorporating
MelaFind&#174; in their diagnostic approaches. We believe that
recommendations by respected physicians will be essential for
the development and successful marketing of MelaFind&#174;, and
there can be no assurance that any such recommendations will be
obtained. To date, the medical community outside the limited
circle of certain dermatologists specializing in melanoma has
had little exposure to us and MelaFind&#174;. Because the
medical community is often skeptical of new companies and new
technologies, we may be unable to gain access to potential
customers in order to demonstrate the operation and
effectiveness of MelaFind&#174;. Even if we gain access to
potential customers, no assurance can be given that members of
the dermatological, or later the general practice, medical
community will perceive a need for or accept MelaFind&#174;. In
particular, given the potentially fatal consequences of failing
to detect melanoma at the early, curable stages, practitioners
may remain reluctant to rely upon MelaFind&#174; even after we
receive approval from the FDA for marketing the product.
</DIV>

<P align="center" style="font-size: 10pt;">13

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Any of the foregoing factors, or other currently unforeseen
factors, could limit or detract from market acceptance of
MelaFind&#174;. Insufficient market acceptance of MelaFind&#174;
would have a material adverse effect on our business, financial
condition and results of operations.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD><B>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</B></TD>
    <TD>
    <B><I>We may be unable to complete the development and
    commercialization of MelaFind&#174;</I></B> <B><I>or other
    products without additional funding.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We currently believe that our available cash, cash equivalents
and marketable securities, together with our net proceeds from
this offering, will be sufficient to fund our anticipated levels
of operations through mid 2008. However, our operations have
consumed substantial amounts of cash for each of the last six
years. We expect to continue to spend substantial amounts on
research and development, including conducting a clinical trial
for MelaFind&#174;. Even before we receive approval to market
MelaFind&#174;, we expect to spend significant additional
amounts to ready the product for commercial distribution
following FDA approval, including development of a direct sales
force and expansion of manufacturing capacity. We expect that
our cash used by operations will increase significantly in each
of the next several years, and should we encounter any material
delays or impediments, we may need additional funds to complete
the development and commercialization of MelaFind&#174;. Any
additional financing may be dilutive to stockholders, or may
require us to grant a lender a security interest in our assets.
The amount of funding we will need will depend on many factors,
including:
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    the schedule, costs, and results of our clinical trials;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    the success of our research and development efforts;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    the costs and timing of regulatory approval;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    reimbursement amounts for the use of MelaFind&#174; that we are
    able to obtain from Medicare and third party payors, or the
    amount of direct payments we are able to obtain from patients
    and/or physicians utilizing MelaFind&#174;;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    the cost of commercialization activities, including product
    marketing and building a domestic direct sales force;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    the emergence of competing or complementary technological
    developments;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    the costs of filing, prosecuting, defending and enforcing any
    patent claims and other rights, including litigation costs and
    the results of such litigation;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    the costs involved in defending any patent infringement actions
    brought against us by third parties; and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    our ability to establish and maintain any collaborative,
    licensing or other arrangements, and the terms and timing of any
    such arrangements.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Additional financing may not be available to us when we need it,
or it may not be available on favorable terms. If we are unable
to obtain adequate financing on a timely basis, we may be
required to significantly curtail or cease one or more of our
development and marketing programs. We could be required to seek
funds through arrangements with collaborators or others that may
require us to relinquish rights to some of our technologies,
product candidates or products that we would otherwise pursue on
our own. We also may have to reduce marketing, customer support
and other resources devoted to our products. If we raise
additional funds by issuing equity securities, our then-existing
stockholders will experience ownership dilution, could
experience declines in our share price and the terms of any new
equity securities may have preferences over our common stock.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD><B>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</B></TD>
    <TD>
    <B><I>If we are unable to establish sales, marketing and
    distribution capabilities or enter into and maintain
    arrangements with third parties to sell, market and distribute
    MelaFind&#174;, our business may be harmed.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We do not have a sales organization, and have no experience as a
company in the marketing and distribution of devices such as
MelaFind&#174;. To achieve commercial success for
MelaFind&#174;, we must develop a sales and marketing force and
enter into arrangements with others to market and sell our
products. Following product approval, we currently plan to
establish a small direct sales force to market MelaFind&#174; in
the US,
</DIV>

<P align="center" style="font-size: 10pt;">14

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="left" style="font-size: 10pt;">
focused on introducing it at high volume dermatologists&#146;
offices and training their staff in its use, but we have not
made any final determinations regarding the use of a particular
marketing channel. Developing such a sales force is expensive
and time consuming, and could delay or limit the success of any
product launch. We may not be able to develop this capacity on a
timely basis or at all. Qualified direct sales personnel with
experience in the medical device market are in high demand, and
there is no assurance that we will be able to hire or retain an
effective direct sales team. Similarly, qualified, independent
medical device representatives both within and outside the US
are in high demand, and we may not be able to build an effective
network for the distribution of our product through such
representatives. We have no assurance that we will be able to
enter into contracts with representatives on terms acceptable or
reasonable to us. Similarly, there is no assurance that we will
be able to build an alternate distribution framework, should we
attempt to do so.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We will need to contract with third parties in order to sell and
install our products in larger markets, including non-specialist
dermatologists and primary care physicians. To the extent that
we enter into arrangements with third parties to perform
marketing and distribution services in the US, our product
revenue could be lower and our costs higher than if we directly
marketed MelaFind&#174;. Furthermore, to the extent that we
enter into co-promotion or other marketing and sales
arrangements with other companies, any revenue received will
depend on the skills and efforts of others, and we do not know
whether these efforts will be successful. If we are unable to
establish and maintain adequate sales, marketing and
distribution capabilities, independently or with others, we will
not be able to generate product revenue, and may not become
profitable.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD><B>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</B></TD>
    <TD>
    <B><I>We have limited manufacturing capabilities and
    manufacturing personnel, and if our manufacturing capabilities
    are insufficient to produce an adequate supply of
    MelaFind&#174;, our growth could be limited and our business
    could be harmed.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We have not yet completed the development and testing of
MelaFind&#174;, and as a result have no experience in
manufacturing MelaFind&#174; for commercial distribution. We
currently have limited resources, facilities and experience to
commercially manufacture MelaFind&#174;. In order to produce
MelaFind&#174; in the quantities we anticipate to meet market
demand, we will need to increase our manufacturing capacity by a
significant factor over the current level, or procure
manufacturing services from others. There are technical
challenges to increasing manufacturing capacity, including
equipment design and automation, material procurement, problems
with production yields, and quality control and assurance.
Developing commercial-scale manufacturing facilities that meet
FDA requirements would require the investment of substantial
additional funds and the hiring and retaining of additional
management and technical personnel who have the necessary
manufacturing experience.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We currently plan to outsource certain production aspects to
contract manufacturers. Any difficulties in the ability of
third-party manufacturers to supply devices of the quality, at
the times, and in the quantities we need, could have a material
adverse effect on our business, financial condition, and results
of operations. Similarly, if we enter into contracts for third
party manufacture of our devices, any revenue received will
depend on the skills and efforts of others, and we do not know
whether these efforts will be successful. Manufacturers often
encounter difficulties in scaling up production of new products,
including problems involving product yields, controlling and
anticipating product costs, quality control and assurance,
component supply, and shortages of qualified personnel. We
cannot assure you that the third-party contract manufacturers
with whom we are developing relationships will have or sustain
the ability to produce the quantities of MelaFind&#174; needed
for development or commercial sales, or will be willing to do so
at prices that allow MelaFind&#174; to compete successfully in
the market.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Assuming that MelaFind&#174; receives regulatory approval, if we
are unable to manufacture or obtain a sufficient supply of
product, maintain control over expenses, or otherwise adapt to
anticipated growth, or if we underestimate growth, we may not
have the capability to satisfy market demand, and our business
will suffer. Additionally, if MelaFind&#174; receives regulatory
approval and we then need to make manufacturing changes, we may
need to obtain additional approval for these changes.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
MelaFind&#174; is complex and may contain undetected design
defects and errors when first introduced, or errors that may be
introduced when enhancements are released. Such defects and
errors may occur despite
</DIV>

<P align="center" style="font-size: 10pt;">15

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="left" style="font-size: 10pt;">
our testing, and may not be discovered until after our devices
have been shipped to and used by our customers. The existence of
these defects and errors could result in costly repairs, returns
of devices, diversion of development resources and damage to our
reputation in the marketplace. Any of these conditions could
have a material adverse impact on our business, financial
condition and results of operations. In addition, if we contract
with third-party manufacturers for the production of our
products, these manufacturers may inadvertently produce devices
that vary from devices we have produced in unpredictable ways
that cause adverse consequences.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD><B>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</B></TD>
    <TD>
    <B><I>Our manufacturing operations are dependent upon
    third-party suppliers, making us vulnerable to supply problems
    and price fluctuations, which could harm our business. We
    anticipate contracting for final device assembly and
    integration, but no contract for such services on a commercial
    basis has yet been procured.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Our manufacturing efforts currently rely on FillFactory, a
subsidiary of Cypress Semiconductor Corp., to manufacture and
supply the complementary metal oxide semiconductor sensor in
MelaFind&#174;, on Pracownia Optyki Instrumentalnej (Optyka) for
lens elements and on Fairchild Semiconductor Corp., Panasonic
Corp., and others for light-emitting diodes, or LEDs, printed
circuit boards, and other elements or components of our devices.
We have written agreements with several of these vendors, under
which the vendor is obligated to perform services or produce
components for us. There can be no assurance that these third
parties will meet their obligations under the agreements. Each
of these suppliers is a sole-source supplier. Our contract
manufacturers also rely on sole-source suppliers to manufacture
some of the components used in our products. Our manufacturers
and suppliers may encounter problems during manufacturing due to
a variety of reasons, including failure to follow specific
protocols and procedures, failure to comply with applicable
regulations, equipment malfunction and environmental factors,
any of which could delay or impede their ability to meet our
demand. Our reliance on these outside manufacturers and
suppliers also subjects us to other risks that could harm our
business, including:
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    suppliers may make errors in manufacturing components that could
    negatively affect the effectiveness or safety of our products,
    or cause delays in shipment of our products;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    we may not be able to obtain adequate supply in a timely manner
    or on commercially reasonable terms;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    we may have difficulty locating and qualifying alternative
    suppliers for our sole-source suppliers;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    switching components may require product redesign and submission
    to the FDA of a PMA supplement or possibly a separate PMA,
    either of which could significantly delay production;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    our suppliers manufacture products for a range of customers, and
    fluctuations in demand for the products these suppliers
    manufacture for others may affect their ability to deliver
    components to us in a timely manner; and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    our suppliers may encounter financial hardships unrelated to our
    demand for components, which could inhibit their ability to
    fulfill our orders and meet our requirements.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Any interruption or delay in the supply of components or
materials, or our inability to obtain components or materials
from alternate sources at acceptable prices in a timely manner,
could impair our ability to meet the demand of our customers and
cause them to cancel orders.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We have entered into a development agreement with ASKION GmbH
(ASKION)&nbsp;to complete developmental engineering and testing
of our hand-held imaging device, and have entered into a
non-binding Letter of Intent with ASKION to assemble the
components and produce initial quantities of our hand-held
imaging devices for clinical trials. We intend to enter into a
contract for commercial production of the hand-held imaging
devices once specifications for MelaFind&#174; have been
finalized, but we may not be able to enter such an agreement on
mutually acceptable terms. Failure to enter into such an
agreement with ASKION would require us to expand our own
manufacturing facilities or obtain such services elsewhere. Our
planned reliance upon an outside provider for assembly and
production services subjects us to the risk of adverse
consequences from delays and defects caused by the failure of
such outside supplier to meet its contractual
</DIV>

<P align="center" style="font-size: 10pt;">16

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="left" style="font-size: 10pt;">
obligations. The failure by us or our supplier to produce a
sufficient number of hand-held imaging devices that can operate
according to our specifications could delay the pivotal clinical
trial and/or the commercial sale of MelaFind&#174;, and would
adversely affect both our ability to successfully commercialize
MelaFind&#174; and our business, financial condition and results
of operations.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD><B>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</B></TD>
    <TD>
    <B><I>We will not be able to sell MelaFind&#174;</I></B>
    <B><I>unless and until its design is verified and validated in
    accordance with current good manufacturing practices as set
    forth in the US medical device Quality System Regulation.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We are in the process, but have not yet successfully completed,
all the steps necessary to verify and validate the design of the
MelaFind&#174; system that are required to be performed prior to
commercialization. If we are delayed or unable to complete
verification and validation successfully, we will not be able to
sell MelaFind&#174;, and we will not be able to meet our plans
for the commercialization of MelaFind&#174; in 2007.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Assuming that regulatory approval of MelaFind&#174; is granted,
the approval may be subject to limitations on the indicated uses
for which the product may be marketed, or may contain
requirements for costly post-marketing testing and surveillance
to monitor the safety or effectiveness of the device. Later
discovery of previously unknown problems with MelaFind&#174;,
including manufacturing problems, or failure to comply with
regulatory requirements such as the Quality System Regulation
(QSR), may result in restrictions on MelaFind&#174; or its
manufacturing processes, withdrawal of MelaFind&#174; from the
market, patient or physician notification, voluntary or
mandatory recalls, fines, withdrawal of regulatory approvals,
refusal to approve pending applications or supplements to
approved applications, refusal to permit the import or export of
our products, product seizures, injunctions or the imposition of
civil or criminal penalties. Should any of these enforcement
actions occur, our business, financial condition and results of
operations could be materially and adversely affected.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD><B>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</B></TD>
    <TD>
    <B><I>Assuming that MelaFind&#174;</I></B> <B><I>is approved by
    regulatory authorities, if we or our suppliers fail to comply
    with ongoing regulatory requirements, or if we experience
    unanticipated problems with MelaFind&#174;, it could be subject
    to restrictions or withdrawal from the market.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Any product for which we obtain marketing approval, along with
the manufacturing processes, post-approval clinical data and
promotional activities for such product, will be subject to
continuous review and periodic inspections by the FDA and other
regulatory bodies. In particular, we and our suppliers are
required to comply with the QSR and other regulations which
cover the methods and documentation of the design, testing,
production, control, quality assurance, labeling, packaging,
storage, promotion, distribution, and shipping of
MelaFind&#174;, and with record keeping practices. We also will
be subject to ongoing FDA requirements, including required
submissions of safety and other post-market information and
reports and registration and listing requirements. To the extent
that we contract with third parties to manufacture some of our
products, our manufacturers will be required to adhere to
current Good Manufacturing Practices (cGMP) requirements
enforced by the FDA as part of QSR, or similar regulations
required by regulatory agencies in other countries. The
manufacturing facilities of our contract manufacturers must be
inspected or must have been inspected, and must be in full
compliance with cGMP requirements before approval for marketing.
The FDA enforces the QSR and other regulatory requirements
through unannounced inspections. We have not yet been inspected
by the FDA for MelaFind&#174;, and will have to complete such an
inspection successfully before we ship any commercial
MelaFind&#174; devices. However, we were previously inspected in
connection with DIFOTI&#174;, which we have discontinued for
business reasons, and were cited for failures to comply fully
with QSR mandated procedures. We have discussed the findings in
a subsequent meeting with the FDA and are in the process of
addressing the deficiencies. The FDA inspectors observed
deficiencies that were documented on FDA Form&nbsp;483 that was
issued to us following the inspection. We have had a follow-up
meeting with the FDA, and are working with the FDA and
consultants to address the inspectional findings, particularly
as they relate to current MelaFind&#174; design development and
ultimate MelaFind&#174; commercial manufacturing. If we are not
successful in convincing the FDA that we are capable of
addressing its concerns, or if our efforts to address the
deficiencies should prove unsuccessful, we might be subject to
additional FDA action of a type described below, which could
negatively affect our ability to commercialize MelaFind&#174;.
</DIV>

<P align="center" style="font-size: 10pt;">17

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
There can be no assurance that the future interpretations of
legal requirements made by the FDA or other regulatory bodies
with possible retroactive effect, or the adoption of new
requirements or policies, will not adversely affect us. We may
be slow to adapt, or may not be able to adapt to these changes
or new requirements. Failure by us or one of our suppliers to
comply with statutes and regulations administered by the FDA and
other regulatory bodies, or failure to take adequate response to
any observations, could result in, among other things, any of
the following actions:
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    warning letters;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    fines and civil penalties;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    unanticipated expenditures;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    delays in approving or refusal to approve MelaFind&#174;;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    withdrawal of approval by the FDA or other regulatory bodies;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    product recall or seizure;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    interruption of production;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    operating restrictions;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    injunctions; and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    criminal prosecution.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
If any of these actions were to occur, it would harm our
reputation and cause our product sales and profitability to
suffer.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD><B>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</B></TD>
    <TD>
    <B><I>We are involved in a heavily regulated sector, and our
    ability to remain viable will depend on favorable government
    decisions at various points by various agencies.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
From time to time, legislation is introduced in the US Congress
that could significantly change the statutory provisions
governing the approval, manufacture and marketing of a medical
device. Additionally, healthcare is heavily regulated by the
federal government, and by state and local governments. The
federal laws and regulations affecting healthcare change
constantly, thereby increasing the uncertainty and risk
associated with any healthcare related venture, including our
business and MelaFind&#174;. In addition, FDA regulations and
guidance are often revised or reinterpreted by the agency in
ways that may significantly affect our business and our
products. It is impossible to predict whether legislative
changes will be enacted or FDA regulations, guidance, or
interpretations changed, and what the impact of such changes, if
any, may be.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The federal government regulates healthcare through various
agencies, including but not limited to the following:
(i)&nbsp;the FDA, which administers the Food, Drug, and Cosmetic
Act (FD&#38;C Act), as well as other relevant laws;
(ii)&nbsp;CMS, which administers the Medicare and Medicaid
programs; (iii)&nbsp;the Office of Inspector General
(OIG)&nbsp;which enforces various laws aimed at curtailing
fraudulent or abusive practices, including by way of example,
the Anti-Kickback Law, the Anti-Physician Referral Law, commonly
referred to as Stark, the Anti-Inducement Law, the Civil Money
Penalty Law, and the laws that authorize the OIG to exclude
healthcare providers and others from participating in federal
healthcare programs; and (iv)&nbsp;the Office of Civil Rights,
which administers the privacy aspects of the Health Insurance
Portability and Accountability Act of 1996 (HIPAA). All of the
aforementioned are agencies within HHS. Healthcare is also
provided or regulated, as the case may be, by the Department of
Defense through its TriCare program, the Public Health Service
within HHS under the Public Health Service Act, the Department
of Justice through
</DIV>

<P align="center" style="font-size: 10pt;">18

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="left" style="font-size: 10pt;">
the Federal False Claims Act and various criminal statutes, and
state governments under Medicaid and other state sponsored or
funded programs and their internal laws regulating all
healthcare activities.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In addition to regulation by the FDA as a medical device
manufacturer, we are subject to general healthcare industry
regulations. The healthcare industry is subject to extensive
federal, state and local laws and regulations relating to:
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    billing for services;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    quality of medical equipment and services;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    confidentiality, maintenance and security issues associated with
    medical records and individually identifiable health information;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    false claims; and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    labeling products.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
These laws and regulations are extremely complex and, in some
cases, still evolving. In many instances, the industry does not
have the benefit of significant regulatory or judicial
interpretation of these laws and regulations. If our operations
are found to be in violation of any of the federal, state or
local laws and regulations that govern our activities, we may be
subject to the applicable penalty associated with the violation,
including civil and criminal penalties, damages, fines or
curtailment of our operations. The risk of being found in
violation of these laws and regulations is increased by the fact
that many of them have not been fully interpreted by the
regulatory authorities or the courts, and their provisions are
open to a variety of interpretations. Any action against us for
violation of these laws or regulations, even if we successfully
defend against it, could cause us to incur significant legal
expenses and divert our management&#146;s time and attention
from the operation of our business.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD><B>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</B></TD>
    <TD>
    <B><I>We must comply with complex statutes prohibiting fraud and
    abuse, and both we and physicians utilizing
    MelaFind&#174;</I></B> <B><I>could be subject to significant
    penalties for noncompliance.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
There are extensive federal and state laws and regulations
prohibiting fraud and abuse in the healthcare industry that can
result in significant criminal and civil penalties. These
federal laws include: the anti-kickback statute which prohibits
certain business practices and relationships, including the
payment or receipt of remuneration for the referral of patients
whose care will be paid by Medicare or other federal healthcare
programs; the physician self-referral prohibition, commonly
referred to as the Stark Law; the anti-inducement law, which
prohibits providers from offering anything to a Medicare or
Medicaid beneficiary to induce that beneficiary to use items or
services covered by either program; the Civil False Claims Act,
which prohibits any person from knowingly presenting or causing
to be presented false or fraudulent claims for payment by the
federal government, including the Medicare and Medicaid programs
and; the Civil Monetary Penalties Law, which authorizes HHS to
impose civil penalties administratively for fraudulent or
abusive acts.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Sanctions for violating these federal laws include criminal and
civil penalties that range from punitive sanctions, damage
assessments, money penalties, imprisonment, denial of Medicare
and Medicaid payments, or exclusion from the Medicare and
Medicaid programs, or both. As federal and state budget
pressures continue, federal and state administrative agencies
may also continue to escalate investigation and enforcement
efforts to root out waste and to control fraud and abuse in
governmental healthcare programs. Private enforcement of
healthcare fraud has also increased, due in large part to
amendments to the Civil False Claims Act in 1986 that were
designed to encourage private persons to sue on behalf of the
government. A violation of any of these federal and state fraud
and abuse laws and regulations could have a material adverse
effect on our liquidity and financial condition. An
investigation into the use of MelaFind&#174; by physicians may
dissuade physicians from either purchasing or using
MelaFind&#174;, and could have a material adverse effect on our
ability to commercialize MelaFind&#174;.
</DIV>

<P align="center" style="font-size: 10pt;">19

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD><B>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</B></TD>
    <TD>
    <B><I>The application of the privacy provisions of HIPAA is
    uncertain.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
HIPAA, among other things, protects the privacy and security of
individually identifiable health information by limiting its use
and disclosure. HIPAA directly regulates &#147;covered
entities&#148; (insurers, clearinghouses, and most healthcare
providers) and indirectly regulates &#147;business
associates&#148; with respect to the privacy of patients&#146;
medical information. All entities that receive and process
protected health information are required to adopt certain
procedures to safeguard the security of that information. It is
uncertain whether we would be deemed to be a covered entity
under HIPAA, and it is unlikely that based on our current
business model, we would be a business associate. Nevertheless,
we will likely be contractually required to physically safeguard
the integrity and security of the patient information that we or
our physician customers receive, store, create or transmit. If
we fail to adhere to our contractual commitments, then our
physician customers may be subject to civil monetary penalties,
and this could adversely affect our ability to market
MelaFind&#174;. We also may be liable under state laws governing
the privacy of health information.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD><B>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</B></TD>
    <TD>
    <B><I>We may become subject to claims of infringement or
    misappropriation of the intellectual property rights of others,
    which could prohibit us from shipping affected products, require
    us to obtain licenses from third parties or to develop
    non-infringing alternatives, and subject us to substantial
    monetary damages and injunctive relief. Our patents may also be
    subject to challenge on validity grounds, and our patent
    applications may be rejected.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Third parties could, in the future, assert infringement or
misappropriation claims against us with respect to our current
or future products. Whether a product infringes a patent
involves complex legal and factual issues, the determination of
which is often uncertain. Therefore, we cannot be certain that
we have not infringed the intellectual property rights of such
third parties. Our potential competitors may assert that some
aspect of MelaFind&#174; infringes their patents. Because patent
applications may take years to issue, there also may be
applications now pending of which we are unaware that may later
result in issued patents that MelaFind&#174; infringes. There
also may be existing patents of which we are unaware that one or
more components of our MelaFind&#174; system may inadvertently
infringe.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Any infringement or misappropriation claim could cause us to
incur significant costs, could place significant strain on our
financial resources, divert management&#146;s attention from our
business and harm our reputation. If the relevant patents were
upheld as valid and enforceable and we were found to infringe,
we could be prohibited from selling our product that is found to
infringe unless we could obtain licenses to use the technology
covered by the patent or are able to design around the patent.
We may be unable to obtain a license on terms acceptable to us,
if at all, and we may not be able to redesign MelaFind&#174; to
avoid infringement. A court could also order us to pay
compensatory damages for such infringement, plus prejudgment
interest and could, in addition, treble the compensatory damages
and award attorney fees. These damages could be substantial and
could harm our reputation, business, financial condition and
operating results. A court also could enter orders that
temporarily, preliminarily or permanently enjoin us and our
customers from making, using, selling, offering to sell or
importing MelaFind&#174;, and/or could enter an order mandating
that we undertake certain remedial activities. Depending on the
nature of the relief ordered by the court, we could become
liable for additional damages to third parties.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We also may rely on our patents, patent applications and other
intellectual property rights to give us a competitive advantage.
Whether a patent is valid, or whether a patent application
should be granted, is a complex matter of science and law, and
therefore we cannot be certain that, if challenged, our patents,
patent applications and/or other intellectual property rights
would be upheld. If one or more of those patents, patent
applications and other intellectual property rights are
invalidated, rejected or found unenforceable, that could reduce
or eliminate any competitive advantage we might otherwise have
had.
</DIV>

<P align="center" style="font-size: 10pt;">20

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD><B>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</B></TD>
    <TD>
    <B><I>New product development in the medical device industry is
    both costly and labor intensive with very low success rates for
    successful commercialization; if we cannot successfully develop
    or obtain future products, our growth would be delayed.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Our long-term success is dependent, in large part, on the
design, development and commercialization of MelaFind&#174; and
other new products and services in the medical device industry.
The product development process is time-consuming, unpredictable
and costly. There can be no assurance that we will be able to
develop or acquire new products, successfully complete clinical
trials, obtain the necessary regulatory clearances or approvals
required from the FDA on a timely basis, or at all, manufacture
our potential products in compliance with regulatory
requirements or in commercial volumes, or that MelaFind&#174; or
other potential products will achieve market acceptance. In
addition, changes in regulatory policy for product approval
during the period of product development, and regulatory agency
review of each submitted new application, may cause delays or
rejections. It may be necessary for us to enter into licensing
arrangements, in order to market effectively any new products or
new indications for existing products. There can be no assurance
that we will be successful in entering into such licensing
arrangements on terms favorable to us or at all. Failure to
develop, obtain necessary regulatory clearances or approvals
for, or successfully market potential new products could have a
material adverse effect on our business, financial condition and
results of operations.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD><B>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</B></TD>
    <TD>
    <B><I>We face the risk of product liability claims and may not
    be able to obtain or maintain adequate insurance.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Our business exposes us to the risk of product liability claims
that is inherent in the testing, manufacturing and marketing of
medical devices, including those which may arise from the misuse
or malfunction of, or design flaws in, our products. We may be
subject to product liability claims if MelaFind&#174; causes, or
merely appears to have caused, an injury or if a patient alleges
that MelaFind&#174; failed to provide appropriate diagnostic
information on a lesion where melanoma was subsequently found to
be present. Claims may be made by patients, healthcare providers
or others involved with MelaFind&#174;. MelaFind&#174; will
require PMA approval prior to commercialization in the US. The
clinical studies of MelaFind&#174; are considered by the FDA as
Non-Significant Risk (NSR). Consequently, the trials are
conducted under the auspices of an abbreviated Investigational
Device Exemption (IDE). We therefore do not maintain domestic
clinical trial liability insurance. We have obtained clinical
trial liability insurance in certain European countries where
required by statute or clinical site policy. Although we have
general liability insurance that we believe is appropriate, and
anticipate obtaining adequate product liability insurance before
commercialization of MelaFind&#174;, this insurance is and will
be subject to deductibles and coverage limitations. Our
anticipated product liability insurance may not be available to
us in amounts and on acceptable terms, if at all, and if
available, the coverages may not be adequate to protect us
against any future product liability claims. If we are unable to
obtain insurance at an acceptable cost or on acceptable terms
with adequate coverage, or otherwise protect against potential
product liability claims, we will be exposed to significant
liabilities, which may harm our business. A product liability
claim, recall or other claim with respect to uninsured
liabilities or for amounts in excess of insured liabilities
could result in significant costs and significant harm to our
business.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We may be subject to claims against us even if the apparent
injury is due to the actions of others. For example, we rely on
the expertise of physicians, nurses and other associated medical
personnel to operate MelaFind&#174;. If these medical personnel
are not properly trained or are negligent, we may be subjected
to liability. These liabilities could prevent or interfere with
our product commercialization efforts. Defending a suit,
regardless of merit, could be costly, could divert management
attention and might result in adverse publicity, which could
result in the withdrawal of, or inability to recruit, clinical
trial volunteers, or result in reduced acceptance of
MelaFind&#174; in the market.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Insurance and surety companies have reassessed many aspects of
their business and, as a result, may take actions that could
negatively affect our business. These actions could include
increasing insurance premiums, requiring higher self-insured
retentions and deductibles, reducing limits, restricting
coverages, imposing exclusions, and refusing to underwrite
certain risks and classes of business. Any of these actions may
adversely affect our ability to obtain appropriate insurance
coverage at reasonable costs, which could have a material
adverse effect on our business, financial condition and results
of operations.
</DIV>

<P align="center" style="font-size: 10pt;">21

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD><B>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</B></TD>
    <TD>
    <B><I>We may be adversely affected by a data center
    failure.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The success of MelaFind&#174; is dependent upon our ability to
protect our data center against damage from fire, power loss,
telecommunications failure, natural disaster, sabotage or a
similar catastrophic event. Substantially all of our computer
equipment and data operations are located in a single facility.
Our prospective failure to maintain off-site copies of
information contained in our MelaFind&#174; database, or our
inability to use alternative sites in the event we experience a
natural disaster, hardware or software malfunction or other
interruption of our data center, or any interruption in the
ability of physicians to obtain access to our MelaFind&#174;
server and its database could adversely impact our business,
financial condition and results of operations.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD><B>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</B></TD>
    <TD>
    <B><I>We may be adversely affected by breaches of online
    security.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Our MelaFind&#174; database does not contain any information
that allows us to identify specific patients. However, we must
identify certain data as belonging to or as derived from
specific patients for billing purposes. To the extent that our
activities involve the storage and transmission of confidential
information, security breaches could damage our reputation and
expose us to a risk of loss, or to litigation and possible
liability. Our business may be materially adversely affected if
our security measures do not prevent security breaches. In
addition, such information may be subject to HIPAA privacy and
security regulations, the potential violation of which may
trigger concerns by healthcare providers, which may adversely
impact our business, financial condition and results of
operations.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD><B>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</B></TD>
    <TD>
    <B><I>We are dependent upon telecommunications and the
    internet.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The connection between the MelaFind&#174; hand-held imaging
device and the central server in our offices will be dependent
on the internet. Our success will depend in large part on the
continued availability of electronic means for storing and
transmitting encoded compressed diagnostic information, and
storing and transmitting the results of the comparison of such
information with our electronically-maintained database through
the internet. If the domestic and international
telecommunications infrastructure required for these
transmissions fails, our business could be materially adversely
affected.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We plan to use the internet as a medium to provide diagnostic
assistance services to physicians. We also plan to use the
internet to inform the public about the availability of our
products and to market to and communicate with physicians who
are potential or actual customers. Our success will therefore
depend in part on the continued growth and use of the internet.
If our ability to use the internet fails, it may materially
adversely affect our business.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD><B>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</B></TD>
    <TD>
    <B><I>We will be obligated to comply with Federal Communications
    Commission regulations for radio transmissions used by our
    products.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Versions of MelaFind&#174; may rely on radio transmissions from
the hand-held imaging device to a base station that is connected
to the internet. Applicable requirements will restrict us to a
particular band of frequencies allocated to low power radio
service for transmitting data in support of specific diagnostic
or therapeutic functions. Failure to comply with all applicable
restrictions on the use of such frequencies, or unforeseeable
difficulties with the use of such frequencies, could impede our
ability to commercialize MelaFind&#174;.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD><B>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</B></TD>
    <TD>
    <B><I>All of our operations are conducted at a single location.
    Any disruption at our facility could increase our
    expenses.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
All of our operations are conducted at two adjacent buildings in
Irvington, New York. We take precautions to safeguard our
facility, including insurance, health and safety protocols,
contracted off-site engineering services, provision for off-site
manufacturing, and storage of computer data. However, a natural
disaster, such as a fire, flood or earthquake, could cause
substantial delays in our operations, damage or destroy our
manufacturing equipment or inventory, and cause us to incur
additional expenses. The insurance
</DIV>

<P align="center" style="font-size: 10pt;">22

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="left" style="font-size: 10pt;">
we maintain against fires, floods, earthquakes and other natural
disasters may not be adequate to cover our losses in any
particular case.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD><B>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</B></TD>
    <TD>
    <B><I>We may be liable for contamination or other harm caused by
    materials that we handle, and changes in environmental
    regulations could cause us to incur additional expense.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Our manufacturing, research and development and clinical
processes do not generally involve the handling of potentially
harmful biological materials or hazardous materials, but they
may occasionally do so. We are subject to federal, state and
local laws and regulations governing the use, handling, storage
and disposal of hazardous and biological materials. If
violations of environmental, health and safety laws occur, we
could be held liable for damages, penalties and costs of
remedial actions. These expenses or this liability could have a
significant negative impact on our business, financial condition
and results of operations. We may violate environmental, health
and safety laws in the future as a result of human error,
equipment failure or other causes. Environmental laws could
become more stringent over time, imposing greater compliance
costs and increasing risks and penalties associated with
violations. We may be subject to potentially conflicting and
changing regulatory agendas of political, business and
environmental groups. Changes to or restrictions on permitting
requirements or processes, hazardous or biological material
storage or handling might require an unplanned capital
investment or relocation. Failure to comply with new or existing
laws or regulations could harm our business, financial condition
and results of operations.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD><B>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</B></TD>
    <TD>
    <B><I>Failure to obtain and maintain regulatory approval in
    foreign jurisdictions will prevent us from marketing
    abroad.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Following commercialization of MelaFind&#174; in the US, we may
market MelaFind&#174; internationally. Outside the US, we can
market a product only if we receive a marketing authorization
and, in some cases, pricing approval, from the appropriate
regulatory authorities. The approval procedure varies among
countries and can involve additional testing, and the time
required to obtain approval may differ from that required to
obtain FDA approval. The foreign regulatory approval process may
include all of the risks associated with obtaining FDA approval,
in addition to other risks. Foreign regulatory bodies have
established varying regulations governing product standards,
packaging requirements, labeling requirements, import
restrictions, tariff regulations, duties and tax requirements.
We may not obtain foreign regulatory approvals on a timely
basis, if at all. Foreign regulatory agencies, as well as the
FDA, periodically inspect manufacturing facilities both in the
US and abroad. Approval by the FDA does not ensure approval by
regulatory authorities in other countries, and approval by one
foreign regulatory authority does not ensure approval by
regulatory authorities in other foreign countries or by the FDA.
We have not taken any significant actions to obtain foreign
regulatory approvals. We may not be able to file for regulatory
approvals and may not receive necessary approvals to
commercialize MelaFind&#174; in any market on a timely basis, or
at all. Our inability or failure to comply with varying foreign
regulation, or the imposition of new regulations, could restrict
our sale of products internationally.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD><B>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</B></TD>
    <TD>
    <B><I>Our success will depend on our ability to attract and
    retain our personnel.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We are highly dependent on our senior management, especially
Joseph V. Gulfo, M.D., our President and Chief Executive
Officer, and Dina Gutkowicz-Krusin, Ph.D., our Director of
Clinical Studies. Our success will depend on our ability to
retain our current management and to attract and retain
qualified personnel in the future, including scientists,
clinicians, engineers and other highly skilled personnel.
Competition for senior management personnel, as well as
scientists, clinicians, engineers, and experienced sales and
marketing individuals, is intense, and we may not be able to
retain our personnel. The loss of the services of members of our
senior management, scientists, clinicians or engineers could
prevent the implementation and completion of our objectives,
including the development and introduction of MelaFind&#174;.
The loss of a member of our senior management or our
professional staff would require the remaining executive
officers to divert immediate and substantial attention to
seeking a replacement. Each of our officers may terminate their
employment at any time without notice and without cause or good
reason.
</DIV>

<P align="center" style="font-size: 10pt;">23

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We expect to expand our operations and grow our research and
development, product development and administrative operations.
This expansion is expected to place a significant strain on our
management, and will require hiring a significant number of
qualified personnel. Accordingly, recruiting and retaining such
personnel in the future will be critical to our success. There
is competition from other companies and research and academic
institutions for qualified personnel in the areas of our
activities. If we fail to identify, attract, retain and motivate
these highly skilled personnel, we may be unable to continue our
development and commercialization activities.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD><B>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</B></TD>
    <TD>
    <B><I>Our financial results for future periods may be adversely
    affected by changes required by financial and accounting
    regulatory agencies.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Our reported financial results may be adversely affected by
changes in accounting principles generally accepted in the US.
Generally accepted accounting principles in the US are subject
to interpretation by the Financial Accounting Standards Board
(FASB), the American Institute of Certified Public Accountants,
the Securities and Exchange Commission (SEC), and various bodies
formed to promulgate and interpret appropriate accounting
principles. A change in these principles or interpretations
could have a significant effect on our reported financial
results, and could affect the reporting of transactions
completed before the announcement of a change.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
For example, we currently are not required to record stock-based
compensation charges if the employee&#146;s stock option
exercise price is equal to or exceeds the fair value of our
common stock at the date of grant. However, several companies
have recently elected to change their accounting policies, and
have begun to record the fair value of stock options as an
expense. New FASB Statement of Financial Accounting Standards
No.&nbsp;123 (revised 2004), Share-Based Payment (FASB Statement
No.&nbsp;123R), requires companies to recognize in the income
statement the grant-date fair value of stock options and other
equity-based compensation issued to employees. Under FASB
Statement No.&nbsp;123R, SEC registrants would have been
required to implement this standard for interim or annual
periods beginning after June&nbsp;15, 2005, or after
December&nbsp;15, 2005 for small business issuers. On
April&nbsp;14, 2005, the SEC adopted a new rule amending the
compliance dates for FASB Statement No.&nbsp;123R. The
SEC&#146;s new rule permits companies to implement FASB
Statement No.&nbsp;123R at the beginning of their next fiscal
year, instead of the next reporting period that begins after
June&nbsp;15, 2005, or December&nbsp;15, 2005 for small business
issuers. Awards to most non-employee directors will be accounted
for as employee awards. All public companies must use either the
modified prospective or the modified retrospective transition
method. Under the modified prospective method, awards that are
granted, modified, or settled after the date of adoption should
be measured and accounted for in accordance with FASB Statement
No.&nbsp;123R. Under the modified retrospective method, the
previously-reported amounts are restated to either the beginning
of the year of adoption or for all periods presented. If we
elect to adopt the retroactive provisions and to restate all
prior periods presented our operating expenses and reported
losses will increase. Although we believe that our accounting
practices are consistent with current accounting pronouncements,
changes to or interpretations of accounting methods or policies
in the future may require us to reclassify, restate or otherwise
change or revise our financial statements.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD><B>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</B></TD>
    <TD>
    <B><I>Our financial results for future periods will be affected
    by the attainment of milestones.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We have granted to certain employees stock options that vest
with the attainment of various performance milestones. Assuming
that FASB Statement No.&nbsp;123R is implemented, then upon the
attainment of these milestones we will be required to recognize
a stock based compensation expense in an amount based on the
then current fair market value of our common stock underlying
the options which vest when the milestone is attained. Assuming
that all shares offered are sold in this public offering at a
price of
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face="wingdings">l</FONT>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;per
share, the mid-point of our filing range, that upon the
attainment of each of the relevant milestones such offering
price remains the fair market value per share of our common
stock, and that the number of shares of our common stock
outstanding after this offering
remains&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face="wingdings">l</FONT>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;then
we will record a compensation expense: (1)&nbsp;upon completion
of this offering of
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face="wingdings">l</FONT>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;with
respect to 125,000 shares underlying options with an assumed
fair value of $4.00 per share; (2)&nbsp;upon filing our
MelaFind&#174; PMA with the FDA of
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face="wingdings">l</FONT>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;with
respect to 50,000 shares underlying options with an assumed fair
value of $4.00 per share; and (3)&nbsp;upon our
</DIV>

<P align="center" style="font-size: 10pt;">24

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="left" style="font-size: 10pt;">
receipt of PMA approval for MelaFind&#174; of
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face="wingdings">l</FONT>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;with
respect to 25,000 shares underlying options with an assumed fair
value of $4.00 per share and of
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face="wingdings">l</FONT>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;with
respect
to &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face="wingdings">l</FONT>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
underlying options with an fair value of $0.46 per share.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="1%"></TD>
    <TD width="99%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>If we fail to maintain the adequacy of our internal
    controls, our ability to provide accurate financial statements
    could be impaired and any failure to maintain our internal
    controls and provide accurate financial statements could cause
    our stock price to decrease substantially.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We will face increased legal, accounting, administrative and
other costs and expenses as a public company that we did not
incur as a private company. The Sarbanes-Oxley Act of 2002
(SOX), as well as new rules subsequently implemented by the SEC,
the Public Company Accounting Oversight Board and the NASDAQ
National Market, require changes in the corporate governance
practices of public companies. We expect these new rules and
regulations to increase our legal and financial compliance
costs, to divert management attention from operations and
strategic opportunities, and to make legal, accounting and
administrative activities more time-consuming and costly. We
also expect to incur substantially higher costs to maintain
directors&#146; and officers&#146; insurance. We are in the
process of instituting changes to our internal procedures to
satisfy the requirements of the SOX. We are evaluating our
internal controls systems in order to allow us to report on, and
our independent registered public accounting firm to attest to,
our internal controls, as required by Section&nbsp;404 of the
SOX. While we anticipate being able to fully implement the
requirements relating to internal controls and all other aspects
of Section&nbsp;404 of the SOX in a timely fashion, we cannot be
certain as to the timing of completion of our evaluation,
testing and remediation actions or the impact of the same on our
operations, since there is no precedent available by which to
measure compliance adequacy. As a small company with limited
capital and human resources, we will need to divert
management&#146;s time and attention away from our business in
order to ensure compliance with these regulatory requirements.
As a public company, we will require greater financial resources
than we have had as a private company. Implementing these
changes may require new information technologies systems, the
auditing of our internal controls, and compliance training for
our directors, officers and personnel. Such efforts would
require a potentially significant expense. If we fail to
maintain the adequacy of our internal controls as such standards
are modified, supplemented or amended from time to time, we may
not be able to provide accurate financial statements and comply
with the SOX. Any failure to maintain the adequacy of our
internal controls and provide accurate financial statements
could cause the trading price of our common stock to decrease
substantially.
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Risks Relating to this Offering</B>
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="1%"></TD>
    <TD width="99%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>An active trading market for our common stock may not
    develop.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Prior to this offering, there has been no public market for our
common stock. Although we are seeking approval for listing of
our common stock on the NASDAQ National Market, an active
trading market for our shares may never develop or be sustained
following this offering. Further, we cannot be certain that the
market price of our common stock will not decline below the
initial public offering price or below the amount required by
Nasdaq to maintain a listing on its National Market. Should we
fail to meet the minimum standards established by Nasdaq for its
National Market, we could be de-listed, meaning shareholders
might be subject to limited liquidity. The initial public
offering price for our common stock will be determined through
negotiations with the underwriters. This initial public offering
price may vary from the market price of our common stock after
the offering and investors may therefore be unable to sell their
common stock at or above the initial public offering price.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="1%"></TD>
    <TD width="99%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Our stock price will be volatile, meaning purchasers of
    our common stock could incur substantial losses.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Our stock price is likely to be volatile. The stock market in
general and the market for medical technology companies in
particular have experienced extreme volatility that has often
been unrelated to the operating performance of particular
companies. As a result of this volatility, investors may not be
able to sell their common stock at or above the initial public
offering price. The following factors, in addition to other risk
</DIV>

<P align="center" style="font-size: 10pt;">25

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="left" style="font-size: 10pt;">
factors described in this section and general market and
economic conditions, may have a significant impact on the market
price of our common stock:
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    results of our research and development efforts and our clinical
    trials;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    the timing of regulatory approval for our products;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    failure of any of our products, if approved, to achieve
    commercial success;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    the announcement of new products or product enhancements by us
    or our competitors;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    regulatory developments in the US and foreign countries;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    ability to manufacture our products to commercial standards;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    developments concerning our clinical collaborators, suppliers or
    marketing partners;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    changes in financial estimates or recommendations by securities
    analysts;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    public concern over our products;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    developments or disputes concerning patents or other
    intellectual property rights;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    product liability claims and litigation against us or our
    competitors;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    the departure of key personnel;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    the strength of our balance sheet;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    variations in our financial results or those of companies that
    are perceived to be similar to us;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    changes in the structure of and third-party reimbursement in the
    US and other countries;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    changes in accounting principles or practices;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    general economic, industry and market conditions; and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    future sales of our common stock.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
A decline in the market price of our common stock could cause
you to lose some or all of your investment and may adversely
impact our ability to attract and retain employees and raise
capital. In addition, stockholders may initiate securities class
action lawsuits if the market price of our stock drops
significantly. Whether or not meritorious, litigation brought
against us could result in substantial costs and could divert
the time and attention of our management. Our insurance to cover
claims of this sort may not be adequate.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD><B>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</B></TD>
    <TD>
    <B><I>We have broad discretion in the use of the net proceeds
    from this offering and may not use them effectively.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We cannot specify with certainty the particular uses of the net
proceeds we will receive from this offering. Our management will
have broad discretion in the application of the net proceeds,
including for any of the purposes described in &#147;Use of
Proceeds.&#148; Accordingly, you will have to rely upon the
judgment of our management with respect to the use of the
proceeds, with only limited information concerning
management&#146;s specific intentions. Our management may spend
a portion or all of the net proceeds from this offering in ways
that our stockholders may not desire or that may not yield a
favorable return. The failure by our management to apply these
funds effectively could harm our business and financial
condition. Pending their use, we may invest the net proceeds
from this offering in a manner that does not produce income or
that loses value.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD><B>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</B></TD>
    <TD>
    <B><I>Concentration of ownership among our directors, executive
    officers, and principal stockholders may prevent new investors
    from influencing significant corporate decisions.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Upon closing of this offering, based upon beneficial ownership
as of May&nbsp;15, 2005, our directors, executive officers,
holders of more than 5% of our common stock, and their
affiliates will, in the aggregate,
</DIV>

<P align="center" style="font-size: 10pt;">26

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="left" style="font-size: 10pt;">
beneficially own approximately <FONT face="wingdings">l</FONT>%
of our outstanding common stock. As a result, these
stockholders, subject to any fiduciary duties owed to our other
stockholders under Delaware law, will be able to exercise a
controlling influence over matters requiring stockholder
approval, including the election of directors and approval of
significant corporate transactions, and will have significant
control over our management and policies. Some of these persons
or entities may have interests that are different from yours.
For example, these stockholders may support proposals and
actions with which you may disagree or which are not in your
interests. The concentration of ownership could delay or prevent
a change in control of our company or otherwise discourage a
potential acquirer from attempting to obtain control of our
company, which in turn could reduce the price of our common
stock. In addition, these stockholders, some of whom have
representatives sitting on our board of directors, could use
their voting influence to maintain our existing management and
directors in office, delay or prevent changes of control of our
company, or support or reject other management and board
proposals that are subject to stockholder approval, such as
amendments to our employee stock plans and approvals of
significant financing transactions.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>If there are substantial
sales of our common stock, our stock price could decline.</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
If our existing stockholders sell a large number of shares of
our common stock or the public market perceives that these sales
may occur, the market price of our common stock could decline.
Based on shares outstanding on May&nbsp;15, 2005, upon the
closing of this offering, assuming no outstanding options are
exercised prior to the closing of this offering, we will have
approximately <FONT face="wingdings">l</FONT> shares of common
stock outstanding. All of the shares offered under this
prospectus will be freely tradable without restriction or
further registration under the federal securities laws, unless
purchased by our affiliates. Taking into consideration the
effect of lock-up agreements that will be entered into by our
stockholders, the remaining <FONT face="wingdings">l</FONT>
shares outstanding upon the closing of this initial public
offering will be available for sale pursuant to Rules&nbsp;144
and 701, and the volume, manner of sale and other limitations
under these rules, as follows:
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    <FONT face="wingdings">l</FONT> shares of common stock will be
    eligible for sale in the public market, beginning 270&nbsp;days
    after the effective date of this prospectus, unless the lock-up
    period is otherwise extended pursuant to its terms; and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    the remaining <FONT face="wingdings">l</FONT> shares of common
    stock will become eligible for sale in the public market
    beginning <FONT face="wingdings">l</FONT> , 2005.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Existing stockholders holding an aggregate of
<FONT face="wingdings">l</FONT> shares of common stock and
warrant holders holding warrants to purchase
<FONT face="wingdings">l</FONT> shares of our common stock,
based on shares outstanding as of May&nbsp;15, 2005 have rights
with respect to the registration of these shares of common stock
with the SEC. See &#147;Description of Capital Stock&nbsp;&#151;
Registration Rights.&#148; If we register these shares of common
stock, they can immediately sell those shares in the public
market.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Within nine months following this offering, we intend to
register up to 1,899,875 shares of common stock that are
authorized for issuance under our stock option plans. As of
May&nbsp;15, 2005, 899,875 shares were subject to outstanding
options, of which 446,675 shares were vested. Once we register
these shares, they can be freely sold in the public market upon
issuance, subject to the lock-up agreements referred to above
and restrictions on our affiliates.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>You will incur immediate and
substantial dilution as a result of this offering.</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The initial public offering price is substantially higher than
the book value per share of our common stock. As a result,
purchasers in this offering will experience immediate and
substantial dilution of $ <FONT face="wingdings">l</FONT> per
share in the tangible book value of our common stock from the
initial public offering price, based on the number of shares
outstanding as of March&nbsp;31, 2005. This is due in large part
to earlier investors in the company having paid substantially
less than the initial public offering price when they purchased
their shares. Investors who purchase shares of common stock in
this offering will contribute approximately
<FONT face="wingdings">l</FONT> % of the total amount we have
raised to fund our operations but will own only approximately
<FONT face="wingdings">l</FONT> % of our common stock, based on
the number of shares outstanding as of March&nbsp;31, 2005. In
addition, the exercise of currently outstanding options to
purchase common stock and future equity issuances, including
future public or private
</DIV>

<P align="center" style="font-size: 10pt;">27

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="left" style="font-size: 10pt;">
securities offerings and any additional shares issued in
connection with acquisitions, will result in further dilution.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD><B>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</B></TD>
    <TD>
    <B><I>Our charter documents and Delaware law may inhibit a
    takeover that stockholders consider favorable and could also
    limit the market price of our stock.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Upon the closing of this offering, provisions of our restated
certificate of incorporation and bylaws and applicable
provisions of Delaware law may make it more difficult for or
prevent a third party from acquiring control of us without the
approval of our board of directors. These provisions:
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    set limitations on the removal of directors;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    limit who may call a special meeting of stockholders;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    establish advance notice requirements for nominations for
    election to our board of directors or for proposing matters that
    can be acted upon at stockholder meetings;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    do not permit cumulative voting in the election of our
    directors, which would otherwise permit less than a majority of
    stockholders to elect directors;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    prohibit stockholder action by written consent, thereby
    requiring all stockholder actions to be taken at a meeting of
    our stockholders; and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    provide our board of directors the ability to designate the
    terms of and issue a new series of preferred stock without
    stockholder approval.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In addition, Section&nbsp;203 of the Delaware General
Corporation Law generally limits our ability to engage in any
business combination with certain persons who own 15% or more of
our outstanding voting stock or any of our associates or
affiliates who at any time in the past three years have owned
15% or more of our outstanding voting stock. These provisions
may have the effect of entrenching our management team and may
deprive you of the opportunity to sell your shares to potential
acquirors at a premium over prevailing prices. This potential
inability to obtain a control premium could reduce the price of
our common stock.
</DIV>

<P align="center" style="font-size: 10pt;">28

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>SPECIAL NOTE&nbsp;REGARDING FORWARD-LOOKING STATEMENTS</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
This prospectus contains forward-looking statements that involve
substantial risks and uncertainties. All statements, other than
statements of historical facts, included in this prospectus
regarding our strategy, future operations, future financial
position, future revenues, projected costs, prospects, plans and
objectives of management are forward-looking statements. The
words &#147;anticipates,&#148; &#147;believes,&#148;
&#147;estimates,&#148; &#147;expects,&#148; &#147;intends,&#148;
&#147;may,&#148; &#147;plans,&#148; &#147;projects,&#148;
&#147;will,&#148; &#147;would&#148; and similar expressions are
intended to identify forward-looking statements, although not
all forward-looking statements contain these identifying words.
Although we do not make forward-looking statements unless we
believe we have a reasonable basis for doing so, we cannot
guarantee their accuracy. We may not actually achieve the plans,
intentions or expectations disclosed in our forward-looking
statements and you should not place undue reliance on our
forward-looking statements. Actual results or events could
differ materially from the plans, intentions and expectations
stated in the forward-looking statements we make. We have
included important factors in the cautionary statements included
in this prospectus, particularly in the &#147;Risk Factors&#148;
section, that we believe could cause actual results or events to
differ materially from the forward-looking statements that we
make. Additional risks, uncertainties and factors, other than
those discussed under &#147;Risk Factors,&#148; could also cause
our actual results to differ materially from those projected in
any forward-looking statements we make. We operate in a very
competitive and rapidly changing environment in which new risks
emerge from time to time and it is not possible for us to
predict all risk factors, nor can we address the impact of all
factors on our business or the extent to which any factor, or
combination of factors, may cause actual results to differ
materially from those contained in any forward-looking
statements. Our forward-looking statements do not reflect the
potential impact of any future acquisitions, mergers,
dispositions, joint ventures or investments we may make. We do
not assume any obligation to update or revise any
forward-looking statements, or to so update the reasons actual
results could differ materially from those anticipated in these
forward-looking statements, even if new information becomes
available in the future.
</DIV>

<P align="center" style="font-size: 10pt;">29

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>USE OF PROCEEDS</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We estimate that we will receive net proceeds of
approximately &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face="wingdings">l</FONT>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;from
our sale
of &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face="wingdings">l</FONT>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
of common stock at an assumed initial public offering price of
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face="wingdings">l</FONT>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;per
share, the mid-point of our filing range, after deducting
underwriting discounts and commissions and estimated expenses of
approximately
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face="wingdings">l</FONT>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;,
which includes our underwriter&#146;s non-accountable expense
allowance, legal, accounting, printing costs and expenses, and
various fees associated with the registration and listing of our
securities payable by us. If the underwriters exercise their
over-allotment option in full, we will receive an additional
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face="wingdings">l</FONT>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;after
deducting
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face="wingdings">l</FONT>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;for
underwriting discounts and commissions.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We intend to use these net proceeds approximately as follows:
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face="wingdings">l</FONT>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;%
    ($&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face="wingdings">l</FONT>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;)
    to fund our research and development activities, including our
    clinical studies;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face="wingdings">l</FONT>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;%
    ($&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face="wingdings">l</FONT>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;)
    to develop our sales and marketing capabilities;&nbsp;and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face="wingdings">l</FONT>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;%
    ($&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face="wingdings">l</FONT>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;)
    for general corporate purposes, including working capital, and
    capital expenditures made in the ordinary course of business.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The amounts that we actually expend for working capital purposes
will vary significantly depending on a number of factors. As a
result, we will retain broad discretion in the allocation of the
net proceeds of this offering. While we have no present
understandings, commitments or agreements to enter into any
potential acquisitions, we may also use a portion of the net
proceeds for the acquisition of, or investment in, technologies
or products that complement our business. Pending the uses
described above, we intend to invest the net proceeds of this
offering in short-term, investment-grade, interest-bearing
securities. We cannot predict whether the proceeds which we
invest will yield a favorable return.
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>DIVIDEND POLICY</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We have never declared or paid cash dividends on our common
stock. We currently intend to retain our cash for the
development of our business. We do not intend to pay cash
dividends to our stockholders in the foreseeable future.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Any future determination relating to our dividend policy will be
made at the discretion of our board of directors and will depend
on then existing conditions, including our earnings, financial
condition, results of operations, level of indebtedness,
contractual restrictions, capital requirements, business
prospects and other factors our board of directors may deem
relevant. Our board of directors&#146; ability to declare a
dividend is also subject to limits imposed by Delaware law.
</DIV>

<P align="center" style="font-size: 10pt;">30

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>CAPITALIZATION</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
You should read this capitalization table together with the
sections of this prospectus entitled &#147;Management&#146;s
Discussions and Analysis of Financial Condition and Results of
Operations&#148; and with the financial statements and related
notes to those statements included elsewhere in this prospectus.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The following table sets forth our capitalization as of
March&nbsp;31, 2005:
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    on an actual basis;&nbsp;and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    on a pro forma as adjusted basis to reflect the conversion of
    all our outstanding shares of convertible preferred stock into
    shares of common stock immediately prior to completion of this
    offering, the assumed conversion of 2,610,643 warrants to
    purchase the company&#146;s common stock to be exchanged for a
    total of 1,305,321&nbsp;shares of the company&#146;s common
    stock based on an exchange ratio of one share of our common
    stock for every two shares of our common stock purchasable under
    the warrants to occur prior to the closing of this offering and
    the receipt of the estimated net proceeds from the sale
    of &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face="wingdings">l</FONT>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
    of our common stock in this offering at the assumed initial
    public offering price of
    $&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face="wingdings">l</FONT>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;per
    share, the mid-point of our filing range, after deducting the
    underwriting discounts and commissions and estimated offering
    expenses payable by us.</TD>
</TR>

</TABLE>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="3%">&nbsp;</TD>
    <TD width="64%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="8%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
</TR>


<TR style="font-size: 8pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>As of March&nbsp;31, 2005</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Pro Forma(1)</B></TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>As Adjusted</B></TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Actual</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>(unaudited)</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>


<TR style="font-size: 8pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>(In thousands, except share</B></TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>and per share data)</B></TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <B>Redeemable Convertible Preferred Stock:</B></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Redeemable Preferred Stock Series&nbsp;B convertible;
    992,986&nbsp;shares designated (liquidation preference
    $2.26&nbsp;per share); issued and outstanding
    992,986&nbsp;shares at December&nbsp;31, 2003 and 2004 and
    March&nbsp;31, 2005 and 0&nbsp;shares at March&nbsp;31, 2005,
    pro forma as adjusted</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>2,224</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="wingdings">l</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Redeemable Preferred Stock Series&nbsp;C convertible
    5,744,340&nbsp;shares designated (liquidation preference
    $2.26&nbsp;per share); issued and outstanding
    907,077&nbsp;shares at December&nbsp;31, 2003 and
    5,414,779&nbsp;shares at December&nbsp;31, 2004 and
    March&nbsp;31, 2005 and 0&nbsp;shares at March&nbsp;31, 2005,
    pro forma as adjusted</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>6,762</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="wingdings">l</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <B>Stockholders&#146; (Deficiency) Equity:</B></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Preferred stock&nbsp;&#151; $.10&nbsp;par value; authorized
    16,936,704&nbsp;shares:</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Series&nbsp;A Convertible Preferred Stock, 199,380&nbsp;shares
    designated (liquidation preference $5.00&nbsp;per share); issued
    and outstanding 198,000&nbsp;shares at December&nbsp;31, 2003
    and 2004 and March&nbsp;31, 2005 and 0&nbsp;shares at
    March&nbsp;31, 2005, pro forma as adjusted</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>972</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="wingdings">l</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Common stock&nbsp;&#151; $.001&nbsp;par value; authorized
    30,000,000&nbsp;shares; issued and outstanding
    1,684,760&nbsp;shares at December&nbsp;31, 2003 and
    1,809,758&nbsp;shares at December&nbsp;31, 2004 and
    March&nbsp;31, 2005 and 6,513,164&nbsp;shares at March&nbsp;31,
    2005, pro forma as adjusted</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="wingdings">l</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Additional paid-in capital</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>10,631</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="wingdings">l</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Notes receivable</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(69</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="wingdings">l</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Deferred compensation</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(151</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="wingdings">l</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Accumulated deficit</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(15,150</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="wingdings">l</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <B>Stockholders&#146; (Deficiency) Equity</B></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(3,765</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="wingdings">l</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <B>Total Capitalization</B></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>5,241</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="wingdings">l</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

</TABLE>
</CENTER>

<P align="center" style="font-size: 10pt;">31

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
None of the columns shown above reflect the following:
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    899,875&nbsp;shares of common stock issuable as of the date of
    this prospectus upon the exercise of outstanding stock options
    under our 2003 Stock Incentive Plan and our 1996 Stock Option
    Plan, respectively, at a weighted average exercise price of
    approximately $0.63&nbsp;per share, which amount is 54,391
    shares less than the number of shares issuable under such option
    plans as of March&nbsp;31, 2005 due to the effect of a
    formula-based option granted to our President and Chief
    Executive Officer&nbsp;&#151; see &#147;Management&nbsp;&#151;
    Employment Agreement&#148;;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    up to 1,000,000&nbsp;shares of common stock reserved for future
    grants under our 2005 Stock Incentive Plan;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    75,000&nbsp;shares of common stock issuable upon exercise of
    outstanding warrants to purchase our common stock at an exercise
    price of $7.00&nbsp;per share;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    73,280&nbsp;shares of common stock issuable upon exercise of
    outstanding warrants to purchase our series&nbsp;C convertible
    preferred stock (assuming conversion of our series&nbsp;C
    convertible preferred stock) at an exercise price of
    $4.52&nbsp;per share;&nbsp;and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face="wingdings">l</FONT>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
    of common stock issuable upon exercise of warrants to be issued
    to the underwriters upon completion of this offering at an
    exercise price equal to 125% of the public offering price per
    share.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 3pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<DIV style="width: 18%; border-top: 1.0pt solid black; font-size: 1pt">&nbsp;</DIV>
</DIV>

<DIV style="margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="4%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>(1)&nbsp;</TD>
    <TD align="left">
    Includes the impact of 125,000 options that vest upon
    consummation of the offering, which will have no effect on total
    stockholders&#146; equity but will require an expense of
    $&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face="wingdings">l</FONT>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;to
    be recorded if such options vested at the assumed initial public
    offering price of
    $&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face="wingdings">l</FONT>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;per
    share, which is the mid-point of our filing range.</TD>
</TR>

</TABLE>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>DILUTION</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
If you invest in our common stock, your interest will be diluted
to the extent of the difference between the public offering
price per share of our common stock and the net tangible book
value per share of our common stock immediately after this
offering. Net tangible book value per share represents the
amount of our common stockholders&#146; equity, less intangible
assets, divided by the number of shares of our common stock
outstanding. As of March&nbsp;31, 2005, we had a net tangible
book value of approximately $(3,925,630) or $(2.17) per share of
common stock. Pro forma net tangible book value as of
March&nbsp;31, 2005 is
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face="wingdings">l</FONT>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;or
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face="wingdings">l</FONT>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;per
common share. Assuming the sale by us
of &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face="wingdings">l</FONT>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
of common stock offered in this offering at an assumed initial
public offering price of
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face="wingdings">l</FONT>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;per
share, the mid-point of our filing range, and after deducting
the underwriting discounts and commissions and estimated
offering expenses, our as adjusted pro forma net tangible book
value as of March&nbsp;31, 2005, would have been
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face="wingdings">l</FONT>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;,
or
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face="wingdings">l</FONT>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;per
share of common stock. This represents an immediate increase in
pro forma net tangible book value of
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face="wingdings">l</FONT>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;per
share of common stock to our existing stockholders and an
immediate dilution of
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face="wingdings">l</FONT>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;per
share to the new investors purchasing shares in this offering.
The following table illustrates this per share dilution:
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="86%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Assumed initial public offering price per share</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;&nbsp;&nbsp;<FONT face="wingdings">l</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Net tangible book value per share as of March&nbsp;31, 2005</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(2.17</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Pro forma net tangible book value per share as of March&nbsp;31,
    2005</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;&nbsp;&nbsp;<FONT face="wingdings">l</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Increase in pro forma net tangible book value per share
    attributable to new investors</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;&nbsp;&nbsp;<FONT face="wingdings">l</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Pro forma net tangible book value per share after the offering</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;&nbsp;&nbsp;<FONT face="wingdings">l</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Dilution per share to new investors</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;&nbsp;&nbsp;<FONT face="wingdings">l</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

</TABLE>
</CENTER>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The following table sets forth on a pro forma as adjusted basis,
as of March&nbsp;31, 2005, the number of shares of common stock
purchased from us (assuming conversion of all preferred stock
into common stock), the total consideration paid and the average
price per share paid by existing holders of common stock
</DIV>

<P align="center" style="font-size: 10pt;">32

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="left" style="font-size: 10pt;">
(assuming conversion of all preferred stock into common stock)
and by the new investors in this initial public offering, before
deducting the underwriting discounts and commissions and
estimated offering expenses payable by us.
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="42%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="7">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="7">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Average</B></TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>Shares Purchased</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>Total Consideration</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Consideration</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Number</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Percent</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Amount</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Percent</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Per Share</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Existing Investors</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>6,513,164</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="wingdings">l</FONT></TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>20,033,573</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="wingdings">l</FONT></TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>3.08</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    New Investors</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="wingdings">l</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="wingdings">l</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="wingdings">l</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="wingdings">l</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="wingdings">l</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Total</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="wingdings">l</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>100.0</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="wingdings">l</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>100.0</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

</TABLE>
</CENTER>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Assuming all our outstanding options and the outstanding
warrants are fully exercised, the shares purchased by the new
investors would
constitute &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face="wingdings">l</FONT>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;%
of all shares purchased from us, and the total consideration
paid by new investors would
constitute &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face="wingdings">l</FONT>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;%
of the total consideration paid for all shares purchased from
us. In addition, the average price per share paid by new
investors would be
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face="wingdings">l</FONT>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;,
and the average price per share paid by existing stockholders
would be $3.08.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In the preceding tables, the shares of our common stock exclude,
as of March&nbsp;31, 2005:
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    899,875&nbsp;shares of common stock issuable as of the date of
    this prospectus upon the exercise of outstanding stock options
    under our 2003 Stock Incentive Plan and our 1996 Stock Option
    Plan, respectively, at a weighted average exercise price of
    approximately $0.63&nbsp;per share, which amount is 54,391
    shares less than the number of shares issuable under such option
    plans as of March&nbsp;31, 2005 due to the effect of a
    formula-based option granted to our President and Chief
    Executive Officer&nbsp;&#151; see &#147;Management&nbsp;&#151;
    Employment Agreement&#148;;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    up to 1,000,000&nbsp;shares of common stock reserved for future
    grants under our 2005 Stock Incentive Plan;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    75,000&nbsp;shares of common stock issuable upon exercise of
    outstanding warrants to purchase common stock at an exercise
    price of $7.00&nbsp;per share;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    73,280&nbsp;shares of common stock issuable upon exercise of
    outstanding warrants to purchase our series&nbsp;C convertible
    preferred stock (assuming conversion of our series&nbsp;C
    convertible preferred stock) at an exercise price of
    $4.52&nbsp;per share;&nbsp;and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face="wingdings">l</FONT>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
    of common stock issuable upon exercise of warrants to be issued
    to the underwriters upon completion of this offering at an
    exercise price equal to 125% of the public offering price per
    share.</TD>
</TR>

</TABLE>

<P align="center" style="font-size: 10pt;">33
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>SELECTED FINANCIAL DATA</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The following summary financial data for the fiscal years ended
December&nbsp;31, 2000, 2001, 2002, 2003 and 2004 have been
derived from our historical audited financial statements. The
summary financial data for the three months periods ended
March&nbsp;31, 2004 and 2005 have been derived from our
unaudited financial statements. The unaudited summary financial
data include, in our opinion, all adjustments, consisting only
of normal, recurring adjustments, necessary to present fairly
the financial position and results of operations for the periods
presented. Our historical results for and prior or interim
period are not necessarily indicative of results to be expected
for a full fiscal year or for any future period. The selected
financial data shown below include revenues and related expenses
for our DIFOTI&#174; product, a non-invasive imaging device for
the detection of dental cavities. We decided to discontinue all
operations associated with our DIFOTI&#174; product, effective
as of April&nbsp;5, 2005, in order to focus our resources and
attention on the development and commercialization of
MelaFind&#174;. See the footnote to the Financial Statements
relating to subsequent events included elsewhere in this
prospectus. You should read the following selected financial
information together with the financial statements and the
related notes appearing at the end of this prospectus and the
&#147;Management&#146;s Discussion and Analysis of Financial
Condition and Results of Operations&#148; section of this
prospectus.
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 9pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="30%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>


<TR style="font-size: 7pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="19">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>Three Months Ended</B></TD><TD></TD>
</TR>

<TR style="font-size: 7pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="18" align="center" nowrap><B>Year Ended December&nbsp;31,</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>March&nbsp;31,</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="18" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 7pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2000</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2001</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2002</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2003</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2004</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2004</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2005</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>


<TR style="font-size: 7pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>(unaudited)</B></TD><TD></TD>
</TR>


<TR style="font-size: 7pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="26" align="center" nowrap><B>(In thousands, except share and per share data)</B></TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <B>Statements of Operations Data:</B></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Revenue from DIFOTI&#174; sales, net</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>194</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>80</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>143</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>375</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>364</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>91</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>88</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Revenue from grants</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>210</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>290</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>547</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Total revenues</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>404</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>370</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>690</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>375</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>364</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>91</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>88</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Cost of goods sold</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>464</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>217</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>650</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>83</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>166</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>20</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>8</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Gross profit</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(60</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>153</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>40</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>292</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>198</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>71</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>80</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Operating expenses:</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Research and development</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>726</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>144</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>404</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>828</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,892</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>307</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>636</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Selling, general and administrative</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,573</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2,962</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>769</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,339</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,858</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>533</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>713</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Total operating expenses</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2,299</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3,106</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,173</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2,167</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3,750</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>840</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,349</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Loss from operations</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(2,359</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(2,953</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(1,133</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(1,875</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(3,552</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(769</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(1,269</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Interest (income)/expense</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(79</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(85</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>8</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>75</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>67</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(26</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Net loss</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(2,280</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(2,868</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(1,141</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(1,950</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(3,619</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(770</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(1,243</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Preferred stock deemed dividends</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>85</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>213</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>214</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>322</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>676</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>111</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>362</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Preferred stock accretion</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>143</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>180</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>180</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>25</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>323</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>7</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>421</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Stock distribution on series&nbsp;B preferred shares</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>102</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Net loss attributable to common stockholders</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(2,508</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(3,261</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(1,535</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(2,399</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(4,618</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(888</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(2,026</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

</TABLE>
</CENTER>

<P align="center" style="font-size: 10pt;">34

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 9pt; ">

<TR style="font-size: 1pt;">
    <TD width="30%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>


<TR style="font-size: 7pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="19">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>Three Months Ended</B></TD><TD></TD>
</TR>

<TR style="font-size: 7pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="18" align="center" nowrap><B>Year Ended December&nbsp;31,</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>March&nbsp;31,</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="18" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 7pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2000</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2001</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2002</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2003</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2004</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2004</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2005</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>


<TR style="font-size: 7pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>(unaudited)</B></TD><TD></TD>
</TR>


<TR style="font-size: 7pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="26" align="center" nowrap><B>(In thousands, except share and per share data)</B></TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Basic and diluted net loss per share</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(1.64</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(2.13</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(1.00</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(1.49</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(2.61</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(0.53</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(1.12</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Weighted average shares outstanding&nbsp;&#151; basic and diluted</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,529,471</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,534,540</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,534,760</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,614,897</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,766,608</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,684,760</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,809,758</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Pro forma basic and diluted net loss per common share
    (unaudited)(1)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(0.91</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(0.19</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Pro forma basic and diluted weighted average number of common
    shares outstanding (unaudited)(1)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3,967,024</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>6,513,164</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

</TABLE>
</CENTER>

<DIV align="left" style="font-size: 3pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<DIV style="width: 18%; border-top: 1.0pt solid black; font-size: 1pt">&nbsp;</DIV>
</DIV>

<DIV style="margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="4%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>(1)&nbsp;</TD>
    <TD align="left">
    Pro forma basic and diluted net loss per common share reflects
    the effect of the assumed conversion of the company&#146;s
    preferred stock, as if this offering had occurred at the date of
    original issuance, into 3,398,105&nbsp;shares of our common
    stock for the year ended December&nbsp;31, 2004 and three months
    ended March&nbsp;31, 2005 which will occur upon closing of this
    offering. Additionally, it is assumed that 2,610,643 warrants to
    purchase the Company&#146;s common stock will be exchanged for a
    total of 1,305,321&nbsp;shares of the company&#146;s common
    stock based on an exchange ratio of one share of our common
    stock for every two shares of our common stock purchaseable
    under the warrants and will occur prior to the closing of this
    offering. The net loss attributable to our common stockholders
    used in the computation of basic and diluted net loss per share
    for the unaudited pro forma net loss attributable to common
    stockholders has been adjusted to reverse the accretion on our
    preferred stock and also excludes the preferred stock dividends
    for the respective period.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The following table presents summary balance sheet data, derived
from our historical audited financial statements. The table also
presents summary balance sheet, derived from our historical
unaudited financial statements, as of March&nbsp;31, 2004 and
March&nbsp;31, 2005:
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 9pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="40%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
</TR>


<TR style="font-size: 7pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="19">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>Three Months Ended</B></TD><TD></TD>
</TR>

<TR style="font-size: 7pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="18" align="center" nowrap><B>Year Ended December&nbsp;31,</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>March&nbsp;31,</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="18" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 7pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2000</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2001</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2002</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2003</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2004</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2004</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2005</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>


<TR style="font-size: 7pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>(unaudited)</B></TD><TD></TD>
</TR>


<TR style="font-size: 7pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="26" align="center" nowrap><B>(In thousands)</B></TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <B>Balance Sheet Data:</B></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Total current assets</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>3,513</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>867</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>111</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>217</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>6,813</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>498</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>5,413</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Total assets</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3,814</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,131</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>344</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>432</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>7,096</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>713</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5,734</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Total liabilities</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>211</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>247</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>529</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>650</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>691</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>600</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>493</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Redeemable convertible preferred stock</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2,058</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2,155</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2,244</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>4,067</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>8,585</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>4,080</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>9,006</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Accumulated deficit</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(4,148</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(7,197</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(8,518</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(10,288</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(13,907</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(11,191</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(15,150</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Total stockholders&#146; (deficiency)/equity</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(498</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(3,408</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(4,657</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(4,285</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(2,180</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>113</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(3,765</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

</TABLE>
</CENTER>

<P align="center" style="font-size: 10pt;">35

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>MANAGEMENT&#146;S DISCUSSION AND ANALYSIS OF</B>
</DIV>

<DIV align="center" style="font-size: 10pt;">
<B>FINANCIAL CONDITION AND RESULTS OF OPERATIONS</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>You should read the following discussion and analysis of our
financial condition and results of operations together with our
financial statements and the related notes appearing at the end
of this prospectus. Some of the information contained in this
discussion and analysis or set forth elsewhere in this
prospectus, including information with respect to our plans and
strategy for our business and related financing, includes
forward-looking statements that involve risks and uncertainties.
You should review the &#147;Risk Factors&#148; section of this
prospectus for a discussion of important factors that could
cause actual results to differ materially from the results
described in or implied by the forward-looking statements
contained in the following discussion and analysis.</I>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Overview</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We are a medical device company focused on the design and
development of a non-invasive, point-of-care instrument to
assist in the early diagnosis of melanoma. Our flagship product,
MelaFind&#174; features a hand-held imaging device that emits
multiple wavelengths of light to capture images of suspicious
pigmented skin lesions and extract data. We currently do not
have any commercialized products or any significant source of
revenue, however, the financial results discussed below include
the revenues and the related expenses associated with our
DIFOTI&#174; product, a non-invasive imaging device for the
detection of dental cavities. We decided to discontinue all
operations associated with our DIFOTI&#174; product effective as
of April&nbsp;5, 2005, in order to focus our resources and
attention on the development and commercialization of
MelaFind&#174;. We are currently seeking an acquirer for the
DIFOTI&#174; assets, and we do not expect to have any
significant continuing responsibility for the DIFOTI&#174;
business after its disposition.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Our revenue for the foreseeable future will depend on the
commercialization of MelaFind&#174; and may vary substantially
from year to year and quarter to quarter. Our operating expenses
may also vary substantially from year to year and quarter to
quarter based on the timing of the clinical trial and patient
enrollment. We believe that period-to-period comparisons of our
results of operations are not meaningful and should not be
relied on as indicative of our future performance.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We commenced operations in December 1989 as a New York
corporation and re-incorporated as a Delaware corporation in
September 1997. Since our inception, we have generated
significant losses. As of March&nbsp;31, 2005, we had an
accumulated deficit of $15.1&nbsp;million. We expect to continue
to spend significant amounts on the development of
MelaFind&#174;. We expect to incur significant commercialization
costs when we begin to introduce MelaFind&#174; into the US
market. Accordingly, we will need to generate significant
revenues to achieve and then maintain profitability.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Most of our expenditures to date have been for research and
development activities and general and administrative expenses.
Research and development expenses represent costs incurred for
product development, clinical trials and activities relating to
regulatory filings and manufacturing development efforts. We
expense all of our research and development costs as they are
incurred.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Our research and development expenses incurred through
March&nbsp;31, 2005 were expenses related primarily to the
development of MelaFind&#174;. We expect to incur additional
research and development expenses relating to MelaFind&#174;
prior to its commercial launch in the US and selected markets
outside the US. These additional expenses are subject to the
risks and uncertainties associated with clinical trials and the
FDA regulatory review and approval process. As a result, these
additional expenses could exceed our estimated amounts, possibly
materially.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Marketing, general and administrative expenses consist primarily
of salaries and related expenses, general corporate activities
and costs associated with our efforts to obtain PMA approval for
MelaFind&#174;and building a commercial infrastructure to market
and sell MelaFind&#174;. We anticipate that general and
administrative expenses will increase as a result of the
expected expansion of our operations, facilities and other
activities associated with the planned expansion of our
business, together with the additional costs associated with
</DIV>

<P align="center" style="font-size: 10pt;">36

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="left" style="font-size: 10pt;">
operating as a public company. We expect marketing, general and
administrative expenses to increase as we build our sales force
and marketing capabilities to support placing MelaFind&#174; in
selected markets.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
At December&nbsp;31, 2004, we had available a net operating loss
carryforward for federal income tax reporting purposes of
approximately $12.2&nbsp;million. The net operating loss
carryforward may be available to offset future taxable income
expiring at various dates through the year 2024. The
Company&#146;s ability to utilize its net operating losses may
be significantly limited due to changes in the company&#146;s
ownership as defined by federal income tax regulations.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Critical Accounting Policies and Significant Judgments and
Estimates</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Our management&#146;s discussion and analysis of our financial
condition and results of operations are based on our financial
statements, which have been prepared in accordance with
accounting principles generally accepted in the US. The
preparation of these financial statements requires us to make
estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets
and liabilities at the date of the financial statements as well
as the reported revenues and expenses during the reporting
periods. On an ongoing basis, we evaluate our judgments related
to accounting estimates. We base our estimates on historical
experience and on various other factors that we believe are
reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying value of
assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under
different assumptions or conditions.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
While our significant accounting policies are more fully
described in Note&nbsp;1 to our financial statements appearing
at the end of this prospectus, we believe that the following
accounting policies and significant judgments and estimates
relating to revenue recognition, stock-based compensation
charges, and accrued expenses are most critical to aid you in
fully understanding and evaluating our reported financial
results.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Revenue Recognition</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Revenue from the DIFOTI&#174; product sales is recognized at the
time of delivery and acceptance, after consideration of all the
terms and conditions of the customer contract. The DIFOTI&#174;
products which were being sold prior to December&nbsp;31, 2004
included a 30-day return policy. Revenue on these products is
recognized after the shipment is made and the 30-day return
period has elapsed. DIFOTI&#174; products sold subsequent to
December&nbsp;31, 2004 were sold without a right of return and
revenue is therefore recognized after the shipment is made.
Deferred revenues at each respective balance sheet date consist
of revenues that were billed or paid in advance of the shipment
of the product. During April 2005 the company discontinued the
sale of the DIFOTI&#174; product line.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Stock-Based Compensation</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We account for non-employee stock-based awards in which goods or
services are the consideration received for the equity
instruments issued based on the fair value of the equity
instruments issued in accordance with the Emerging Issues Task
Force Issue No.&nbsp;96-18, &#147;Accounting for Equity
Instruments That Are Issued to Other Than Employees for
Acquiring, or in Conjunction With Selling, Goods or
Services.&#148;
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We account for stock-based compensation to employees under the
intrinsic-value-based method of accounting prescribed by
Accounting Principles Board (APB)&nbsp;Opinion No.&nbsp;25,
&#147;Accounting for Stock Issued to Employees,&#148; and
disclose the effect of the differences which would result had we
applied the fair-value-based method of accounting, on a pro
forma basis, as required by FASB Statement No.&nbsp;123,
&#147;Accounting for Stock-Based Compensation, as amended by
Statement of Financial Accounting Standards
(SFAS)&nbsp;No.&nbsp;148, Accounting for Stock-Based
Compensation, Transition and Disclosure.&#148; In December 2004,
FASB issued FASB Statement No.&nbsp;123R, which addresses the
accounting for share-based awards to employees and requires
companies to recognize the fair value of stock options and other
stock-based compensation to employees in their statement of
operations. Because we currently account for our stock-based
compensation plans in accordance with APB Opinion No.&nbsp;25,
the adoption of FASB Statement No.&nbsp;123R will have a
material effect on our financial statements in future accounting
periods.
</DIV>

<P align="center" style="font-size: 10pt;">37

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Our common stock has not been publicly traded and the
determination of the fair value of our common stock involves
considerable judgment. In making this determination, we
evaluated, among other things, our common stock transactions,
the pricing of private equity sales, the rights and preferences
of the security being valued, current market conditions, and
company specific operational milestones.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Accrued Expenses</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
As part of the process of preparing financial statements, we are
required to estimate accrued expenses. This process involves
identifying services that have been performed on our behalf and
estimating the level of service performed and the associated
cost incurred for such service where we have not been invoiced
or otherwise notified of the actual cost. This is done as of
each balance sheet date in our financial statements. Examples of
estimated accrued expenses include:
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    professional service fees;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    contract clinical service fees;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    fees paid to contract manufacturers in conjunction with the
    production of clinical components or materials; and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    fees paid to third party data collection organizations and
    investigators in conjunction with the clinical trials.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In connection with such service fees, our estimates are most
affected by our projections of the timing of services provided
relative to the actual level of services incurred by such
service providers. The majority of our service providers invoice
us monthly in arrears for services performed. In the event that
we do not identify certain costs that have begun to be incurred
or we under or over estimate the level of services performed or
the costs of such services, our actual expenses could differ
from such estimates. The date on which certain services
commence, the level of services performed on or before a given
date, and the cost of such services are often subjective
determinations. We make these judgments based upon the facts and
circumstances known to us in accordance with accounting
principles generally accepted in the US.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Results of Operations (in thousands)</B>
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Three Months Ended March&nbsp;31, 2005 Compared to Three
    Months Ended March&nbsp;31, 2004 (Unaudited)</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I>Revenue. </I></B>Revenue for the three months ended
March&nbsp;31, 2005 was $88 compared to $91 for the same period
in 2004. The revenue for both periods represents the sales of
our DIFOTI&#174; product, a non-invasive imaging device for the
detection of dental cavities.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I>Gross Profit. </I></B>Gross profit increased by $9 to $80
for the three months ended March&nbsp;31, 2005 from $71 for the
three months ended March&nbsp;31, 2004. Expressed as a
percentage of sales, the gross profit increased to 91% for the
three months ended March&nbsp;31, 2005 compared to 78% for the
three months ended March&nbsp;31, 2004.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I>Research and Development Expense. </I></B>Research and
development expense increased by $329 to $636 for the three
months ended March&nbsp;31, 2005 from $307 for the three months
ended March&nbsp;31, 2004. Of this increase, $173 was
attributable to higher personnel and personnel related costs as
we increased headcount to support our research and development
programs and $129 relates to increased consulting and outside
research fees for the development of our MelaFind&#174; product,
a non-invasive, point-of-care instrument to assist in the early
diagnosis of melanoma.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I>Selling, General and Administrative Expense.
</I></B>Selling, general and administrative expense increased by
$180 to $713 for the three months ended March&nbsp;31, 2005 from
$533 for the three months ended March&nbsp;31, 2004. The
increase is primarily due to higher personnel and personnel
related costs of $155 associated with the addition of key
management positions and $20 related to increased consulting
fees.
</DIV>

<P align="center" style="font-size: 10pt;">38

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I>Interest (Income)/ Expense. </I></B>Interest
(income)/expense for the three months ended March&nbsp;31, 2005
was ($26) compared to $1 for the corresponding period in 2004.
The increase was due to higher average cash, cash equivalents
and marketable securities balance during 2005.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Year Ended December&nbsp;31, 2004 Compared to Year Ended
    December&nbsp;31, 2003</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I>Revenue. </I></B>Revenue for the year ended
December&nbsp;31, 2004 was $364 compared to $375 for the
corresponding period last year. The revenue for both periods
represents the sales of our DIFOTI&#174; product, a non-invasive
imaging device for the detection of dental cavities.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I>Gross Profit. </I></B>Gross profit decreased by $94 to
$198 for the year ended December&nbsp;31, 2004 from $292 for the
year ended December&nbsp;31, 2003. Expressed as a percentage of
sales the gross profit decreased to 54% for the year ended
December&nbsp;31, 2004 compared to 78% for the year ended
December&nbsp;31, 2003.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I>Research and Development Expense. </I></B>Research and
development expenses increased by $1,064, from $828 for the year
ended December&nbsp;31, 2003 to $1,892 for the year ended
December&nbsp;31, 2004. This increase relates to increased
headcount to support our research and development programs in
the amount of $715, and $332 represents increased consulting and
outside research fees related to the development of
MelaFind&#174;. For the year ended December&nbsp;31, 2004
research and development costs were approximately 50% of total
operating expenses. Clinical and regulatory expense, a component
of research and development expense, totaled approximately $797
for the year ended December&nbsp;31, 2004. We expect our
research and development expenses to increase in connection with
our clinical trials and other development activities as we
advance our MelaFind&#174; pivotal study and complete the PMA
regulatory approval process.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I>Selling, General and Administrative Expense.
</I></B>Selling, general and administrative expenses increased
by $519, to $1,858 for the year ended December&nbsp;31, 2004
from $1,339 for the year ended December&nbsp;31, 2003. The
increase was principally attributable to higher DIFOTI&#174;
marketing and sales expenses of $100, an increase in personnel
and personnel related costs of $63 associated with additions to
the management team, $150 in stock-based compensation to
non-employee board members, and $193 in stock-based payments for
consulting services. For the year ended December&nbsp;31, 2004
marketing general and administrative expenses were approximately
50% of total operating expenses. We expect that marketing
expenses will increase to support efforts to obtain PMA approval
and commence the commercialization of MelaFind&#174;. In
addition, our general and administrative expenses will increase
to support the additional costs associated with being a public
company.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I>Interest (Income)/ Expense. </I></B>Interest
(income)/expense for the year ended December&nbsp;31, 2004 was
$67 compared to $75 for the corresponding period in 2003. The
decrease was due to an imputed interest charge of $80 related to
the series&nbsp;C private placement during 2004.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Year Ended December&nbsp;31, 2003 Compared to Year Ended
    December&nbsp;31, 2002</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I>Revenue. </I></B>Revenue for the year ended
December&nbsp;31, 2003 was $375 compared to $690 for the
corresponding period in 2002. The sales of our DIFOTI&#174;
product, a non-invasive imaging device for the detection of
dental cavities, were $375 for the year ended December&nbsp;31,
2003 and $143 for the year ended December&nbsp;31, 2002. In
addition, grant revenue was recognized for the year ended
December&nbsp;31, 2002 in the amount of $547.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I>Gross Profit. </I></B>Gross profit increased by $252 to
$292 for the year ended December&nbsp;31, 2003 from $40 for the
year ended December&nbsp;31, 2002. For the year ended
December&nbsp;31, 2002, the cost of goods sold includes all the
expenses attributable to the grant revenue.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I>Research and Development Expense.</I> </B>Research and
development expenses increased $424 to $828 for the year ended
December&nbsp;31, 2003 from $404 for the year ended
December&nbsp;31, 2002. Of this increase, $280 was principally
attributable to personnel and personnel related costs that
specifically supported the grant program in 2002 and were
classified as cost of goods sold in 2002 and $93 related to an
increase in other consulting and outside research fees for the
development of our MelaFind&#174; product, a non-invasive,
point-of-care instrument to assist physicians in the early
diagnosis of melanoma. For the year ended December&nbsp;31,
</DIV>

<P align="center" style="font-size: 10pt;">39

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="left" style="font-size: 10pt;">
2003 research and development costs were approximately 38% of
total operating expenses. Clinical and regulatory expense, a
component of research and development expense totaled
approximately $50 for the year ended December&nbsp;31, 2003.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I>Selling, General and Administrative Expense.
</I></B>Selling, general and administrative expenses increased
by $570 to $1339 for the year ended December&nbsp;31, 2003 from
$769 for the year ended December&nbsp;31, 2002. The increase was
principally attributable to personnel and personnel related
costs of $488 that supported the grant program in 2002 and were
classified as cost of goods sold in 2002 and the addition of two
DIFOTI&#174; marketing and sales positions. For the year ended
December&nbsp;31, 2003 marketing, general and administrative
expenses were approximately 62% of total operating expenses.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I>Interest (Income)/ Expense. </I></B>Interest
(income)/expense for the year ended December&nbsp;31, 2003 was
$75 compared to $8 for the corresponding period in 2002. The
increase was due to a charge of $45 associated with the value of
the beneficial conversion feature for a promissory note during
2003.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Liquidity and Capital Resources (in thousands)</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
From inception, we have financed our operations primarily
through the use of working capital from private placements of
equity securities and by applying for and obtaining a series of
National Institute of Health Small Business Innovative Research
grants and similar grants. To date, we have not borrowed (other
than by issuing convertible notes, all of which have been
converted into equity) or financed our operations through
significant equipment leases, financing loans or other debt
instruments. As of March&nbsp;31, 2005, we had $5,300 in cash,
cash equivalents and marketable securities as compared to $6,703
at December&nbsp;31, 2004. Our cash, cash equivalents and
marketable securities are liquid investments with a maturity
within one year and consist of investments in money market funds
with a commercial bank and short-term commercial paper and
government obligations.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I>Cash Flows from Operating Activities.</I> </B>Net cash
used in operations was $1,382 for the three months ended
March&nbsp;31, 2005. For the years ended December&nbsp;31, 2002,
2003 and 2004 the net cash used in operations was $684, $1,699,
and $3,065 respectively. For all periods, cash used in
operations was attributable primarily to net losses after
adjustment for non-cash charges related to depreciation and
other changes in operating assets and liabilities.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I>Cash from Investing Activities.</I> </B>Net cash provided
by our investing activities was $1,464 for the three months
ended March&nbsp;31, 2005 principally relates to the redemption
of investments. For the years ended December&nbsp;31, 2002, 2003
and 2004 the net cash provided by (used in) investing activities
was $518, $(8) and $(6,677) respectively. The increase in cash
used in investing activities in the years ended
December&nbsp;31, 2003 and 2004 was principally related to the
net purchase of investments and equipment from the proceeds of
our private placement financings. Cash used in investing
activities for the year ended December&nbsp;31, 2002 reflected
the redemption of investments.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I>Cash Flows from Financing Activities.</I> </B>Net cash
provided by financing activities was zero for the three months
ended March&nbsp;31, 2005. For the years ended December&nbsp;31,
2002, 2003 and 2004 the net cash flows provided by financing
activities was zero, $1,816 and $9,733 respectively. For these
periods, financing cash flows reflected the proceeds from the
issuance of common stock, and preferred stock.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Operating Capital and Capital Expenditure Requirements</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
To date, we have not commercialized our principal product,
MelaFind&#174;. We anticipate that we will continue to incur net
losses for the foreseeable future as we continue to develop the
MelaFind&#174; system, expand our clinical development team and
corporate infrastructure, and prepare for the potential
commercial launch of MelaFind&#174;. We do not expect to
generate significant product revenue until we successfully
obtain PMA approval for and begin selling MelaFind&#174;. We
believe that the net proceeds from this offering, together with
our current cash, cash equivalents and marketable securities and
interest we earn on these balances, will be sufficient to meet
our anticipated cash needs for working capital and capital
expenditures through mid 2008. If existing cash and cash
generated from this offering are insufficient to satisfy our
liquidity requirements, or if
</DIV>

<P align="center" style="font-size: 10pt;">40
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="left" style="font-size: 10pt;">
we develop additional products, we may seek to sell additional
equity or debt securities or obtain a credit facility. If
additional funds are raised through the issuance of debt
securities, these securities could have rights senior to those
associated with our common stock, and could contain covenants
that would restrict our operations. Any additional financing may
not be available in amounts or on terms acceptable to us, or at
all. If we are unable to obtain this additional financing, we
may be required to reduce the scope of, delay or eliminate some
or all of planned product research development and
commercialization activities, which could harm our business.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Because of the numerous risks and uncertainties associated with
the development of medical devices such as MelaFind&#174;, we
are unable to estimate the exact amounts of capital outlays and
operating expenditures associated with our current and
anticipated clinical trials. Our future funding requirements
will depend on many factors, including, but not limited to:
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    the schedule, costs, and results of our clinical trials;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    the success of our research and development efforts;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    the costs and timing of regulatory approval;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    reimbursement amounts for the use of MelaFind&#174;&nbsp;that we
    are able to obtain from Medicare and third party payors, or the
    amount of direct payments we are able to obtain from patients
    and/or physicians utilizing MelaFind&#174;;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    the cost of commercialization activities, including product
    marketing and building a domestic direct sales force;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    the emergence of competing or complementary technological
    developments;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    the costs of filing, prosecuting, defending and enforcing any
    patent claims and other rights, including litigation costs and
    the results of such litigation;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    the costs involved in defending any patent infringement actions
    brought against us by third parties; and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    our ability to establish and maintain any collaborative,
    licensing or other arrangements, and the terms and timing of any
    such arrangements.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Contractual Obligations</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The following table summarizes our outstanding contractual
obligations as of December&nbsp;31, 2004 and the effect those
obligations are expected to have on our liquidity and cash flows
in future periods:
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Payments Due by Period</B>
</DIV>

<DIV align="center" style="font-size: 10pt;">
<B>(dollars in thousands)</B>
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="3%">&nbsp;</TD>
    <TD width="41%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Less than</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>More than</B></TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="2" align="left" nowrap><B>Contractual Obligations</B></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Total</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>1 Year</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>1-3 Years</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>4-5 Years</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>5&nbsp;years</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Operating Leases</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>694</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>155</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>319</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>220</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Total</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>694</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>155</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>319</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>220</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
</TR>

</TABLE>
</CENTER>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Our long-term obligations are two non-cancelable operating
leases for space expiring June 2005 and November 2010. The lease
on 3,700 square feet of office, laboratory and assembly space
expires in June 2005. We have orally agreed with the landlord to
extend this lease through June 2009 and we intend to enter into
a lease agreement which will evidence this extension. The lease
on 2,800 square feet of office space expires November 2010.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Related Party Transactions</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
For a description of our related party transactions, see the
&#147;Related Party Transactions&#148; section of this
prospectus.
</DIV>

<P align="center" style="font-size: 10pt;">41

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Off-Balance Sheet Arrangements</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We do not currently have, nor have we ever had, any
relationships with unconsolidated entities or financial
partnerships, such as entities often referred to as structured
finance or special purpose entities, which would have been
established for the purpose of facilitating off-balance sheet
arrangements or other contractually narrow or limited purposes.
In addition, we do not engage in trading activities involving
non-exchange traded contracts. As such, we are not materially
exposed to any financing, liquidity, market or credit risk that
could arise if we had engaged in these relationships.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Quantitative and Qualitative Disclosures about Market Risk</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Our exposure to market risk is confined to our cash equivalents
and short-term investments. We invest in high-quality financial
instruments; primarily money market funds, federal agency notes,
and asset-backed securities, with the effective duration of the
portfolio within one year which we believe are subject to
limited credit risk. We currently do not hedge interest rate
exposure. Due to the short-term nature of our investments, we do
not believe that we have any material exposure to interest rate
risk arising from our investments.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Recent Accounting Pronouncements</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In May 2003, FASB issued Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity
(SFAS&nbsp;No.&nbsp;150). This statement establishes how a
company classifies and measures certain financial instruments
with characteristics of both liabilities and equity, including
redeemable convertible preferred stock. This statement is
effective for financial instruments entered into or modified
after May&nbsp;31, 2003, and is otherwise effective at the
beginning of the interim period commencing July&nbsp;1, 2003,
except for mandatorily redeemable financial instruments of
nonpublic companies. FASB has indefinitely deferred
implementation of some provisions of SFAS&nbsp;No.&nbsp;150. The
adoption of SFAS&nbsp;No.&nbsp;150 did not have a material
effect on our financial position or results of operations.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Quarterly Results of Operations</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The following table sets forth unaudited financial and operating
data in each fiscal quarter during 2003 and 2004. The unaudited
quarterly information reflects all adjustments, which include
only normal and recurring adjustments necessary to present
fairly the information shown.
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 9pt; margin-top: 9pt; ">

<TR style="font-size: 1pt;">
    <TD width="3%">&nbsp;</TD>
    <TD width="30%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
</TR>


<TR style="font-size: 8pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="18" align="center" nowrap><B>Year Ended December 31, 2003</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="18" align="center" nowrap><B>Year Ended December 31, 2004</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="18" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="18" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Q1</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Q2</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Q3</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Q4</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Total</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Q1</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Q2</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Q3</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Q4</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Total</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>


<TR style="font-size: 8pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>(In thousands)</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Revenue</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>90</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>86</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>112</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>87</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>375</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>91</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>172</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>81</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>20</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>364</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Cost of Sales</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>57</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>18</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>33</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(25</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>83</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>20</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>67</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>36</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>43</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>166</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Gross profit</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>33</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>68</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>79</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>112</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>292</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>71</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>105</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>45</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(23</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>198</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Operating expenses:</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Research and development</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>126</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>198</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>246</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>258</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>828</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>307</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>301</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>482</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>802</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,892</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Marketing, general and administrative</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>246</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>322</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>340</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>431</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,339</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>533</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>439</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>477</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>409</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,858</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Total Operating expenses</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>372</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>520</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>586</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>689</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2,167</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>840</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>740</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>959</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,211</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3,750</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Loss from operations</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(339</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(452</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(507</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(577</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(1,875</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(769</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(635</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(914</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(1,234</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(3,552</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Interest (income)/expenses</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(11</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>27</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>54</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>75</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(1</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>66</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>67</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Net loss</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(328</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(479</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(512</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(631</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(1,950</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(770</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(636</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(913</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(1,300</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(3,619</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

</TABLE>
</CENTER>

<P align="center" style="font-size: 10pt;">42

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>OUR BUSINESS</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Overview</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We are a medical device company focused on the design and
development of a non-invasive, point-of-care instrument to
assist in the early diagnosis of melanoma. Our flagship product,
MelaFind&#174; features a hand-held imaging device that emits
multiple wavelengths of light to capture images of suspicious
pigmented skin lesions and extract data. The data are then
analyzed against our proprietary database of melanomas and
benign lesions using our sophisticated algorithms in order to
provide information to the physician and produce a
recommendation of whether the lesion should be biopsied.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The components of the MelaFind&#174; system include:
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    a <I>hand-held imaging device,</I> which employs high precision
    optics and multi-spectral illumination (multiple colors of light
    including near infra-red);</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    our <I>proprietary database </I>of pigmented skin lesions, which
    we believe to be the largest in the US;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    our <I>lesion classifiers,</I> which are sophisticated
    mathematical algorithms that extract lesion feature information
    and classify lesions; and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    a <I>central server </I>in our offices that is intended to
    perform quality control functions and provide reports to the
    physician and in commercial use, will be connected to
    physicians&#146; offices via the internet.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We have entered into a binding Protocol Agreement with the FDA
which is an agreement for the conduct of the pivotal trial in
order to establish the safety and effectiveness of
MelaFind&#174;. We believe the presence of the Protocol
Agreement significantly enhances our ability to expedite the FDA
approval process. Management estimates that the study will
commence in early 2006 at over 20 US clinical study sites, and
anticipates PMA approval to commercialize MelaFind&#174; in 2007.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Cancers of the skin have a higher incidence than all other
cancers combined, and the rates are rising dramatically.
Melanoma is responsible for approximately 80% of skin cancer
fatalities and is the deadliest of all skin cancers as there is
currently no cure for advanced stage melanoma. However, early
detection of skin cancers like melanoma can lead to virtually a
100% cure rate. Advanced stage melanoma is costly to treat and
is responsible for approximately 90% of the total spending on
melanoma treatment in the US, costing up to $170,000 per
patient. If diagnosed early, however, melanoma is almost always
cured by simple resection at a cost of approximately $1,800 per
patient.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Because early detection is critical to survival, the American
Cancer Society recommends that individuals age 40&nbsp;years and
older have complete skin examinations on an annual basis.
According to the 2000 US Census data, over 100&nbsp;million
Americans in the US are over age 40. Furthermore, there are more
than 20&nbsp;million individuals in the US who have dysplastic
nevi, a type of pigmented skin lesion that when present is
associated with an increased risk of melanoma. These individuals
warrant more frequent observation.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Melanomas are mainly diagnosed by dermatologists and/or primary
care physicians using visual clinical evaluation. Physicians
assess pigmented skin lesions using the &#147;ABCDE&#148;
criteria, <U>A</U>symmetry, <U>B</U>order irregularity,
<U>C</U>olor variation, <U>D</U>iameter greater than 6 mm, and
<U>E</U>volving&nbsp;&#151; change in ABCD over time. This
assessment is subjective and results in missed melanomas, as
well as a ratio of benign lesions biopsied to melanomas
confirmed that is highly variable and as high as 40 to 1 for
dermatologists and as high as 50 to 1 for primary care
physicians.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
To date, MelaFind&#174; has been studied on over 5,000 skin
lesions from over 3,500 patients at over 20 clinics. Our
clinical studies have demonstrated that MelaFind&#174; missed
fewer melanomas and produced fewer false positives than
experienced by study dermatologists, who are skin cancer
specialists. The performance of a diagnostic is measured in
terms of <I>&#147;sensitivity&#148; </I>(the ability to detect
disease when disease is present) and
<I>&#147;specificit</I>y&#148; (the ability to exclude disease
when disease is not present). In the largest blinded trial that
we have performed to date on 352 suspicious pigmented skin
lesions, using our most advanced system,
</DIV>

<P align="center" style="font-size: 10pt;">43

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="left" style="font-size: 10pt;">
MelaFind&#174; did not miss a melanoma (measured sensitivity of
100%) and achieved 48.4% specificity compared to the study
dermatologists&#146; sensitivity of 96.4% and specificity of
28.4%.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We believe that with the assistance provided by MelaFind&#174;,
physicians could diagnose more melanomas at the earliest,
curable stage, which would reduce both treatment costs and the
number of unnecessary biopsies, and improve quality of life.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Our objective is for MelaFind&#174; to become an integral part
of the standard of care in melanoma detection.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>The Market Opportunity</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Cancer of the skin (nonmelanoma and melanoma skin cancers
combined) is the most common of all cancers, projected to be
over 1.3&nbsp;million cases in 2005 and estimated to account for
more than 50% of all cancers. There are three significant forms
of skin cancer: basal cell, accounting for approximately 75% of
skin cancer; squamous cell, totaling approximately 20%; and
melanoma, which accounts for an estimated 4% of skin cancer
cases, but is responsible for approximately 80% of all deaths
from skin cancer. The American Cancer Society projects 10,600
deaths from skin cancer in 2005&nbsp;&#151; 7,800 from melanoma
and 2,800 from other skin cancers. Since 1973, the mortality
rate for melanoma has increased by 50%. Since approximately 62%
of melanomas and 45% of melanoma deaths occur prior to age 65,
melanoma places significant burdens on the healthcare system
well beyond Medicare.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Melanoma, if left untreated, can be fatal. If diagnosed and
removed early in its evolution, when confined to the outermost
skin layer and deemed to be &#147;in situ,&#148; it is virtually
100% curable. Invasive melanomas that are thin and extend into
the uppermost regions of the second skin layer still have
excellent cure rates (greater than 90%). However, once the
cancer advances into the deeper layers of skin, the risk of
metastasis (spreading to other parts of the body) increases.
Metastases can occur when the tumor enters into lymphatic
channels and newly formed blood vessels, potentially resulting
in significant morbidity (illness)&nbsp;and mortality (death).
Once the cancer has advanced and metastasized to other parts of
the body, it is difficult to treat. At this advanced stage, the
five year survival rate is reported to be only 10%. Moreover,
survival prospects for those with advanced melanoma have not
improved over the past three decades.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Melanoma is currently the subject of significant attention in
the medical community. In part, this attention is due to the
fact that it is the fastest growing cancer. It is also the most
common cancer in young adults ages 20-30, and currently there
are more new cases of melanoma than HIV/ AIDS. In women ages
20-29, melanoma is the primary cause of cancer death. In women
ages 30-35, melanoma is the second leading cause of death after
breast cancer. Recent published papers identify a strong
correlation between breast cancer and melanoma.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Because early detection is critical to survival, the American
Cancer Society recommends that individuals 40&nbsp;years and
older have complete skin examinations on an annual basis. The
2000 US Census indicates that there are over 100&nbsp;million
Americans over the age of 40 in the US. Furthermore, there are
more than 20&nbsp;million individuals in the US who have
dysplastic nevi, a type of pigmented skin lesion that when
present is associated with an increased risk of melanoma. Such
individuals warrant more frequent observation.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Our Strategy</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Our objective is for MelaFind&#174; to become an integral part
of the standard of care in melanoma detection. To achieve this
objective, we are pursuing the following strategy:
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp; </TD>
    <TD align="left">
    <I>Pursue the timely FDA approval of MelaFind&#174;</I>: We have
    entered into a binding Protocol Agreement with the FDA for the
    conduct of the pivotal trial of MelaFind&#174;. Management
    estimates that the study will commence in early 2006 at over 20
    US clinical study sites, and anticipates PMA approval to
    commercialize MelaFind&#174; in 2007.</TD>
</TR>

</TABLE>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="3%"></TD>
    <TD width="94%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp; &nbsp;</TD>
    <TD align="left">
    <I>Establish MelaFind&#174;</I> <I>as the leading technology for
    assisting in the detection of melanoma: </I>We have invested
    considerable capital and expertise into developing our core
    technology platform, which is</TD>
</TR>

</TABLE>

<P align="center" style="font-size: 10pt;">44

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="3%"></TD>
    <TD width="94%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD></TD>
    <TD align="left">
    protected by six US patents. We will continue to refine and
    optimize this technology to ensure that MelaFind&#174; is the
    leading system for assisting in the detection of melanoma.</TD>
</TR>

</TABLE>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    <I>Obtain third party payor reimbursement to support our
    recurring revenue pricing model: </I>We intend to offer
    MelaFind&#174; on a per patient basis, creating a recurring
    revenue stream. To do so, we will seek to obtain third party
    reimbursement as well as private pay alternatives. We are
    working with experts to create an evidence-based medicine
    evaluation model consistent with those used to support positive
    coverage decisions by CMS and private payors for similar
    products. The value drivers in the model include the cost
    savings associated with early detection (approximately $168,000
    per patient) and fewer biopsies. We believe that the use of
    MelaFind&#174; could result in substantial savings to the US
    healthcare system.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    <I>Commercialize MelaFind&#174;</I> <I>using multiple sales and
    marketing strategies: </I>Our internal sales and marketing
    effort will focus initially on &#147;high volume/key opinion
    leader&#148; dermatologists with specialties in the diagnosis
    and treatment of melanoma. To enter the larger US markets of
    general dermatologists, plastic surgeons, and primary care
    physicians, and for international markets, we intend to
    establish partnerships with pharmaceutical and/or diagnostic
    device companies with an established presence in these markets.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Limitations of Current Melanoma Diagnosis</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The current primary method for detecting melanoma is based on
physicians&#146; ability to recognize patterns using the naked
eye; this is known as clinical examination. Physicians assess
pigmented skin lesions using the &#147;ABCDE&#148; criteria,
<U>A</U>symmetry, <U>B</U>order irregularity, <U>C</U>olor
variation, <U>D</U>iameter greater than 6 mm, and
<U>E</U>volving&nbsp;&#151; change in ABCD over time. This
subjective interpretation relies on physician experience and
skill. The ratio of benign lesions biopsied to melanomas
confirmed can be variable, ranging as high as 40 to 1 for
dermatologists and as high as 50 to 1 for primary care
physicians. In contrast, MelaFind&#174; delivers an objective
assessment based on numerical scores assigned to the suspicious
skin lesion under evaluation. Further, clinical examination is
limited to the surface appearance of the suspicious pigmented
skin lesion, whereas MelaFind&#174; utilizes information derived
from up to 2.5 mm deep into the skin.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Dermatologists who specialize in the management of pigmented
skin lesions may also use dermoscopy, a method of viewing
lesions under magnification. Although dermoscopy provides more
information than unaided visual examination, mastery of the
technique necessitates many years of training and experience.
Proper use of dermoscopy can reduce the number of unnecessary
biopsies of benign lesions, but even dermoscopy experts biopsy
3-10 benign lesions for every melanoma detected.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Most dermatologists generally use only visual clinical
evaluation for melanoma detection. Consequently, they biopsy up
to 40 benign lesions for every melanoma detected. While many
primary care physicians immediately refer patients with
suspicious pigmented skin lesions to a specialist, an increasing
number perform biopsies on skin lesions themselves. Their lack
of specialist training in identifying suspect lesions makes
their diagnostic accuracy much lower in terms of both
sensitivity and specificity. This results in 40% misdiagnosed
melanomas and a ratio of benign lesions biopsied to melanomas
confirmed of up to 50 to 1.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>MelaFind&#174;</B> <B>Product Description</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
MelaFind&#174; is a non-invasive system for assisting in the
early detection of melanoma. The MelaFind&#174; system is
comprised of a point-of-care, hand-held imaging device that, in
commercial use, is intended to be connected via the internet to
a central server in our offices. MelaFind&#174; employs multiple
wavelengths of light to obtain data from images of suspicious
lesions; the data are analyzed against our proprietary database
of melanomas and benign lesions using our sophisticated
algorithms. When marketed, a report will be
</DIV>

<P align="center" style="font-size: 10pt;">45

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="left" style="font-size: 10pt;">
transmitted to the physician&#146;s office containing
MelaFind&#174;&#146;s recommendation of whether the lesion
should be biopsied. The key components of the MelaFind&#174;
system are listed below:
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I>A hand-held imaging device,</I></B> which is comprised of
several components:
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    an illuminator that shines 10 different specific wavelengths of
    light, including near infra-red bands;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    a lens system composed of nine elements that creates images of
    the light reflected from the lesions;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    a photon (light)&nbsp;sensor; and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    an image processor employing proprietary algorithms to extract
    many discrete characteristics or features from the images.</TD>
</TR>

</TABLE>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD align="left">
    <B><I>Our proprietary database of pigmented skin
    lesions,</I></B> which includes <I>in vivo </I>MelaFind&#174;
    images and corresponding histopathological results of over 5,000
    biopsied lesions from over 3,500 patients, which we believe to
    be the largest such database in the US and a substantial barrier
    to competition.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD align="left">
    <B><I>Our lesion classifiers, which are sophisticated
    mathematical algorithms</I></B> that analyze the MelaFind&#174;
    images and extract lesion feature information from the images;
    the features are used to classify the lesions as either
    suspicious for melanoma or not suspicious for melanoma.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD align="left">
    <B><I>A central server </I></B>located in our offices, which is
    intended to perform quality control functions and provide
    diagnostic reports to the physician.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The &#147;brain&#148; of the MelaFind&#174; system, the
<I>Lesion Classifier,</I> distinguishes melanoma from
non-melanoma using the lesion features extracted and measured by
the hand-held imaging device. The <I>Lesion Classifiers </I>are
developed from our proprietary database of pigmented skin
lesions and sophisticated mathematical algorithms. The
mathematical formulas and algorithms used by the <I>Lesion
Classifiers </I>are devised and optimized through the process of
&#147;classifier training&#148; using lesions from our
proprietary database. <I>Lesion Classifier </I>development and
training is an iterative process involving: (1)&nbsp;selection
of the lesion features that provide for optimal lesion
discrimination; (2)&nbsp;optimization of the mathematical
formulas to differentiate benign lesions from melanoma; and
(3)&nbsp;expansion of the size and diversity of our proprietary
lesion database. The performance of the <I>Lesion Classifiers
</I>is directly related to the size of the database used in
classifier training, as well as the degree to which the training
database is representative of the lesions that will be evaluated
by MelaFind&#174; in commercial use.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
As with many diagnostic systems, the diagnostic performance of
MelaFind&#174; is characterized using two measures: (1)
<B><I>sensitivity </I></B>&nbsp;&#151; the ability to detect
disease when it is present; and (2) <B><I>specificity
</I></B>&nbsp;&#151; the ability to exclude disease when it is
not present. Since sensitivity and specificity are typically
trade-offs, meaning that as one parameter increases the other
decreases, the MelaFind&#174; <I>Lesion Classifier </I>is
developed and trained with the intention that MelaFind&#174;
will detect all melanomas in the training data set with the
highest possible specificity.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Reliable functioning of the MelaFind&#174; system is critical to
its utility and success in the marketplace. Automated
self-calibration tests are performed by the hand-held device to
ensure proper functionality. When marketed, the central server
will also perform tests on the hand-held device to determine
whether its functioning is within appropriate limits. The server
will not permit MelaFind&#174; to provide diagnostic information
unless the hand-held device is functioning properly.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>MelaFind&#174;</B> <B>Regulatory Status</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In late 2004, we entered into a binding Protocol Agreement with
the FDA for our pivotal clinical study that specified the
inclusion criteria, sample size, endpoints, and performance
criteria necessary to establish the safety and effectiveness of
MelaFind&#174;. The primary endpoints of the study include:
(1)&nbsp;greater than 95% (exact binomial lower confidence
bound) sensitivity for detection of melanoma; and
(2)&nbsp;statistically significant greater specificity in ruling
out melanoma when compared to study dermatologists. We initiated
a trial under the terms of the Protocol Agreement at the end of
2004. However, technical operational issues with the systems
were experienced, requiring further refinement. We are
continuing this study as a supportive
</DIV>

<P align="center" style="font-size: 10pt;">46

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="left" style="font-size: 10pt;">
pilot trial and are refining the hardware systems. We expect to
have new systems available in order to start the pivotal trial
in early 2006. The pivotal study for PMA approval of
MelaFind&#174; will be conducted under the terms of the Protocol
Agreement, which require at least 1,200 pigmented skin lesions,
and at least 93 eligible melanomas for analysis.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
For commercialization outside the US, approvals from appropriate
regulatory bodies within other countries will be required. Once
PMA approval is obtained, we may proceed with applications to
commercialize in various countries pending further assessment of
market opportunities and the possible identification of
strategic partners.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Clinical Studies of MelaFind&#174;</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Goals and Objectives</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
MelaFind&#174; has been studied on over 5,000 skin lesions from
over 3,500 patients during the past five years at over 20
clinical sites in the US, as well as two sites in Europe and one
in Australia. We aim to develop a system with a sensitivity of
at least 95% in detecting melanoma. Our goals are to complete
pre-commercialization design and testing of the hand-held
imaging device and its associated software, as well as to
establish a database of approximately 300 melanomas, including
<I>in vivo </I>MelaFind&#174; images and biopsy results, for
MelaFind&#174; <I>Lesion Classifier </I>algorithm development
and training. Statistically, in order to have a high level of
confidence of success, we set the exact binomial lower
confidence bound (ELCB)&nbsp;at 99%, which requires
approximately 300 melanomas in the classifier training database.
To date, the MelaFind&#174; lesion database includes 225
melanomas.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We are developing in parallel several MelaFind&#174; <I>Lesion
Classifiers,</I> which differ in the algorithms, as well as in
the specific lesion features and relative weights used in the
mathematical formulas. Prior to conducting the analysis of the
data from the pivotal trial under the Protocol Agreement, the
optimal <I>Lesion Classifier </I>will be selected. The primary
means by which the performance of the MelaFind&#174; <I>Lesion
Classifiers </I>is evaluated is through measures of
<B><I>sensitivity </I></B>(the ability to detect disease when
present) and <B><I>specificity </I></B>(the ability to exclude
disease when not present).
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The reference standard used for comparison of the results of
MelaFind&#174; and study dermatologists is histopathological
analysis of the biopsied lesions by a group of expert
dermatohistopathologists. MelaFind&#174; images of pigmented
skin lesions (melanomas and non-melanomas) and the
histopathological results of the corresponding biopsied lesions
comprise our training database of lesions. When the <I>Lesion
Classifiers</I> are tested on the database used in training,
this is called a &#147;training study.&#148; When the <I>Lesion
Classifiers </I>are tested on a set of lesions not used in
training, this is called a &#147;blinded test,&#148; which is a
simulation of anticipated real-life prospective classifier
performance.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Our ultimate goal for MelaFind&#174; is to demonstrate
sensitivity of at least 95%, and superior specificity as
compared to study dermatologists in the pivotal blinded test for
PMA approval.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>MelaFind&#174;</I></B>
<B><I>Development History&nbsp;&#151; Hardware and
Software</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In developing the MelaFind&#174; system we have tested both a
first and second generation hand-held imaging device, and are in
the process of developing a pre-commercialization version for
use in our pivotal clinical trial. Our research, development and
clinical testing efforts have been designed to improve our
MelaFind&#174; technology platform, including the imaging device
and lesion classifiers, and to enhance our lesion database.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We began using first generation hand-held imaging devices in
clinical studies in 2001. In 2002, we expanded the clinical
research program to additional study sites equipped with second
generation hand-held imaging devices. The aim of the study,
which is ongoing, is to build the MelaFind&#174; proprietary
lesion database for use in <I>Lesion Classifier</I> training.
The study calls for the MelaFind&#174; hand-held imaging device
to acquire images of pigmented skin lesions scheduled for
biopsy. After biopsy, the histopathological slides are collected
and sent for central dermatohistopathological review by a panel
of experts.
</DIV>

<P align="center" style="font-size: 10pt;">47

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The results of initial training studies and blinded tests were
not to the expected level of performance. We determined the
cause to be a flaw in the second generation hand-held imaging
devices, which were subsequently shown to exhibit highly
variable levels of stray light, an optical artifact. Therefore,
we ceased producing this generation of hand-held imaging devices
and purged the training database of lesion images acquired with
them. We also incorporated a manufacturing specification for
stray light which, prior to this time, was not included.
Subsequent training studies and blinded tests performed using
only first generation hand-held imaging devices confirmed our
earlier favorable results: MelaFind&#174; missed none or very
few melanomas, and was shown to have higher specificity than
study dermatologists, as shown in the tables below. See
&#147;&nbsp;&#151; Results of Training Studies and Blinded
Tests&#148;.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We initiated a clinical study under the terms of the Protocol
Agreement with the FDA in late 2004 using first generation
hand-held imaging devices. However, several technical operating
issues with these older systems were experienced, requiring
further refinement. Third generation hand-held imaging devices
were produced in 2004 and early 2005. These serve as the basis
of the design that is currently being used to generate final,
pre-commercialization hand-held imaging devices, which will be
utilized in the pivotal study for PMA approval under the terms
of the Protocol Agreement.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Along with hardware development efforts, we have also developed,
tested, and continue to refine the software components of the
system, including lesion filters, calibration algorithms, lesion
classification algorithms, and hardware normalization software.
We plan to finalize these key elements of the software prior to
the analysis of the data obtained from the pivotal trial for PMA
approval.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Results of Training Studies
and Blinded Tests</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The first iteration of MelaFind&#174; <I>Lesion Classifiers,
Lesion Classifiers A-1 and B,</I> employed a single-step
process, that is, an algorithm that differentiates melanoma from
all other pigmented skin lesions. These MelaFind&#174;
classifiers were trained on a total of 1,129
lesions &nbsp;&#151; 109 melanomas, 70 high grade dysplastic
nevi, and 950 other pigmented skin lesions. For the blinded
test, a different group of 477 pigmented skin lesions, including
26 melanomas, 11 high grade dysplastic nevi, and 440 other
lesions were included. None of these lesions were used in
classifier training. The results of the training study and
blinded tests for MelaFind&#174; <I>Lesion Classifiers A-1
</I>and <I>B, </I>as well as study dermatologists, are
summarized below.
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>August 2003&nbsp;&#151;&nbsp;Training Study and Blinded Test
Results</B>
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="47%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
</TR>


<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>Training Study</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>Blinded Test</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Sensitivity</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Specificity</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Sensitivity</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Specificity</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    MelaFind&#174; <I>Lesion Classifier A-1</I></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>100</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>45.6</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>80.8</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>44.3</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    MelaFind<B>&#174; </B><I>Lesion Classifier B</I></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>96.3</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>21.9</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>80.8</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>25.5</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Study Dermatologists</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>NA</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>NA</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>96.2</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>17.3</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
</TR>

</TABLE>
</CENTER>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The performance of the MelaFind&#174; <I>Lesion Classifiers
</I>on the blinded data set was significantly below results from
the training study. The first attempt to improve the performance
was by developing a new MelaFind&#174; <I>Lesion Classifier
A,</I> employing a three-step process <I>(A-3)</I>, which was
accomplished in November 2003. A three-step process employs
algorithms that differentiate melanoma from three other classes
of pigmented skin lesions. The new classifier was re-trained on
the original data set of lesions (109 melanomas, 70 high grade
dysplastic nevi, and 950 other pigmented skin lesions), tested
on the training set and then tested on the same blinded data set
used in August 2003 (26 melanomas, 11 high grade dysplastic
nevi, and 440 other lesions). The following table summarizes the
results of the tests on the training and blinded data sets. Note
that MelaFind&#174; <I>Lesion Classifier B, </I>which
accommodates a single-step process only, was not evaluated in
these exercises.
</DIV>

<P align="center" style="font-size: 10pt;">48

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="center" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>November 2003&nbsp;&#151; Training Study and Blinded Test
Results</B>
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="47%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
</TR>


<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>Training Study</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>Blinded Test</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Sensitivity</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Specificity</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Sensitivity</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Specificity</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    MelaFind&#174; <I>Lesion Classifier A-3</I></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>100</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>28.5</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>100</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>25.7</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Study Dermatologists</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>N/A</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>N/A</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>96.2</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>17.3</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
</TR>

</TABLE>
</CENTER>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Review of the data indicated that the three-step MelaFind&#174;
<I>Lesion Classifier A-3</I>, which was trained with lesions
acquired from first and second generation MelaFind&#174;
hand-held imaging devices, was much less specific on the
training database (28.5%) than the single-step classifier
MelaFind&#174; <I>Lesion Classifier A-1</I>, which was trained
on lesions acquired using only first generation hand-held
imaging devices (45.6%). A complete analysis of all
MelaFind&#174; devices from the clinical sites indicated a
systematic difference between the first generation and second
generation MelaFind&#174; hand-held imaging devices. The second
generation hand-held imaging devices exhibited a significantly
greater amount of stray light than the first generation
hand-held imaging devices. Stray light induces variable imaging
artifacts that cannot be predicted or accounted for in the
software algorithms, and introduces higher probability for
error. Therefore, in February 2004, all lesions acquired using
second generation hand-held imaging devices were removed from
the training and testing databases. The three-step
MelaFind&#174; <I>Lesion Classifier A-3 </I>was then trained on
a set of lesions acquired solely from first generation hand-held
imaging devices including 113 melanomas, 69 high grade
dysplastic nevi, and 987 other pigmented skin lesions. A blinded
test was conducted on 262 lesions (21 melanoma, 8 high grade
dysplastic nevi, and 233 other lesions) not used in classifier
training and acquired using first generation hand-held imaging
devices only. The following table summarizes the results.
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 9pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>February 2004&nbsp;&#151; Results of Training Study and
Blinded Test after Removing Lesions</B>
</DIV>

<DIV align="center" style="font-size: 10pt;">
<B>Obtained from Second Generation Hand-Held Imaging Devices</B>
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="47%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
</TR>


<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>Training Study</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>Blinded Test</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Sensitivity</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Specificity</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Sensitivity</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Specificity</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    MelaFind&#174; <I>Lesion Classifier A-3</I></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>100</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>43.8</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>100</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>44.2</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Study Dermatologists</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>N/A</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>N/A</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>95.0</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>28.3</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
</TR>

</TABLE>
</CENTER>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
These results demonstrated the importance of minimizing stray
light and establishing a product specification for stray light.
This specification was instituted in our assembly process
following this analysis. As part of the continued development, a
four-step MelaFind&#174; <I>Lesion Classifier A-4</I> was
introduced in March 2004. A four-step process employs algorithms
that differentiate melanoma from four other classes of pigmented
skin lesions. This classifier performed better compared with the
three-step classifier, as summarized in the following table.
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>March 2004&nbsp;&#151; MelaFind&#174;</B> <B>Lesion
Classifiers: Three-step vs. Four-step</B>
</DIV>

<DIV align="center" style="font-size: 10pt;">
<B>Training Study and Blinded Test Results</B>
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="37%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="10%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="10%">&nbsp;</TD>
</TR>


<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>Training Study</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>Blinded Test</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Sensitivity</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Specificity</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Sensitivity</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Specificity</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    MelaFind&#174; <I>Lesion Classifier A-3</I></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>100</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>43.8</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>100</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>44.2</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    MelaFind&#174; <I>Lesion Classifier A-4</I></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>100</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>48.9</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>100</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>48.1</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Study Dermatologists</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>N/A</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>N/A</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>95.0</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>28.3</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
</TR>

</TABLE>
</CENTER>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Due to the enhanced specificity of the four-step classifier
<I>A-4 </I>compared to the three-step classifier <I>A-3</I>, as
seen in the preceding table, the four-step classifier was
selected for further development and testing. In May 2004, the
largest blinded test was performed on a separate set of 352
lesions (including 28 melanomas, 14 high grade dysplastic nevi,
and 310 other pigmented skin lesions) that were not used in
classifier training. The results of sensitivity and specificity
of MelaFind&#174; <I>Lesion Classifiers A-4 and B </I>and study
dermatologists are summarized in the following table.
</DIV>

<P align="center" style="font-size: 10pt;">49

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="center" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>May 2004&nbsp;&#151; Training Study and Blinded Test
Results</B>
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="47%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
</TR>


<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>Training Study</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>Blinded Test</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Sensitivity</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Specificity</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Sensitivity</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Specificity</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    MelaFind&#174; <I>Lesion Classifier A-4</I></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>100</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>53.2</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>100</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>48.4</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    MelaFind&#174; <I>Lesion Classifier B</I></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>100</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>38.0</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>96.4</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>32.9</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Study Dermatologists</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>NA</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>NA</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>96.4</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>28.4</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
</TR>

</TABLE>
</CENTER>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In January 2005, with no additional classifier training and in
an effort to rigorously test the limits of the MelaFind&#174;
<I>Lesion Classifiers,</I> another blinded test was performed on
228 new lesions (28 melanomas, 4 high grade dysplastic nevi, and
196 other pigmented skin lesions). The lesions in this blinded
test were acquired from the first generation MelaFind&#174;
hand-held imaging devices that had been at the clinical sites
for a longer period of time than in any blinded test to date.
<I>Lesion Classifier </I>training was not performed using
MelaFind&#174; hand-held imaging devices that had been at the
clinical sites for longer periods of time. A new four-step
MelaFind&#174; <I>Lesion Classifier C-4 </I>with a revised step
was also evaluated in the blinded test. The results are
summarized in the following table.
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>January 2005&nbsp;&#151; Second Blinded Test Results using
March 2004 Classifiers</B>
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="68%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Sensitivity</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Specificity</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    MelaFind&#174; <I>Lesion Classifier A-4</I></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>82.1</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>37.2</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    MelaFind&#174; <I>Lesion Classifier B</I></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>96.4</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>21.0</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    MelaFind&#174; <I>Lesion Classifier C-4</I></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>92.9</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>35.7</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Study Dermatologists</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>92.9</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>23.0</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
</TR>

</TABLE>
</CENTER>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In evaluating the MelaFind&#174; hand-held imaging devices used
in the January 2005 blinded test, we found that several
MelaFind&#174; devices were not performing within
specifications. Had these devices performed within
specifications, we believe that the sensitivity of
MelaFind&#174; <I>Lesion Classifiers A-4 and C-4 </I>would have
been 96.4%, that is, they would have missed a single melanoma,
compared to study dermatologists who missed two melanomas.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We are utilizing the findings of the blinded tests to refine the
design of hardware to further develop the lesion classification
algorithms, to expand the training database, and to develop
improved calibration methods to ensure appropriate functioning
of each hand-held imaging device. As demonstrated in the January
2005 blinded test, melanomas can be missed when MelaFind&#174;
systems that do not meet specifications are used to acquire
images, and when melanoma lesion types (for instance, nodular
melanomas) are not adequately represented in the training
database. In order to address these situations, we have:
(1)&nbsp;incorporated a weekly field calibration test to
evaluate system performance in order to identify and disable
MelaFind&#174; systems that are not functioning within
specifications; (2)&nbsp;intensified our effort to obtain images
of nodular melanomas for inclusion in the targeted 300 melanoma
database for the final <I>Lesion Classifier;</I> and
(3)&nbsp;refined our algorithms to result in either a positive
reading of melanoma when MelaFind&#174; images reveal
characteristics well outside the ranges of lesions in the final
training database, or to report that MelaFind&#174; cannot
provide a diagnosis in this circumstance. As mentioned above,
had these devices performed within specifications, we believe
that the sensitivity of MelaFind&#174; <I>Lesion Classifiers A-4
and C-4 </I>would have been 96.4%, that is, they would have
missed a single melanoma, compared to study dermatologists who
missed two melanomas.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Sales and Marketing</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We plan to offer MelaFind&#174; as a point-of-care online
service. This approach is intended to provide us with the
advantage of recurring revenues corresponding to the number of
patients examined and to provide the physician with access to
our technology without having to make a significant capital
investment.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Our sales and marketing strategy is to initially establish
focused sales, marketing, and distribution organization in North
America. We plan to focus our commercialization efforts
initially on &#147;high volume/key opinion leader&#148;
dermatologists who are strongly focused on the diagnosis and
treatment of melanoma. For the expansion to the larger US
markets of general dermatologists, plastic surgeons, and primary
care physicians, and for international markets, we intend to
establish development and commercialization partnerships with
</DIV>

<P align="center" style="font-size: 10pt;">50

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="left" style="font-size: 10pt;">
pharmaceutical and/or diagnostic device companies with an
established competency in the market to accelerate the product
introduction and to maximize the breadth of the commercial
opportunity. At this time, we have not yet established any
commercialization partnerships.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We believe that the ultimate market for MelaFind&#174; is in the
primary care setting. When used by primary care physicians,
MelaFind&#174; could have a significant public health benefit
and a favorable impact on healthcare costs. Primary care
physicians are at the front line of early detection, but their
lack of specialist training in identifying suspect lesions makes
the achievement of a high level of diagnostic accuracy
challenging. We believe that MelaFind&#174; can significantly
assist primary care physicians in improving their diagnostic
acumen.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>The MelaFind&#174;</I></B>
<B><I>Value Proposition for the Healthcare System</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We are currently working with experts on a quantitative analysis
of the value proposition of the use of MelaFind&#174; by both
dermatologists and primary care physicians using Evidence-Based
Medicine evaluation techniques. This strategy is consistent with
the approach that has been used to support positive coverage
decisions by CMS and private payors for other products. The
value drivers include: (1)&nbsp;the diagnosis of melanoma at the
early curable stages, as opposed to advanced stages, allowing
for both a greater opportunity to cure and a reduction in
treatment costs by approximately 99%; and (2)&nbsp;reduced
number of referrals for evaluation and biopsy of benign
pigmented skin lesions. We believe that the use of
MelaFind&#174; could result in substantial savings to the US
healthcare system.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Our Reimbursement
Strategy</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We are aware of no Current Procedural Terminology
(CPT)&nbsp;code that is specifically applicable to the use of
MelaFind&#174;. Therefore, we have engaged the services of
expert consultants with extensive experience in the CPT and
coverage decision processes to assist us in the submission of
appropriate applications to obtain a CPT code(s) and positive
coverage decisions from CMS and private payors.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In advance of obtaining a CPT code, we intend to extend our
efforts to secure coverage by private payors and state Medicaid
agencies. Securing coverage first through private payors and
state Medicaid agencies is a common strategy for facilitating
national Medicare coverage. Our efforts to secure reimbursement
for services using MelaFind&#174; will focus first on private
payors and state Medicaid agencies, particularly in sunbelt
locations and in areas that have been shown to be underserved by
dermatologists.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In the US, healthcare providers that utilize medical systems
such as MelaFind&#174;, generally rely on third-party payors,
including Medicare, Medicaid, private health insurance carriers,
and managed care organizations, to reimburse part, but not
necessarily all, of the costs and fees associated with the
procedures performed using these devices. Public and
professional concern about the cost of medical care and new
technologies has evoked a variety of remedies. Third-party
payors are increasingly challenging the pricing of medical
products and procedures. Guidelines have been established that
recognize the need for clinical strategies to assess the
cost-effectiveness of new diagnostic tools or procedures
(Evidence-Based Medicine), in the hope of reducing the
variations in diagnostic and treatment protocols and reducing
healthcare expenditures. Insurers are also attempting to curb
utilization by applying a rational analysis of the costs versus
benefits of new technologies.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The Evidence-Based Medicine evaluation that we are undertaking
is central to our efforts to obtain positive coverage decisions
from CMS and private insurers. The importance of Evidence-Based
Medicine is underscored by recent actions by CMS, including its
proposed Covered with Evidence Development initiative designed
to provide quicker access to new technologies for beneficiaries
while assuring that appropriate evidence for final coverage
decisions will be obtained.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We recognize that a favorable reimbursement environment will
have a significant impact on MelaFind&#174;&#146;s adoption and
commercial success. Even if a procedure is eligible for
reimbursement, the level of reimbursement may not be adequate.
In addition, third-party payors may deny reimbursement if they
determine that the device used in the treatment was not
cost-effective or was used for a non-approved indication. We have
</DIV>

<P align="center" style="font-size: 10pt;">51

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="left" style="font-size: 10pt;">
anticipated this need and have employed an active strategy to
obtain medical coverage, identify appropriate coding and
establish adequate payment.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Pending approval of a CPT code and the availability of third
party reimbursement, we plan to offer MelaFind&#174; to
physicians, who would pay for using MelaFind&#174;, and may or
may not charge patients directly for its use. In addition, we
believe that roughly ten percent of all dermatological practices
are focused on cosmetic dermatology. Most procedures performed
in cosmetic dermatological practices and Medi-Spas are provided
on a patient self-pay basis. We believe that healthcare
consumers that seek these services are likely to pay for
MelaFind&#174;, as well.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Competition</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We are not aware of any direct competitors to MelaFind&#174;. A
number of systems for visualization and assessment of pigmented
skin lesions are in use or in development. These include
clinical (naked eye) examination, whole body mole mapping
systems, dermoscopes (also known as &#147;dermatoscopes&#148;),
digital dermoscopes, spectrophotometric intercutaneous analysis,
confocal microscopy, and spectrophotometric
(color)&nbsp;analysis. These systems rely on physician
experience and expertise in recognizing patterns that are
associated with melanoma and non-melanoma in order to render an
interpretation and diagnosis.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The current primary method for detecting melanoma relies on
physicians to interpret whether a pigmented skin lesion is
suspicious for melanoma (thereby requiring biopsy) based on
their ability to recognize patterns using clinical examination.
Physicians use the &#147;ABCDE&#148; criteria, <U>A</U>symmetry,
<U>B</U>order irregularity, <U>C</U>olor variation,
<U>D</U>iameter greater than 6 mm, and <U>E</U>volving in ABCD,
in their assessment. Whole body mole mapping consists of
periodic photography of patients, typically those at high risk
for developing melanoma. The pictures are reviewed clinically.
This service is provided at some diagnostic imaging centers and
dermatology offices. DigitalDerm, Inc. offers a computerized
system for acquisition, storage, and review of the pictures.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Dermoscopy, or epiluminescence microscopy, allows for
non-invasive visualization of colors and microstructures of the
epidermis, the dermal-epidermal junction, and the papillary
dermis not visible to the naked eye. Manufacturers of
dermoscopes include (but are not limited to) Welch Allyn, Inc.
(US), Heine Optotechnik (Germany), and 3Gen, LLC (US). Digital
dermoscopes allow for dermoscopic images to be visualized on a
computer screen at larger magnification. In addition, images may
be stored and compared to images taken previously. Manufacturers
of digital dermoscopes include (but are not limited to) Derma
Medical Systems, Inc. (Austria), ZN Vision Technologies AG
(Germany), Polartechnics, Ltd. (Australia), Linos Photonics,
Inc. (Germany), and Biomips Engineering (Italy). Dermoscopy is a
tool used by approximately 25% of dermatologists in the US and
is associated with a long learning curve. Physicians experienced
in the use of dermoscopy have been shown to have an increased
diagnostic accuracy of 10 to 20% over clinical examination.
Although some digital dermoscopes provide information regarding
the probability that a lesion may be melanoma compared to a
database of lesions, no system, to our knowledge, is under PMA
development for objective interpretation.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
A recent published article describes the results of a study
utilizing the DB-Mips system from Biomips Engineering. The
database of lesions used in this study differs significantly
from our proprietary database. For example, our database
includes seborrheic keratoses and pigmented basal cell
carcinomas, which can be difficult to differentiate from
melanoma. The DB-Mips database included none of these lesions.
Further, our database includes many more melanomas that are
minimally invasive as well as a much higher percentage of
dysplastic nevi compared to the DB-Mips database. Minimally
invasive melanomas are more difficult to diagnose than melanomas
that have significantly invaded the skin, and dysplastic nevi
can be very difficult to differentiate from melanoma. Thus, we
believe that the DB-Mips database does not include as many
pigmented lesions that are difficult to differentiate from
melanoma as our database. The specificity of dermatologists in
other DB-Mips studies was reported to be over 80% while the
specificity of dermatologists in MelaFind&#174; studies is
typically under 30%. The DB-Mips system has a reported
specificity of up to 79%, which is roughly equivalent to the
specificity of the dermatologists in DB-Mips studies.
</DIV>

<P align="center" style="font-size: 10pt;">52

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Spectrophotometric intercutaneous analysis is a technique of
visualizing collagen, blood, and pigment. Astron Clinica
(UK)&nbsp;manufactures a device utilizing this technique.
Confocal microscopy is an experimental approach for non-invasive
visualization of skin structures at the cellular level; such a
device utilizing this technique is in development by Lucid (US).
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
A spectrophotometer (color measuring device) is offered by
Medical High Technologies S.p.A. (Switzerland). In contrast to
MelaFind&#174;, the product does not perform automatic quality
control of images and has an external light source. We believe
that the reported sensitivity of 80.4% would not gain market
approval. Further, we are not aware of comparative data on
physicians&#146; performance in corresponding data sets. The
system does not have PMA approval, nor are we aware of efforts
directed to obtain PMA approval of the product.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The broad market for precision optical imaging devices used for
medical diagnosis is intensely competitive, subject to rapid
change and significantly affected by new product introductions
and other market activities of industry participants. If our
products are approved for marketing, we will potentially be
subject to competition from major optical imaging companies,
such as General Electric Co., Siemens AG, Bayer AG, Eastman
Kodak Company, Olympus Corporation, Carl Zeiss AG Deutschland
and others, each of which manufactures and markets precision
optical imaging products for the medical market and could decide
to develop or acquire a product to compete with MelaFind&#174;.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Manufacturing</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We are currently focusing our manufacturing efforts on hardware
engineering in order to make the functioning of the
MelaFind&#174; hand-held imaging devices more consistent and
robust, and to facilitate larger-scale manufacturing methods of
the pre-commercialization devices that will be used in the
pivotal clinical trial. Data from the clinical studies as well
as from engineering tests under stress and different
environmental conditions are being used to refine appropriate
manufacturing and field specifications before the design is
fixed.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
For this crucial phase in development, we have contracted with a
third-party vendor, ASKION (Gera, Germany), which specializes in
precision optics. The pre-commercialization hand-held imaging
devices to be assembled by ASKION are expected to be available
for pivotal trial initiation planned for early 2006. The
pre-commercialization hand-held imaging devices are expected to
be more robust while having at least the same or better
performance than the hand-held imaging devices used in the
clinical program to date.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We have recently been inspected by the FDA for the manufacturing
and commercialization of DIFOTI&#174;, our dental cavities
detection product that has been discontinued for business
reasons. The FDA inspectors observed deficiencies that were
documented on FDA Form&nbsp;483 that was issued to us following
the inspection. We have had a follow-up meeting with the FDA and
are working with the FDA and consultants to address the
inspectional findings, particularly as they relate to current
MelaFind&#174; design development and ultimate MelaFind&#174;
commercial manufacturing. We believe that the issues can be
addressed to the satisfaction of the FDA and will not materially
adversely effect our operations.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Research and Development Efforts</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Our research and development efforts are currently focused on
finalization and validation of the pre-commercialization
hand-held imaging device, and completion of the development of
the MelaFind&#174; <I>Lesion Classifiers</I>. To date, we have
developed and tested four-step classifiers (see &#147;Results of
Training Studies and Blinded Tests&#148;), and we are currently
working on five-step versions. The classifiers have been trained
on 113 melanomas to date, and our goal is to use 300 melanomas
(and over 4,000 non-melanoma pigmented lesions) for training. To
date we have collected over 225 melanomas, which are available
for classifier training.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Our R&#38;D plan also includes further improvements such as
incorporating wireless technology and an internet connection for
hand-held imaging device quality monitoring, as well as faster
and easier software downloads for future software versions. The
internet based monitoring of the performance of our hand-held
imaging device, known as Intelligent Device Management, is
intended to enable us to continuously monitor
</DIV>

<P align="center" style="font-size: 10pt;">53

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="left" style="font-size: 10pt;">
our hand-held imaging device, advise the user of errors in
handling, and thus enhance customer satisfaction and loyalty.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We have performed feasibility studies of a MelaFind&#174;
software add-on feature called
MelaMeter<SUP style="font-size: 85%; vertical-align: text-top"><FONT style="font-variant:SMALL-CAPS">tm</FONT></SUP>,
an enhancement to MelaFind&#174; that provides information
regarding the depth of penetration of a pigmented skin lesion.
This information may be useful to physicians in determining the
necessary depth and breadth of biopsy of a pigmented skin
lesion. Initial clinical studies of
MelaMeter<SUP style="font-size: 85%; vertical-align: text-top"><FONT style="font-variant:SMALL-CAPS">tm</FONT></SUP>
demonstrate the ability of
MelaMeter<SUP style="font-size: 85%; vertical-align: text-top"><FONT style="font-variant:SMALL-CAPS">tm</FONT></SUP>
to non-invasively estimate the Breslow thickness comparably to
histopathological examination of excised lesions. We plan to
continue the development of
MelaMeter<SUP style="font-size: 85%; vertical-align: text-top"><FONT style="font-variant:SMALL-CAPS">tm</FONT></SUP>
and seek its FDA approval after receiving PMA approval of
MelaFind&#174;.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Following commercialization of MelaFind&#174;, we intend to
evaluate the potential use of our light based computer vision
platform in other applications, including the non-invasive
detection of basal cell carcinoma, the most common skin cancer.
New hardware systems for the imaging of blood and blood vessel
patterns are needed since the majority of basal cell carcinomas
are not pigmented and, accordingly, the MelaFind&#174; system as
currently developed is not appropriate for this use. However, we
believe MelaFind&#174;&#146;s software programs and algorithms
will be applicable.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Intellectual Property</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Our policy is to protect our intellectual property by obtaining
US and foreign patents to protect technology, inventions and
improvements important to the development of our business. To
date we have been awarded 14 US patents with numerous foreign
counterparts, of which six US patents and two Australian patents
relate to various aspects of MelaFind&#174;. In addition, we
have applied for two additional US patents and have filed
certain foreign patent applications relating to MelaFind&#174;,
of which two foreign patent applications are currently in the
European regional phase. Also, we have obtained non-exclusive
licenses from several of our suppliers for critical components
of MelaFind&#174;. We have not granted any significant licenses
with respect to our intellectual property.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We cannot be certain that our patents will not be challenged or
circumvented by competitors. Whether a patent is infringed and
is valid, or whether a patent application should be granted, are
all complex matters of science and law, and therefore we cannot
be certain that, if challenged, our patents, patent applications
and/or other intellectual property rights would be upheld. If
one or more of those patents, patent applications and other
intellectual property rights are invalidated, rejected or found
unenforceable, that could reduce or eliminate any competitive
advantage.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We also rely on trade secrets and technical know-how in the
manufacture and marketing of MelaFind&#174;. We require our
employees, consultants and contractors to execute
confidentiality agreements with respect to our proprietary
information.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We have obtained US trademark registrations for the following
marks: &#147;MelaFind&#174;&#148; and &#147;DIFOTI&#174;,&#148;
as well as the corporate logo for &#147;eos-electro-optical
sciences, inc.&#174;&#148; The goods covered by these
registrations are in International Class&nbsp;010 and US
Classes&nbsp;26, 39 and 44. For MelaFind&#174;, the description
of goods and services covered by the trademark is: &#147;medical
devices, namely, electro-optical devices incorporating hardware
for obtaining images in different spectral bands and software
for analyzing the images for use in analyzing skin lesions and
determining the existence of melanoma.&#148; For DIFOTI&#174;,
the description of goods and services covered by the trademark
is: &#147;electro-optical apparatus to diagnose dental
conditions.&#148; For &#147;eos-electro-optical sciences,
inc.&#174;&#148;, the description of goods and services covered
by the trademark is: &#147;instrumentation comprising computer
assisted optical imagers and image analyzers for use in the
detection of dental cavities, cutaneous melanoma, and other
pathologies of the teeth, skin and other tissues.&#148; We also
have registered the internet domain names: www.eo-sciences.com,
www.eosciences.com, www.melafind.com, www.difoti.com,
www.smartlightsensors.com, and www.skinsurf.com.
</DIV>

<P align="center" style="font-size: 10pt;">54

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The following table lists the fundamental US patents that cover
the MelaFind&#174; methodology, apparatus, and systems:
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>US Patents Relating to MelaFind&#174;</B>
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="19%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="67%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>

<TR style="font-size: 8pt;">
    <TD align="left" nowrap><B>Patent #</B></TD>
    <TD>&nbsp;</TD>
    <TD align="center" nowrap><B>Title</B></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Issued</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    6,081,612</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">
    Systems and Methods for the Multispectral Imaging and</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>06/27/00</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">
    Characterization of Skin Tissue</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    6,208,749</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">
    Systems and Methods for the Multispectral Imaging and</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>03/27/01</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">
    Characterization of Skin Tissue</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    6,307,957</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">
    Multispectral Imaging and Characterization of Biological Tissue</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>10/23/01</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    6,626,558</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">
    Apparatus for Uniform Illumination of an Object</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>09/30/03</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    6,657,798</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">
    Method for Optimizing the Number of Good Assemblies</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>12/02/03</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">
    Manufacturable From a Number of Parts</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    6,710,947</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">
    Method for Assembling Lens Elements</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>03/23/04</TD>
    <TD>&nbsp;</TD>
</TR>

</TABLE>
</CENTER>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We also have developed trade secret calibration methods,
classifier programs, and search engines; these programs have
been developed over many years and incorporate decades of
experience in optical computer vision. In addition, our
proprietary MelaFind&#174; database of over 5,000 lesions has
been compiled over a number of years and would be difficult to
replicate.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>FDA Regulation</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Our product, MelaFind&#174;, is regulated as a medical device
and is subject to extensive regulation by the FDA and other
regulatory authorities in the US. The FD&#38;C Act and other
federal and state statutes and regulations govern the research,
design, development, preclinical and clinical testing,
manufacturing, safety, approval or clearance, labeling,
packaging, storage, record keeping, servicing, promotion, import
and export, and distribution of medical devices.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Unless an exemption applies, each medical device we wish to
commercially distribute in the US will require either prior
premarket notification, or 510(k) clearance, or PMA approval,
from the FDA. The FDA classifies medical devices into one of
three classes. Devices requiring fewer controls because they are
deemed to pose lower risk are placed in Class&nbsp;I or II.
Class&nbsp;I devices are subject to general controls such as
labeling, premarket notification, and adherence to the
FDA&#146;s QSR. Class&nbsp;II devices are subject to special
controls such as performance standards, postmarket surveillance,
FDA guidelines, as well as general controls. Some Class&nbsp;I
and Class&nbsp;II devices are exempted by regulation from the
premarket notification, or 510(k), clearance requirement or the
requirement of compliance with certain provisions of the QSR.
Devices are placed in Class&nbsp;III, which requires approval of
a PMA application, if insufficient information exists to
determine that the application of general controls or special
controls are sufficient to provide reasonable assurance of
safety and effectiveness, or they are life-sustaining,
life-supporting or implantable devices, or the FDA deems these
devices to be &#147;not substantially equivalent&#148; either to
a previously 510(k) cleared device or to a
&#147;preamendment&#148; Class&nbsp;III device in commercial
distribution before May&nbsp;28, 1976, for which PMA
applications have not been required. The FDA classifies
MelaFind&#174; as a Class&nbsp;III device, requiring PMA
approval.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
A PMA application must be supported by valid scientific
evidence, which typically requires extensive data, including
technical, pre-clinical, clinical, manufacturing and labeling
data, to demonstrate to the FDA&#146;s satisfaction the safety
and effectiveness of the device. A PMA application must include,
among other things, a complete description of the device and its
components, a detailed description of the methods, facilities
and controls used to manufacture the device, and proposed
labeling. A PMA application also must be accompanied by a user
fee, unless exempt. For example, the FDA does not require the
submission of a user fee for a small business&#146;s first PMA.
After a PMA application is submitted and found to be
sufficiently complete, the FDA begins an in-depth review of the
submitted information. During this review period, the FDA may
request additional information, or clarification of information
already provided. Also during the review
</DIV>

<P align="center" style="font-size: 10pt;">55

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="left" style="font-size: 10pt;">
period, an advisory panel of experts from outside the FDA may be
convened to review and evaluate the application and provide
recommendations to the FDA as to the approvability of the
device. In addition, the FDA generally will conduct a
pre-approval inspection of the manufacturing facility to ensure
compliance with the QSR, which requires manufacturers to follow
design, testing, control, documentation and other quality
assurance procedures.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We commenced the PMA application process for MelaFind&#174; by
filing a proposed Shell for a three module PMA on
September&nbsp;30, 2002. We filed as a Small Business Entity
exempt from the user fee requirement. The Shell was accepted and
two Modules have been filed and reviewed. The third Module will
include the results of the pivotal clinical study, and cannot be
filed until after that study is complete and its results have
been evaluated. The FDA can delay, limit or deny approval of a
PMA application for many reasons, including:
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    MelaFind&#174; may not be safe or effective to the FDA&#146;s
    satisfaction;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    the data from our pre-clinical studies and clinical trials may
    be insufficient to support approval;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    the manufacturing process or facilities we use may not meet
    applicable requirements; and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    changes in FDA approval policies or adoption of new regulations
    may require additional data.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
If the FDA evaluations of both the PMA application and the
manufacturing facilities are favorable, the FDA will either
issue an approval letter, or approvable letter, which usually
contains a number of conditions which must be met in order to
secure final approval of the PMA. When and if those conditions
have been fulfilled to the satisfaction of the FDA, the agency
will issue a PMA approval letter authorizing commercial
marketing of the device for certain indications. If the
FDA&#146;s evaluation of the PMA or manufacturing facilities is
not favorable, the FDA will deny approval of the PMA or issue a
not approvable letter. The FDA may also determine that
additional clinical trials are necessary, in which case the PMA
approval may be delayed while the trials are conducted and the
data acquired is submitted in an amendment to the PMA. Even with
additional trials, the FDA may not approve the PMA application.
The PMA process can be expensive, uncertain and lengthy and a
number of devices for which FDA approval has been sought by
other companies have never been approved for marketing.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
New PMA applications or PMA supplements may be required for
modifications to the manufacturing process, labeling and device
specifications, materials or design of a device that is approved
through the PMA process. PMA supplements often require
submission of the same type of information as an initial PMA
application, except that the supplement is limited to
information needed to support any changes from the device
covered by the original PMA application, and may not require as
extensive clinical data or the convening of an advisory panel.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Clinical trials are almost always required to support a PMA
application, and are sometimes required for a 510(k) clearance.
These trials generally require submission of an application for
an IDE to the FDA. We have not been required to file an IDE for
the MelaFind&#174; clinical studies because FDA has considered
the trials &#147;non-significant risk&#148; (NSR)&nbsp;studies
subject to abbreviated IDE regulations, which do not require
formal IDE submission. An IDE application must be supported by
appropriate data, such as animal and laboratory testing results,
showing that it is safe to test the device in humans and that
the testing protocol is scientifically sound. The IDE
application must be approved in advance by the FDA for a
specified number of patients, unless the product is deemed a
non-significant risk device and eligible for more abbreviated
IDE requirements. Generally, clinical trials for a significant
risk device may begin once the IDE application is approved by
the FDA and the study protocol and informed consent form are
approved by appropriate institutional review boards at the
clinical trial sites. The FDA&#146;s approval of an IDE allows
clinical testing to go forward, but does not bind the FDA to
accept the results of the trial as sufficient to prove the
product&#146;s safety and effectiveness, even if the trial meets
its intended success criteria. All clinical trials must be
conducted in accordance with the FDA&#146;s IDE regulations that
govern investigational device labeling, prohibit promotion of
the investigational device, and specify an array of
recordkeeping, reporting and monitoring responsibilities of
study sponsors and study investigators. As stated above, the
clinical studies of MelaFind&#174; are considered by the FDA as
NSR. Consequently, the trials are conducted under the auspices
of an abbreviated IDE. Clinical
</DIV>

<P align="center" style="font-size: 10pt;">56

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="left" style="font-size: 10pt;">
trials must further comply with the FDA&#146;s regulations for
IRB approval and for informed consent. Required records and
reports are subject to inspection by the FDA. The results of
clinical testing may be unfavorable or, even if the intended
safety and effectiveness success criteria are achieved, may not
be considered sufficient for the FDA to grant approval or
clearance of a product. The commencement or completion of any of
our clinical trials may be delayed or halted, or be inadequate
to support approval of a PMA application, or 510(k) clearance,
for numerous reasons, including, but not limited to, the
following:
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    the FDA, other regulatory authorities, or an IRB do not approve
    a clinical trial protocol or a clinical trial, or place a
    clinical trial on hold;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    patients do not enroll in clinical trials at the rate we expect;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    physicians do not comply with trial protocols;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    patient follow-up is not at the rate we expect;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    patients experience adverse side effects;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    IRBs and third-party clinical investigators may delay or reject
    our trial protocol;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    third-party clinical investigators decline to participate in a
    trial or do not perform a trial on our anticipated schedule or
    consistent with the clinical trial protocol, GCPs or other FDA
    requirements;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    third-party organizations do not perform data collection and
    analysis in a timely or accurate manner;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    regulatory inspections of our clinical trials or manufacturing
    facilities may, among other things, require us to undertake
    corrective action or suspend or terminate our clinical trials,
    or invalidate our clinical trials;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    changes in governmental regulations or administrative actions;
    and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    the interim or final results of the clinical trial are
    inconclusive or unfavorable as to safety or effectiveness.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Our clinical trials may not generate favorable data to support
any PMA applications, and we may not be able to obtain such
approvals on a timely basis, or at all. Delays in receipt of or
failure to receive such approvals, the withdrawal of previously
received approvals, or failure to comply with existing or future
regulatory requirements would have a material adverse effect on
our business, financial condition and results of operations.
Even if granted, the approvals may include significant
limitations on the intended use and indications for use for
which our products may be marketed.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
After a device is approved or cleared and placed in commercial
distribution, numerous regulatory requirements apply. These
include:
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    establishment registration and device listing;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    QSR, which requires manufacturers to follow design, testing,
    control, documentation and other quality assurance procedures;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    labeling regulations, which prohibit the promotion of products
    for unapproved or &#147;off-label&#148; uses and impose other
    restrictions on labeling;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    medical device reporting regulations, which require that
    manufacturers report to the FDA if a device may have caused or
    contributed to a death or serious injury or malfunctioned in a
    way that would likely cause or contribute to a death or serious
    injury if it were to recur; and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    corrections and removal reporting regulations, which require
    that manufacturers report to the FDA field corrections and
    product recalls or removals if undertaken to reduce a risk to
    health posed by the device or to remedy a violation of the
    FD&#38;C Act that may present a risk to health.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Also, the FDA may require us to conduct postmarket surveillance
studies or order us to establish and maintain a system for
tracking our products through the chain of distribution to the
patient level. The FDA
</DIV>

<P align="center" style="font-size: 10pt;">57

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="left" style="font-size: 10pt;">
enforces regulatory requirements by conducting periodic,
unannounced inspections and market surveillance. Inspections may
include the manufacturing facilities of our subcontractors.
Thus, we must continue to spend time, money, and effort to
maintain compliance.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Failure to comply with applicable regulatory requirements,
including those applicable to the conduct of our clinical
trials, can result in enforcement action by the FDA, which may
lead to any of the following sanctions:
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    warning letters;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    fines and civil penalties;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    unanticipated expenditures;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    delays in approving or refusal to approve our applications,
    including supplements;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    withdrawal of FDA approval;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    product recall or seizure;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    interruption of production;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    operating restrictions;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    injunctions; and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    criminal prosecution.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We and our contract manufacturers, specification developers, and
some suppliers of components, are also required to manufacture
our products in compliance with cGMP requirements set forth in
the QSR. The QSR requires a quality system for the design,
manufacture, packaging, labeling, storage, installation and
servicing of marketed devices, and includes extensive
requirements with respect to quality management and
organization, device design, equipment, purchase and handling of
components, production and process controls, packaging and
labeling controls, device evaluation, distribution,
installation, complaint handling, servicing, and record keeping.
The FDA enforces the QSR through periodic unannounced
inspections that may include the manufacturing facilities of our
subcontractors. We expect that our manufacturing facility and
those of our subcontractors will be subject to domestic and
international regulatory inspection and review. If the FDA
believes we or any of our contract manufacturers or regulated
suppliers are not in compliance with these requirements, it can
shut down our manufacturing operations, require recall of our
products, refuse to approve new marketing applications,
institute legal proceedings to detain or seize products, enjoin
future violations, or assess civil and criminal penalties
against us or our officers or other employees. Any such action
by the FDA would have a material adverse effect on our business.
We cannot assure you that we will be able to comply with all
applicable FDA regulations.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Government Regulation</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The advertising of our MelaFind&#174; product will be subject to
both FDA and Federal Trade Commission regulations. In addition,
the sale and marketing of MelaFind&#174; will be subject to a
complex system of federal and state laws and regulations
intended to deter, detect, and respond to fraud and abuse in the
healthcare system. These laws and regulations restrict and may
prohibit pricing, discounting, commissions and other commercial
practices that may be typical outside of the healthcare
business. In particular, anti-kickback and self-referral laws
and regulations will limit our flexibility in crafting
promotional programs and other financial arrangements in
connection with the sale of our products and related services,
especially with respect to physicians seeking reimbursement
through Medicare or Medicaid. These federal laws include, by way
of example, the following:
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    the anti-kickback statute prohibits certain business practices
    and relationships that might affect the provision and cost of
    healthcare services reimbursable under Medicare, Medicaid and
    other federal healthcare programs, including the payment or
    receipt of remuneration for the referral of patients whose care
    will be paid by Medicare or other federal healthcare programs;</TD>
</TR>

</TABLE>

<P align="center" style="font-size: 10pt;">58

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    the physician self-referral prohibition, commonly referred to as
    the Stark Law, which prohibits referrals by physicians of
    Medicare or Medicaid patients to providers of a broad range of
    designated healthcare services in which the physicians or their
    immediate family members have ownership interests or with which
    they have certain other financial arrangements;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    the anti-inducement law, which prohibits providers from offering
    anything to a Medicare or Medicaid beneficiary to induce that
    beneficiary to use items or services covered by either program;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    the Civil False Claims Act, which prohibits any person from
    knowingly presenting or causing to be presented false or
    fraudulent claims for payment by the federal government,
    including the Medicare and Medicaid programs; and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    the Civil Monetary Penalties Law, which authorizes HHS to impose
    civil penalties administratively for fraudulent or abusive acts.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Sanctions for violating these federal laws include criminal and
civil penalties that range from punitive sanctions, damage
assessments, money penalties, imprisonment, denial of Medicare
and Medicaid payments, or exclusion from the Medicare and
Medicaid programs, or both. These laws also impose an
affirmative duty on those receiving Medicare or Medicaid funding
to ensure that they do not employ or contract with persons
excluded from the Medicare and other government programs.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Many states have adopted or are considering legislative
proposals similar to the federal fraud and abuse laws, some of
which extend beyond the Medicare and Medicaid programs to
prohibit the payment or receipt of remuneration for the referral
of patients and physician self-referrals regardless of whether
the service was reimbursed by Medicare or Medicaid. Many states
have also adopted or are considering legislative proposals to
increase patient protections, such as limiting the use and
disclosure of patient-specific health information. These state
laws typically impose criminal and civil penalties similar to
the federal laws.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In the ordinary course of their business, medical device
manufacturers and suppliers have been and are subject regularly
to inquiries, investigations and audits by federal and state
agencies that oversee these laws and regulations. Recent federal
and state legislation has greatly increased funding for
investigations and enforcement actions, which have increased
dramatically over the past several years. This trend is expected
to continue. Private enforcement of healthcare fraud also has
increased, due in large part to amendments to the Civil False
Claims Act in 1986 that were designed to encourage private
persons to sue on behalf of the government. These whistleblower
suits by private persons, known as <I>qui tam </I>relators, may
be filed by almost anyone, including physicians and their
employees and patients, our employees, and even competitors.
HIPAA, in addition to its privacy provisions, created a series
of new healthcare-related crimes.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Environmental Regulation</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Our research and development and clinical processes involve the
handling of potentially harmful biological materials as well as
hazardous materials. We and our investigators and vendors are
subject to federal, state and local laws and regulations
governing the use, handling, storage and disposal of hazardous
and biological materials and we incur expenses relating to
compliance with these laws and regulations. If violations of
environmental, health and safety laws occur, we could be held
liable for damages, penalties and costs of remedial actions.
These expenses or this liability could have a significant
negative impact on our financial condition. We may violate
environmental, health and safety laws in the future as a result
of human error, equipment failure or other causes. Environmental
laws could become more stringent over time, imposing greater
compliance costs and increasing risks and penalties associated
with violations. We are subject to potentially conflicting and
changing regulatory agendas of political, business and
environmental groups. Changes to or restrictions on permitting
requirements or processes, hazardous or biological material
storage or handling might require an unplanned capital
investment or relocation. Failure to comply with new or existing
laws or regulations could harm our business, financial condition
and results of operations.
</DIV>

<P align="center" style="font-size: 10pt;">59

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>International Regulation</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
International sales of medical devices are subject to foreign
government regulations, which may vary substantially from
country to country from having no regulations to having a
premarket notice or premarket acceptance. The time required to
obtain approval in a foreign country may be longer or shorter
than that required for FDA approval, and the requirements may
differ. There is a trend towards harmonization of quality system
standards among the European Union, US, Canada and various other
industrialized countries.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The European Union, which includes most of the major countries
in Europe, has adopted numerous directives and standards
regulating the design, manufacture, clinical trials, labeling
and adverse event reporting for medical devices. Devices that
comply with the requirements of a relevant directive will be
entitled to bear the CE conformity marking, indicating that the
device conforms to the essential requirements of the applicable
directives and, accordingly, can be commercially distributed
throughout Europe. The method of assessing conformity varies
depending on the class of the product, but normally involves a
combination of self-assessment by the manufacturer and a third
party assessment by a &#147;Notified Body.&#148; This third
party assessment may consist of an audit of the
manufacturer&#146;s quality system and specific testing of the
manufacturer&#146;s product. An assessment by a Notified Body of
one country within the European Union is required in order for a
manufacturer to commercially distribute the product throughout
the European Union. As part of the CE compliance, manufacturers
are required to comply with the ISO 9000 series of standards for
quality operations. Other countries, such as Switzerland, have
voluntarily adopted laws and regulations that mirror those of
the European Union with respect to medical devices. Outside of
the European Union, regulatory approval needs to be sought on a
country-by-country basis in order for us to market our products.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Product Liability and Insurance</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Our business exposes us to the risk of product liability claims
that is inherent in the testing, manufacturing and marketing of
medical devices, including those which may arise from the misuse
or malfunction of, or design flaws in, our products. We may be
subject to product liability claims if MelaFind&#174; causes, or
merely appears to have caused, an injury. Claims may be made by
patients, healthcare providers or others involved with
MelaFind&#174;. MelaFind&#174; will require from the FDA
approval prior to commercialization in the US. The clinical
studies of MelaFind&#174; are considered by the FDA as NSR.
Consequently, the trials are conducted under the auspices of an
abbreviated IDE. We therefore do not maintain domestic clinical
trial liability insurance. We have placed clinical trial
liability insurance in certain European countries where required
by statute or clinical site policy. Although we have general
liability insurance that we believe is appropriate, and
anticipate obtaining adequate product liability insurance before
commercialization of MelaFind&#174;, this insurance is and will
be subject to deductibles and coverage limitations. Our
anticipated product liability insurance may not be available to
us in amounts and on acceptable terms, if at all, and, if
available, the coverages may not be adequate to protect us
against any future product liability claims. If we are unable to
obtain insurance at an acceptable cost or on acceptable terms
with adequate coverage or otherwise protect against potential
product liability claims, we will be exposed to significant
liabilities, which may harm our business.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Employees</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
As of May&nbsp;15, 2005, we had 28 full-time and two part-time
employees, of whom 14 were engaged in research and development
(including clinical and regulatory affairs), seven in production
(including document control and quality assurance) and nine in
marketing, sales and administrative activities. We believe that
our relationship with our employees is good.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Facilities</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We lease approximately 2,800 square feet of office space at 3
West Main Street, Suite&nbsp;201, Irvington, New York, and an
additional 3,700 square feet of office, laboratory, and assembly
space in an adjacent building with the street address of 1
Bridge Street, Suite&nbsp;15, Irvington, New York. The lease on
the 2,800 square feet of space expires in November 2010. The
lease on the 3,700 square feet of space expires in June
</DIV>

<P align="center" style="font-size: 10pt;">60

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="left" style="font-size: 10pt;">
2005, and we have orally agreed with the landlord to extend this
lease through June 2009 and we intend to enter into a lease
agreement which will evidence this extension. We believe that
these facilities are adequate to meet our current and reasonably
foreseeable requirements. We believe that we will be able to
obtain additional space, if required, on commercially reasonable
terms.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Legal Proceedings</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We are not currently a party to any legal proceedings.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Discontinued Business</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
As of April&nbsp;5, 2005, we decided to discontinue all
operations associated with our DIFOTI&#174; product, a
non-invasive imaging device for the detection of dental
cavities, in order to focus our resources on the development and
commercialization of Melafind&#174;. We are currently seeking an
acquirer for the DIFOTI&#174; assets. Once a disposition
relating to the DIFOTI&#174; assets is complete, we do not
expect to have any significant continuing responsibility for the
DIFOTI&#174; business.
</DIV>

<P align="center" style="font-size: 10pt;">61

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>MANAGEMENT</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Executive Officers and Directors</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The following table sets forth the names, ages as of
May&nbsp;15, 2005 and a brief account of the business experience
of each person who is a current executive officer or director of
our company and each person who has been elected to serve as a
director effective upon the close of this offering. Each
director of our company will hold office until the next annual
meeting of shareholders of our company or until his successor
has been elected and qualified.
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="36%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="54%">&nbsp;</TD>
</TR>

<TR style="font-size: 8pt;">
    <TD align="left" nowrap><B>Name</B></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Age</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD align="center" nowrap><B>Position</B></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Joseph V. Gulfo, M.D.&nbsp;</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>42</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">
    Director, President and Chief Executive Officer</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Karen Krumeich</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>51</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">
    Vice President, Finance, Chief Financial Officer and Treasurer</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Jon I. Klippel</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>50</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">
    Vice President, Marketing and Sales</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    William R. Bronner</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>59</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">
    Vice President, Legal Counsel and Compliance</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Breaux Castleman(1)(2)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>64</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">
    Director, Chairman of the Board of Directors</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Sidney Braginsky(1)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>67</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">
    Director</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    George C. Chryssis(1)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>58</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">
    Director</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Martin D. Cleary(2)(3)(4)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>59</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">
    Director Elect</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Dan W. Lufkin(2)(3)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>73</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">
    Director</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Gerald Wagner, Ph.D.&nbsp;</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>61</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">
    Director</TD>
</TR>

</TABLE>
</CENTER>

<DIV align="left" style="font-size: 3pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<DIV style="width: 18%; border-top: 1.0pt solid black; font-size: 1pt">&nbsp;</DIV>
</DIV>

<DIV style="margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="4%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>(1)&nbsp;</TD>
    <TD align="left">
    Member of Compensation Committee</TD>
</TR>

<TR>
    <TD style="font-size: 3pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>(2)&nbsp;</TD>
    <TD align="left">
    Member of Nominating and Governance Committee</TD>
</TR>

<TR>
    <TD style="font-size: 3pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>(3)&nbsp;</TD>
    <TD align="left">
    Member of Audit Committee</TD>
</TR>

<TR>
    <TD style="font-size: 3pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>(4)&nbsp;</TD>
    <TD align="left">
    Director elected to serve effective as of the completion of this
    offering</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Executive Officers</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I>Joseph V. Gulfo, M.D.</I>, <I>M.B.A. </I></B>has served as
our President and Chief Executive Officer and a member of our
board of directors since January 2004. From May 1999 to November
2004, he served as Chairman, Chief Executive Officer and
President of Antigen Express, Inc., a development-stage company
developing immunodiagnostics and therapeutics for cancer.
Dr.&nbsp;Gulfo serves as a director of ProCertus BioPharm, Inc.,
a privately-held company. Dr.&nbsp;Gulfo received a B.S. in
Biology from Seton Hall University, an M.D. from the University
of Medicine and Dentistry of New Jersey and an M.B.A. in Finance
from Seton Hall University.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I>Karen Krumeich </I></B>has served as our Vice President,
Finance and Chief Financial Officer since January 2005 and
Treasurer since May 2005. From August 2004 to January 2005 she
served as a financial consultant with Horn Murdock Cole, a
financial consulting firm. From September 2002 to July 2004, she
served as divisional Chief Financial Officer of the hospital
group division of Henry Schein, Inc., a publicly-held medical
and dental products distributor. From March 2000 to August 2002,
she served as a financial consultant with Consulting Associates,
a financial consulting firm. Ms.&nbsp;Krumeich received her B.S.
in Pharmacy from the University of Toledo College of Pharmacy
and completed additional coursework in accounting at Cleveland
State University.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I>Jon I. Klippel </I></B>has served as our Vice President,
Marketing and Sales since December 2004. From April 2004 to
November 2004, he was a marketing and sales consultant. From
January 2003 to March 2004, he served as Senior Marketing
Manager of PDI, Inc., a publicly-traded company offering
outsourced marketing, sales and sale support services to
biopharmaceutical and medical device companies. From February
2002 to December 2002, he was a marketing and sales consultant.
From July 2000 to February 2002, he served as Director of
Marketing and Business Development at National Imaging
Associates, Inc., a privately-held diagnostic imaging management
company. Mr.&nbsp;Klippel received a B.A. in Political Science
from Albright College and an M.B.A. from Rutgers University
Graduate School of Business.
</DIV>

<P align="center" style="font-size: 10pt;">62

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I>William R. Bronner </I></B>has served as our Vice
President, Legal Counsel and Compliance since July 2000 and as
our Secretary since May 2002. From 1986 to July 2000,
Mr.&nbsp;Bronner served as Vice President, General Counsel and
Secretary of Kronos, Inc. Mr.&nbsp;Bronner received a B.A. in
Government from Dartmouth College and a J.D. from Columbia
University Law School.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Our executive officers are elected by, and serve at the
discretion of our board of directors. There are no family
relationships between our directors and executive officers.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Non-Executive Directors</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I>Breaux Castleman </I></B>has served as a member of our
board of directors and Chairman of our board since July 2003.
Since August 2001, he has served as President, Chief Executive
Officer and Chairman of Syntiro Healthcare Services, Inc.
Mr.&nbsp;Castleman also serves as a director of FemPartners,
Inc., Integrated Diagnostic Centers, Inc. and Radiology Practice
Management, Inc., each of which are privately-held companies.
From December 1999 to July 2001, he served as Chief Executive
Officer of Physia Corp. He served as President of Scripps Clinic
from July 1996 to October 1999. He holds a B.A. in economics
from Yale University and attended New York University Graduate
School of Business Administration.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I>Sidney Braginsky </I></B>has served as a member of our
board of directors since 2001. Since 2001, he has also served as
the Chairman and Chief Executive Officer of Digilab, LLC, a
spectroscopy instruments manufacturer. He served as President of
Olympus America, Chairman of Atropos, Inc., and as a director
for Noven Pharmaceuticals, Inc., as well. Mr.&nbsp;Braginsky
received his B.S. in biology from Queens College.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I>George C. Chryssis </I></B>has served as a member of our
board of directors since 2001. Since 2003, he has served as
President, Chief Executive Officer and Chairman of the Board of
MISTsoft Corp., a privately-held software company which he
founded. Since 2000, he has served as the Managing Member of
Arcadian Capital Management, LLC, and General Partner of
Arcadian Venture Partners, LP, a venture capital firm with
investments in early stage technology companies, including EOS.
Since 2003, he has also served as Chairman of the Board of
Directors of DelCom Corp., a privately-held telecommunications
software company. Mr.&nbsp;Chryssis received a B.S. and M.S. in
electrical engineering from Northeastern University.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I>Martin D. Cleary </I></B>will become a member of our board
of directors upon completion of this offering. Since February
2003, he has served as the President and Chief Executive Officer
of Juvaris Biotherapeutics, Inc., a company engaged in the
development of therapeutic vaccines for cancer and infectious
diseases. From September 1999 to May 2002, he served as the
President and Chief Executive Officer of Genteric, Inc., a
company engaged in non-viral gene delivery. Mr.&nbsp;Cleary
received a B.S. in accounting from Rutgers University in 1971,
and a certificate in international studies from Columbia
University in 1973.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I>Dan W. Lufkin </I></B>has served as a member of our board
of directors since July 2003. He is also a co-founder and former
Chairman of the investment banking firm, Donaldson, Lufkin &#38;
Jenrette, Inc. Mr.&nbsp;Lufkin currently serves as a consultant
to and/or board member of a number of private companies and
non-profit endeavors. Mr.&nbsp;Lufkin received a B.A. degree
from Yale University and an M.B.A. from Harvard Business School.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I>Gerald Wagner, Ph.D. </I></B>was appointed as a member of
our board of directors in May 2005. Since 2002, he has owned and
operated Gerald Wagner Consulting LLC, an international
consulting company specializing in: international project
management; technology and application consulting; and company
assessments. From March 1992 to September 2003, he was a Senior
Vice President, Lab Testing Systems, at Bayer, Inc.
Mr.&nbsp;Wagner received a Masters and Ph.D. in
electro-mechanical design from Technical University, Darmstadt,
Germany.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Board of Directors Composition</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Our current charter documents and the charter documents we
expect to be in effect upon completion of this offering
authorize up to nine (9)&nbsp;directors. We currently have six
(6)&nbsp;directors and expect to have seven&nbsp;(7) directors
upon completion of the initial public offering. Certain of our
current directors were elected pursuant to voting provisions
contained in a voting agreement that we entered into with
certain holders or our
</DIV>

<P align="center" style="font-size: 10pt;">63

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="left" style="font-size: 10pt;">
common stock and preferred stock. Upon the closing of this
offering, the voting agreement will be terminated and none of
our stockholders will have any special rights regarding board
representation.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Board Committees</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Audit Committee.</I> The current members of our audit
committee are Messrs.&nbsp;Braginsky and Lufkin, each of whom we
believe satisfies the independence requirements of the NASDAQ
National Market and the SEC. Mr.&nbsp;Cleary will join the audit
committee upon completion of the offering and will chair the
committee. We believe Mr.&nbsp;Cleary satisfies the independence
requirements of the NASDAQ National Market and the SEC. In
addition, we believe Mr.&nbsp;Cleary is qualified as an audit
committee financial expert under the regulations of the SEC, and
has the accounting and related financial management expertise
required by the NASDAQ National Market. Our audit committee
assists our board in its oversight of:
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    the integrity of our financial statements;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    our independent registered public accounting firm&#146;s
    qualifications and independence; and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    the performance of our independent auditors.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The audit committee has the sole and direct responsibility for
appointing, evaluating and retaining our independent registered
public accounting firm and for overseeing their work. All audit
services to be provided to us and all non-audit services, other
than de minimis non-audit services, to be provided to us by our
independent auditors must be approved in advance by our audit
committee.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Compensation Committee.</I> The members of our compensation
committee are Messrs.&nbsp;Castleman, Braginsky and Chryssis,
each of whom we believe satisfies the independence requirements
of the NASDAQ National Market and the SEC. Mr.&nbsp;Castleman
chairs this committee. The purpose of our compensation committee
is to discharge the responsibilities of our board of directors
relating to compensation of our executive officers. Specific
responsibilities of our compensation committee include:
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    reviewing and recommending compensation of our executive
    officers;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    administering our stock incentive plans; and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    reviewing and recommending incentive compensation and equity
    plans.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Nominating and Governance Committee.</I> The members of our
nominating and governance committee are Messrs.&nbsp;Lufkin and
Castleman, each of whom we believe satisfies the independence
requirements of the NASDAQ National Market. Mr.&nbsp;Lufkin will
chair this committee. Mr.&nbsp;Cleary will join the nominating
and governance committee upon completion of the offering. Our
nominating and governance committee:
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    identifies and recommends nominees for election to our board of
    directors;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    develops and recommends our corporate governance principles; and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    oversees the evaluation of our board of directors and management.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Compensation Committee Interlocks and Insider
Participation</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We did not have a compensation committee until May 2005.
Dr.&nbsp;Gulfo, our Chief Executive Officer, previously
participated in the deliberations regarding executive
compensation. None of our executive officers has served as a
member of the compensation committee, or other committee serving
an equivalent function, of any other entity, one of whose
executive officers served as a member of our compensation
committee.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Election of Directors</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The number of directors is determined by the stockholders at
their annual meeting, subject to the right of the stockholders
to change such number between annual meetings and to the right
of our board to increase such number between annual meetings.
</DIV>

<P align="center" style="font-size: 10pt;">64

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Director Compensation</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
After completion of this offering, in addition to reimbursement
of expenses incurred in attending meetings of our board of
directors and committees of our board, our non-employee
directors will receive an annual fee of $10,000 for serving as
directors and an additional $500 per meeting for each meeting
attended, whether in person or by telephone. In addition, after
completion of this offering, the chairman of our board of
directors, the chairman of our audit committee and the chairman
of our nominating and governance committee will each receive an
annual fee of $10,000. After completion of this offering, each
member of our board who is not a company employee will receive
an annual stock option grant to purchase up to 5,000 shares of
common stock. Such stock options will vest in full upon the
first anniversary of issuance and have an exercise price equal
to the fair market value of our common stock on the date of the
grant. In addition, we reimburse each member of our Board who is
not a company employee for reasonable travel and other expenses
in connection with attending meetings of the Board.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Scientific and Medical Advisory Committee</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We have established a Scientific and Medical Advisory Committee
made up of leading experts in the fields of dermatology and
oncology. Members of our Scientific and Medical Advisory
Committee consult with us regularly on matters relating to:
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    our research and development programs;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    the design and implementation of our clinical trials;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    market opportunities from a clinical perspective;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    new technologies relevant to our research and development
    programs; and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    scientific and technical issues relevant to our business.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The current members of our Scientific and Medical Advisory
Committee are:
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="44%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="53%">&nbsp;</TD>
</TR>

<TR style="font-size: 8pt;">
    <TD align="left" nowrap><B>Name</B></TD>
    <TD>&nbsp;</TD>
    <TD align="center" nowrap><B>Professional Affiliation</B></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Jeffrey P. Callen, M.D.</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">
    Professor and Chief of the Division of Dermatology, University
    of Louisville School of Medicine; Member of the Board of
    Directors of the American Board of Dermatology, Inc.</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Armand B. Cognetta, Jr., M.D.</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">
    Dermatologist in private practice with Dermatology Associates of
    Tallahasee; Member, American Academy of Dermatology; former
    President of Florida Society of Dermatology; former President of
    Dermatology Photography Society.</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Robert Friedman, M.D.</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">
    Clinical Assistant Professor, Department of Dermatology, New
    York University School of Medicine; Past Director, American
    Cancer Society, New York City Division, and Member, Professional
    Education Committee; American Academy of Dermatology: Member,
    Skin Cancer/ Melanoma Committee, Past Chairman, Industry Liaison
    Committee.</TD>
</TR>

</TABLE>
</CENTER>

<P align="center" style="font-size: 10pt;">65

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; ">

<TR style="font-size: 1pt;">
    <TD width="44%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="53%">&nbsp;</TD>
</TR>

<TR style="font-size: 8pt;">
    <TD align="left" nowrap><B>Name</B></TD>
    <TD>&nbsp;</TD>
    <TD align="center" nowrap><B>Professional Affiliation</B></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Alfred W. Kopf, M.D.</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">
    Clinical Professor of Dermatology at New York University School
    of Medicine; Head of the Oncology Section of the Skin and Cancer
    Unit at New York University Medical Center; member of the Board
    of Directors of the International Foundation for Dermatology;
    Past President, American Academy of Dermatology; Past President,
    American Board of Dermatology; Past President, American
    Dermatological Association; and Past Chairman of the Board of
    Directors, International Foundation for Dermatology.</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Martin C. Mihm, Jr., M.D.</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">
    Professor and Chief of Dermatopathology at Harvard Medical
    School; Chief of Dermatopathology at Massachusetts General
    Hospital; Co-Director of the Pigmented Skin Lesion Clinic at
    Massachusetts General Hospital; Co-Chairman of the Melanoma
    Pathology Program of the World Health Organization; Co-Director
    of the Rare Tumor Institute of the World Health Organization;
    member of the editorial and advisory board of the American
    Journal of Dermatopathology and the International Journal of
    Surgical Pathology; Member of the American Academy of
    Dermatology; New England Pathology Society; American Society of
    Dermatopathology; American Society of Clinical Oncology; and
    College of American Pathologists.</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Harold S. Rabinovitz, M.D.</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">
    Dermatologist in private practice with Skin and Cancer
    Associates in Plantation, Florida; Voluntary Professor of
    Dermatology at the University of Miami-School of Medicine;
    Associate Editor of the Journal of Dermatologic Surgery; member
    of the Board of Directors of the South Florida Dermatology
    Foundation.</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Darrell S. Rigel, M.D.</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">
    Clinical Professor of Dermatology, New York University Medical
    Center; Secretary and Treasurer of the American Dermatological
    Association; Past President, American Academy of Dermatology;
    Member, Board of Directors of the American Cancer Society New
    York City Division and Chairman of its Subcommittee on Skin
    Cancer.</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Arthur J. Sober, M.D.</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">
    Professor of Dermatology, Harvard Medical School; Member,
    American Joint Commission on Cancer.</TD>
</TR>

</TABLE>
</CENTER>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Medical Advisor and Liaison to Our Board of Directors</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Robert Friedman, M.D., a member of our Scientific and Medical
Advisory Committee, serves as a medical advisor to our board of
directors and a liaison between our Scientific and Medical
Advisory Committee and our board of directors. See
&#147;Consulting Agreements&nbsp;&#151; Consulting Agreement
with Robert Friedman, M.D.&#148;
</DIV>

<P align="center" style="font-size: 10pt;">66

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Executive Compensation</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The following table sets forth summary compensation information
for the years ended December&nbsp;31, 2002, December&nbsp;31,
2003 and December&nbsp;31, 2004 for our chief executive officer
and each of our two other most highly compensated executive
officers whose salary and bonus for 2004 was more than $100,000.
As of December&nbsp;31, 2004, there were no other persons
serving as executive officers. We have also included summary
compensation information for two executive officers who would
have been among the four other most highly compensated executive
officers whose salary and bonus for 2004 would have been more
than $100,000 had they served as executive officers for the full
year. We refer to these officers collectively as our named
executive officers.
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Summary Compensation Table</B>
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="3%">&nbsp;</TD>
    <TD width="39%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="7">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Long Term</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>Annual Compensation</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Compensation</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="7">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Securities</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="7">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Underlying</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>All Other</B></TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="2" align="left" nowrap><B>Name and Principal Position</B></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Year</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Salary ($)</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Bonus ($)</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Options</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Compensation</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Joseph V. Gulfo, M.D.&nbsp;</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2004</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>173,656</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>81,753</TD>
    <TD align="left" valign="bottom" nowrap>(1)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>19,880</TD>
    <TD align="left" valign="bottom" nowrap>(1)</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    President and Chief</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2003</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Executive Officer</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2002</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Marek Elbaum, Ph.D.&nbsp;</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2004</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>173,549</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>10,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Founder and former Chief Science</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2003</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>81,085</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>29,071</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    and Technology Officer</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2002</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>30,204</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    William Bronner</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2004</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>132,612</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>37,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Vice President, Legal Counsel</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2003</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>106,255</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>32,161</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    and Compliance</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2002</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>26,444</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,875</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Karen Krumeich(2)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2004</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>60,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Vice President Finance, Chief</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2003</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Financial Officer</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2002</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Jon I. Klippel(3)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2004</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>9,346</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>45,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Vice President Marketing</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2003</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    and Sales</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2002</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
</TR>

</TABLE>
</CENTER>

<DIV align="left" style="font-size: 3pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<DIV style="width: 18%; border-top: 1.0pt solid black; font-size: 1pt">&nbsp;</DIV>
</DIV>

<DIV style="margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="4%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>(1)&nbsp;</TD>
    <TD align="left">
    Dr.&nbsp;Gulfo has been granted another stock option which is
    not reflected in this table because the number of shares
    purchasable under the option can only be calculated at the time
    of PMA approval of MelaFind&#174;. The number of shares granted
    under this option is equal to that number of shares of our
    common stock equal to four percent of our fully-diluted capital
    stock at that time of PMA approval of MelaFind&#174; minus
    81,753 shares of our common stock. The exercise price of this
    option is $0.46 per share.</TD>
</TR>

<TR>
    <TD style="font-size: 3pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>(2)&nbsp;</TD>
    <TD align="left">
    Ms.&nbsp;Krumeich&#146;s employment with us began in January
    2005 at an annual salary of $165,000.</TD>
</TR>

<TR>
    <TD style="font-size: 3pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>(3)&nbsp;</TD>
    <TD align="left">
    Mr.&nbsp;Klippel&#146;s employment with us began in December
    2004 at an annual salary of $135,000.</TD>
</TR>

</TABLE>

<P align="center" style="font-size: 10pt;">67

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Stock Options Granted in 2004</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The following table provides information regarding stock options
granted during 2004 to the named executive officers in that
period. We have not granted any stock appreciation rights.
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 9pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="21%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
</TR>


<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>Potential Realizable Value of</B></TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>Assumed Annual Rates of Stock</B></TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Number of</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>% of Total Options</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>Price Appreciation for Option</B></TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Securities</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Granted to</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Exercise or Base</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>Term(2)</B></TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Underlying</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Employees in</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Price Per</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Expiration</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD align="left" nowrap><B>Name</B></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Options Granted</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Fiscal Year</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Share(1)</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Date</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>5%</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>10%</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Joseph V. Gulfo, M.D.(3)&nbsp;</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>75,227</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>11.07</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>0.46</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2/02/09</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;&nbsp;&nbsp;<FONT face="wingdings">l</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;&nbsp;&nbsp;<FONT face="wingdings">l</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>6,526</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>0.09</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>0.46</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2/02/09</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;&nbsp;&nbsp;<FONT face="wingdings">l</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;&nbsp;&nbsp;<FONT face="wingdings">l</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Marek Elbaum, Ph.D.(4)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>10,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1.47</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>0.46</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2/02/09</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;&nbsp;&nbsp;<FONT face="wingdings">l</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;&nbsp;&nbsp;<FONT face="wingdings">l</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Karen Krumeich</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>60,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>8.82</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>0.46</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>12/17/09</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;&nbsp;&nbsp;<FONT face="wingdings">l</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;&nbsp;&nbsp;<FONT face="wingdings">l</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    William R. Bronner</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>17,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2.50</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>0.46</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2/02/09</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;&nbsp;&nbsp;<FONT face="wingdings">l</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;&nbsp;&nbsp;<FONT face="wingdings">l</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>20,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2.94</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>0.46</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>12/17/09</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;&nbsp;&nbsp;<FONT face="wingdings">l</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;&nbsp;&nbsp;<FONT face="wingdings">l</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Jon I. Klippel</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>45,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>6.62</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>0.46</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>12/17/09</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;&nbsp;&nbsp;<FONT face="wingdings">l</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;&nbsp;&nbsp;<FONT face="wingdings">l</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

</TABLE>
</CENTER>

<DIV align="left" style="font-size: 3pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<DIV style="width: 18%; border-top: 1.0pt solid black; font-size: 1pt">&nbsp;</DIV>
</DIV>

<DIV style="margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="5%"></TD>
    <TD width="95%"></TD>
</TR>

<TR valign="top">
    <TD>(1)</TD>
    <TD align="left">
    Exercise price is equal to the fair market value on the date of
    grant as determined by our board of directors.</TD>
</TR>

<TR>
    <TD style="font-size: 3pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>(2)</TD>
    <TD align="left">
    The dollar amounts under these columns are the result of
    calculations at rates set by the SEC and, therefore, are not
    intended to forecast possible future appreciation, if any, in
    the price of the underlying common stock. The potential
    realizable values are calculated using an assumed initial public
    offering price of
    $&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face="wingdings">l</FONT>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;per
    share, the mid-point of our filing range, and assuming that the
    market price appreciates from this price at the indicated rate
    for the entire term of each option and that each option is
    exercised and sold on the last day of its term at the assumed
    appreciated price. Actual gains, if any, on stock option
    exercises depend on the future performance of the common stock
    and overall stock market conditions. The amounts reflected in
    the following table may not necessarily be achieved.</TD>
</TR>

<TR>
    <TD style="font-size: 3pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>(3)</TD>
    <TD align="left">
    Dr.&nbsp;Gulfo has been granted another stock option which is
    not reflected in this table because the number of shares
    purchasable under the option can only be calculated at the time
    of PMA approval of MelaFind&#174;. The number of shares granted
    under this option is equal to that number of shares of our
    common stock equal to four percent of our fully-diluted capital
    stock at that time of PMA approval of MelaFind&#174; minus
    81,753 shares of our common stock.</TD>
</TR>

</TABLE>

<DIV style="margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="4%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>(4)&nbsp;</TD>
    <TD align="left">
    Formerly our Chief Science and Technology Officer.</TD>
</TR>

</TABLE>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Aggregated Option Exercises in 2004 and Year-End Option
    Values</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The following table provides information about the number of
shares issued upon option exercises by our named executive
officers as of December&nbsp;31, 2004 and the value realized by
our named executive officers. The table also provides
information about the number and value of options held by our
named executive officers at December&nbsp;31, 2004.
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="40%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
</TR>


<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>Number of Unexercised</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="7">&nbsp;</TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>Securities Underlying</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>Value of Unexercised</B></TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>Options at</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>In-the-Money Options at</B></TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>December 31, 2004</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>December 31, 2004(1)</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD align="left" nowrap><B>Name</B></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Exercisable</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Unexercisable</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Exercisable</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Unexercisable</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Joseph V. Gulfo, M.D.(2)&nbsp;</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>71,535</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>10,218</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;&nbsp;&nbsp;<FONT face="wingdings">l</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;&nbsp;&nbsp;<FONT face="wingdings">l</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Marek Elbaum, Ph.D.(3)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>14,070</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>25,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;&nbsp;&nbsp;<FONT face="wingdings">l</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;&nbsp;&nbsp;<FONT face="wingdings">l</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Karen Krumeich</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>60,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;&nbsp;&nbsp;<FONT face="wingdings">l</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;&nbsp;&nbsp;<FONT face="wingdings">l</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    William R. Bronner</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>49,160</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>21,875</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;&nbsp;&nbsp;<FONT face="wingdings">l</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;&nbsp;&nbsp;<FONT face="wingdings">l</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Jon I. Klippel</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>45,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;&nbsp;&nbsp;<FONT face="wingdings">l</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;&nbsp;&nbsp;<FONT face="wingdings">l</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

</TABLE>
</CENTER>

<P align="center" style="font-size: 10pt;">68

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="left" style="font-size: 3pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<DIV style="width: 18%; border-top: 1.0pt solid black; font-size: 1pt">&nbsp;</DIV>
</DIV>

<DIV style="margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="4%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>(1)&nbsp;</TD>
    <TD align="left">
    There was no public trading market for our common stock as of
    December&nbsp;31, 2004. Accordingly, as permitted by the rules
    of the SEC, we have calculated the value of unexercised
    in-the-money options assuming an initial public offering price
    of
    $&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face="wingdings">l</FONT>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;per
    share, the mid-point of our filing range, less the aggregate
    exercise price, without taking into account any taxes that might
    be payable in connection with the transaction.</TD>
</TR>

<TR>
    <TD style="font-size: 3pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>(2)&nbsp;</TD>
    <TD align="left">
    Dr.&nbsp;Gulfo has been granted another stock option which is
    not reflected in this table because the number of shares
    purchasable under the option can only be calculated at the time
    of PMA approval of MelaFind&#174;. The number of shares granted
    under this option is equal to that number of shares of our
    common stock equal to four percent of our fully-diluted capital
    stock at that time of PMA approval of MelaFind&#174; minus
    81,753 shares of our common stock.</TD>
</TR>

<TR>
    <TD style="font-size: 3pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>(3)&nbsp;</TD>
    <TD align="left">
    Formerly our Chief Science and Technology Officer.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Equity Compensation Plans</B>
</DIV>

<DIV style="margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>2005 Stock Incentive Plan</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In 2005, we adopted our 2005 Stock Incentive Plan (2005 Plan).
The 2005 Plan permits the granting of awards to key employees,
directors, officers, consultants and scientific collaborators in
the form of incentive or nonqualified stock options and
equity-based awards. Stock options granted under the 2005 Plan
may be &#147;incentive stock options&#148; meeting the
requirements of Section&nbsp;422 of the Code or nonqualified
stock options, which do not meet the requirements of
Section&nbsp;422. Stock awards granted under the 2005 Plan to
eligible participants may take the form of the issuance and
transfer to the recipient of shares of common stock or a grant
of stock units representing a future right to such shares of
common stock. As of the date of this offering, there are
1,000,000 shares of our common stock authorized and reserved for
issuance upon exercise of options which may be granted under the
2005 Plan and no options or other equity based awards have been
issued under the 2005 Plan. Pursuant to the 2005 Plan on each of
January&nbsp;1, 2006 and January&nbsp;1, 2007, the number of
shares of common stock authorized for issuance will be
automatically increased by an amount equal to 3% of the then
outstanding shares of common stock unless the board decides to
reduce the amount of the increase.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>2003 Stock Incentive Plan</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In 2003, we adopted our 2003 Stock Incentive Plan, as amended
(2003 Plan). The 2003 Plan permitted the granting of awards to
our employees and other key persons (including directors,
officers, consultants and scientific collaborations) in the form
of restricted stock, and incentive or nonqualified stock
options. Stock options granted under the 2003 Plan may be
&#147;incentive stock options&#148; meeting the requirements of
Section&nbsp;422 of the Code or nonqualified stock options which
do not meet the requirements of Section&nbsp;422. As of
May&nbsp;15, 2005, options to purchase 639,697 shares of our
common stock are outstanding under the 2003 Plan. No options or
other equity-based awards have been granted under the 2003 Plan
since the adoption of the 2005 Plan, and no further options or
other equity-based awards are issuable under the 2003 Plan. As
of May&nbsp;15, 2005, no options granted under the 2003 Plan
have been exercised.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>1996 Stock Option Plan</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In 1996, we adopted our 1996 Stock Option Plan (1996 Plan). The
1996 Plan permitted the granting of awards to our officers, key
employees, directors and collaborating scientists in the form of
incentive or nonqualified stock options. Stock options granted
under the 1996 Plan may be &#147;incentive stock options&#148;
meeting the requirements of Section&nbsp;422 of the Code or
nonqualified stock options which do not meet the requirements of
Section&nbsp;422. Since the adoption of the 2003 Plan, we have
not granted any stock options under the 1996 Plan. As of
May&nbsp;15, 2005, options to purchase 260,178 shares of our
common stock are outstanding under the 1996 Plan. No further
options or other equity-based awards are issuable under the 1996
Plan. As of May&nbsp;15, 2005, no options granted under the 1996
Plan have been exercised.
</DIV>

<P align="center" style="font-size: 10pt;">69

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Employment Agreement</B>
</DIV>

<DIV style="margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I>Employment Agreement with Joseph V. Gulfo, M.D.</I></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
On January&nbsp;5, 2004, we entered into an employment agreement
with Dr.&nbsp;Joseph&nbsp;V. Gulfo, our President and Chief
Executive Officer. Pursuant to the agreement, Dr.&nbsp;Gulfo is
required to devote substantially all of his business time,
attention and efforts to the performance of his duties under the
agreement. The initial term of the employment agreement extends
until December&nbsp;31, 2005 and will automatically renew for
successive twelve-month (12)&nbsp;terms unless either party
sends a written notice of termination within 90&nbsp;days of the
expiration of the initial term or renewal term, as the case may
be.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The employment agreement provides Dr.&nbsp;Gulfo with an annual
base salary of $175,000 subject to periodic review by our board
of directors. Our board of directors has determined that
Dr.&nbsp;Gulfo was entitled to a review and salary increase in
an amount to be agreed by Dr.&nbsp;Gulfo and the Company as a
result of the equity financing consummated in October 2004, but
to date our board of directors has not conducted a review or
granted a salary increase. Dr.&nbsp;Gulfo is also entitled to
receive yearly bonuses at the discretion of our board of
directors. The target for such bonuses is 50% of
Dr.&nbsp;Gulfo&#146;s then current base salary.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In addition, Dr.&nbsp;Gulfo is entitled to be reimbursed for
certain travel expenses up to $1,100 per month, $2,000 per month
for lodging expenses and for certain communication expenses,
including cellular phone service and broadband internet service.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
If Dr.&nbsp;Gulfo&#146;s employment is terminated by us without
cause or Dr.&nbsp;Gulfo resigns for good reason, then
Dr.&nbsp;Gulfo would be entitled to receive severance pay equal
to 15&nbsp;months of his then current base salary and, if
Dr.&nbsp;Gulfo is then covered by health insurance provided by
us, the cost to Dr.&nbsp;Gulfo of COBRA coverage for
15&nbsp;months. If we elect not to renew Dr.&nbsp;Gulfo&#146;s
employment agreement, Dr.&nbsp;Gulfo is entitled to an amount
equal to his then current base salary for nine months and, if
Dr.&nbsp;Gulfo is covered by our health insurance policy at such
time, the cost of COBRA for nine months (subject to reduction to
the extent Dr. Gulfo received comparable benefits from a
subsequent employer during such nine month period).
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Dr.&nbsp;Gulfo is subject to a non-compete covenant upon
termination of his employment by us or him. The term of
Dr.&nbsp;Gulfo&#146;s non-compete covenant is one (1)&nbsp;year,
which can be extended to two (2)&nbsp;years in the event we
elect to pay him additional severance equal to twelve
(12)&nbsp;months of his base salary at the time of termination
and his most recent bonus (if any).
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The employment agreement provides for three separate grants of
stock options. As of May&nbsp;15, 2005, the first two stock
option grants for the purchase of a total of 81,753 shares of
our common stock at an exercise price of $0.46 per share have
fully vested. The number of shares of our common stock subject
to the third stock option can only be calculated at the time of
PMA approval of MelaFind&#174;. The number of shares purchasable
under this option at an exercise price of $0.46 per share is
equal to that number of shares of our common stock equal to four
percent of our fully-diluted capital stock at the time of PMA
approval of MelaFind&#174; minus the number of shares of common
stock underlying options granted to Dr.&nbsp;Gulfo under the
employment agreement, which is 81,753. Assuming
that &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face="wingdings">l</FONT>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
are outstanding as of the completion of this offering and remain
the total number of shares outstanding on the date we receive
PMA approval of MelaFind&#174;(assuming in both cases the
exercise of all outstanding options and warrants and the
conversion of all convertible securities), the number of shares
subject to this option would
be &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face="wingdings">l</FONT>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;.
This third stock option grant vests 50% at the time of PMA
approval of MelaFind&#174;, and the remaining 50% vests in four
equal installments over the one year period following such PMA
approval of MelaFind&#174;.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Consulting Agreements</B>
</DIV>

<DIV style="margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I>Consulting Agreement with Breaux Castleman</I></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In June 2003, we entered into a consulting agreement with Breaux
Castleman for consulting services related to FDA approval of
MelaFind&#174;, administrative matters, financial reporting, and
our business and financial strategy. Under this agreement,
Mr.&nbsp;Castleman receives compensation for each month of
services rendered. During 2003 Mr.&nbsp;Castleman was paid at
the rate of $8,000 for each month of services rendered and
thereafter from 2004 onward he has been paid at the rate of
$2,000 for each month of services rendered. We
</DIV>

<P align="center" style="font-size: 10pt;">70

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="left" style="font-size: 10pt;">
made payments pursuant to this consulting agreement of $48,000
in 2003, $22,000 in 2004, and $12,000 in 2005. These payments
did not exceed $60,000 in any twelve-month period since June
2003. In connection with our consulting agreement with
Mr.&nbsp;Castleman, we granted Mr.&nbsp;Castleman a restricted
stock award of 75,000 shares of our common stock under our 2003
Plan for an aggregate purchase price of $34,500.
Mr.&nbsp;Castleman issued an interest-bearing promissory note in
the principal amount of $34,500 as payment for these shares. To
date, no payments have been made under this note. Our consulting
agreement with Mr.&nbsp;Castleman is terminable by either party
on 30&nbsp;days&#146; written notice.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I>Consulting Agreement with Marek Elbaum, Ph.D.</I></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Pursuant to a consulting agreement effective as of May&nbsp;31,
2005, we retained Marek Elbaum, Ph.D., our founder and former
Chief Science and Technology Officer, as our Chief Scientist to
provide services relating to the integration of our product
development, mentoring and advising our staff scientists,
providing new product vision, supporting of our research and
development and providing such other services as assigned to him
by our Chief Executive Officer. Pursuant to the consulting
agreement, Dr.&nbsp;Elbaum will provide us with a majority of
his business time in consideration of a monthly fee of
approximately $14,500. The term of such agreement extends for a
period of two years and is automatically renewable for an
additional one year period unless either Dr.&nbsp;Elbaum or we
decide to not so renew. In the event of a non-renewal, and in
the event that Dr.&nbsp;Elbaum&#146;s services terminate as a
result of his death or disability, we will pay to
Dr.&nbsp;Elbaum a termination fee of $100,000. In addition, upon
termination of the consulting agreement for any reason other
than a termination by us for cause, we will pay to
Dr.&nbsp;Elbaum for 18&nbsp;months an amount equal to what
Dr.&nbsp;Elbaum would have had to pay to extend his insurance
coverage under COBRA. Dr.&nbsp;Elbaum is subject to a
non-compete covenant during the term of the consulting agreement
and for a period of two years after the term of the consulting
agreement. We have also agreed that all stock options previously
granted to Dr.&nbsp;Elbaum will continue to vest in accordance
with their original terms.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I>Consulting Agreement with Robert Friedman, M.D.</I></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Pursuant to a consulting agreement effective as of June&nbsp;1,
2005, we have retained the services of Robert Friedman, M.D. for
an initial term of one year as a consultant, medical advisor to
our board of directors, and as a liaison between our board of
directors and our Scientific and Medical Advisory Committee, and
in connection with the clinical testing of MelaFind&#174;. In
consideration of rendering of these services, Dr.&nbsp;Friedman
will be paid at a rate of $5,000 per day (assuming an eight-hour
day) for up to 30&nbsp;days of service. The consulting agreement
is automatically renewed for successive one-year terms unless
either party terminates the agreement at least 30&nbsp;days
prior to the expiration of the agreement.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I>Consulting Agreement with Gerald Wagner, Ph.D.</I></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Pursuant to a consulting agreement dated as of June&nbsp;1, 2005
with Gerald Wagner Consulting LLC (GWC), a company owned and
operated by Dr.&nbsp;Gerald Wagner, GWC has agreed to direct our
MelaFind&#174; product development efforts and oversee the
manufacturing process for a period that began June&nbsp;1, 2005
and ends three months following the initiation of our pivotal
clinical trial of MelaFind&#174;. The consulting agreement
provides for a flat fee of $150,000, payable ratably over the
course of the term, and the grant to Dr.&nbsp;Wagner immediately
after completion of this offering of a non-qualified stock
option to purchase up to 50,000 shares of our common stock at
the public offering price per share.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Limitation of Liability and Indemnification of Directors and
Officers</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Our fourth amended and restated certificate of incorporation and
third amended and restated bylaws provide that we will indemnify
our directors and executive officers and may indemnify our other
officers and employees and other agents to the fullest extent
permitted by law. Our fourth amended and restated certificate of
incorporation and third amended and restated bylaws also permit
us to secure insurance on behalf of any officer, director,
employee or other agent for any liability arising out of his or
her actions in such capacity, regardless of whether the bylaws
would permit indemnification. We maintain directors&#146; and
officers&#146;
</DIV>

<P align="center" style="font-size: 10pt;">71

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="left" style="font-size: 10pt;">
liability insurance. We believe that these provisions and
agreements are necessary to attract and retain qualified persons
as directors and executive officers.
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>RELATED PARTY TRANSACTIONS</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We also describe below certain other transactions with our
directors, executive officers and stockholders.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</B><I>Common Stock</I>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In June 2003, we sold 75,000 shares of our common stock at a
price of $0.46 per share to Dr.&nbsp;Robert Friedman, a former
member of our board of directors, and 75,000 shares of our
common stock at a price of $0.46 per share to Breaux Castleman,
a member of our board of directors, and the chairman of our
board. In May 2004, we issued 125,000 shares of our common stock
at a per share purchase price of $0.46 to investors who loaned
an aggregate of $1,000,000 to EOS, which loans were evidenced by
convertible promissory notes, all of which converted into shares
of our series&nbsp;C preferred stock on October&nbsp;26, 2004.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</B><I>Preferred Stock</I>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
All share numbers and share prices presented below for our
preferred stock do not reflect the 1-for-2 reverse stock split
approved by our board of directors on May&nbsp;13, 2005 with
respect to our common stock. The reverse split will be effective
after the conversion of our preferred stock and thus the shares
of our common stock into which our preferred stock will convert
will be subject to the reverse stock split.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In 1998, we issued 198,000 shares of our series&nbsp;A preferred
stock at a per share purchase price of $5.00 to 22 accredited
investors for an aggregate consideration of $990,000. All shares
of series&nbsp;A preferred stock will convert into an aggregate
of 115,201 shares of our common stock upon completion of this
offering.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In 2000 and 2001, we issued an aggregate of 947,986 shares of
our series&nbsp;B preferred stock in three transactions at per
share purchase prices of $5.1282 and $6.50 to 149 accredited
investors for an aggregate consideration of $5,894,409. The
rights of the holders of series&nbsp;B preferred stock were
identical except for the purchase prices paid for such stock.
The purchasers of our series&nbsp;B preferred stock included
Arcadian Venture Partners L.P., a venture fund with which George
C. Chryssis, a member of our board of directors, is affiliated,
and Double D Venture Fund, LLC, a venture fund with which Sidney
Braginsky, a member of our board of directors, is affiliated.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
On June&nbsp;20, 2003, we issued an aggregate of 45,000 shares
of our series&nbsp;B preferred stock to the original
series&nbsp;B preferred stock investors in consideration of
certain amendments to their investment agreements, bringing the
total number of shares of our series&nbsp;B preferred stock
outstanding to 992,986. All shares of our series&nbsp;B
preferred stock will convert into an aggregate of 575,532 shares
of our common stock upon completion of this offering.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
From June 2003 to October 2004, we sold an aggregate of
5,414,779 shares of our series&nbsp;C preferred stock (together
with warrants to purchase an aggregate of 2,610,643 shares of
our common stock, all of which warrants will be converted into
an aggregate of 1,305,313 shares of our common stock pursuant to
the warrant exchange described below under &#147;Warrants to
Purchase Common Stock&#148;) to 73 accredited investors for an
aggregate consideration of $12,191,480. These investors
included: Breaux Castleman, a member of our board of directors
and chairman of our board; Dr.&nbsp;Robert Friedman, a member of
our scientific and medical advisory committee and former member
of our board of directors; Double D Venture Fund, LLC, a venture
fund with which Sidney Braginsky, a member of our board of
directors, is affiliated; and Dan W. Lufkin, a member of our
board of directors. All shares of our series&nbsp;C preferred
stock will convert into an aggregate of 2,707,372 shares of our
common stock upon completion of this offering.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</B><I>Warrants to Purchase
Preferred Stock</I>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In June 2003, we issued a warrant to purchase up to 24,890
shares of our series&nbsp;C preferred stock at an exercise price
of $2.26 per share to Koji Miyazaki, one of our series&nbsp;C
preferred stock investors.
</DIV>

<P align="center" style="font-size: 10pt;">72

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In February 2004, we issued a warrant to purchase up to 121,681
shares of our series&nbsp;C preferred stock with an exercise
price $2.26 per share to Health Partners I, LLC (HP I). In
November 2004, HP I was dissolved and this warrant, together
with all shares of our series&nbsp;C preferred stock and
warrants to purchase our common stock previously issued to HP I,
were distributed to HP I&#146;s members, which included:
Dr.&nbsp;Robert Friedman, a member of our scientific and medical
advisory committee and a former member of our board of
directors; Breaux Castleman, a member of our board of directors
and chairman of our board; and Dan W. Lufkin, a member of our
board of directors. Assuming conversion of our preferred stock
immediately prior to completion of this offering, these warrants
and the warrant issued to Mr.&nbsp;Miyazaki will be exercisable
for an aggregate of 73,280 shares of our common stock at an
exercise price of $4.52 per share.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</B><I>Warrants to Purchase
Common Stock</I>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Prior to the closing of this offering, we will consummate an
exchange of warrants to purchase our common stock for shares of
our common stock under a plan of recapitalization to be adopted
by our board of directors. During the period from June 2003
through October 2004, we issued warrants to purchase an
aggregate of up to 2,610,643 shares of our common stock to
certain holders of our series&nbsp;C preferred stock. All of
these warrants have an exercise price of $13.00 per share. In
June 2003, we also issued a warrant to Dr.&nbsp;Marek Elbaum,
our former Chief Science and Technology Officer, to purchase up
to 25,000 shares of our common stock at per share exercise price
of $13.00. In December 2004, we issued a warrant to Allen &#38;
Company LLC to purchase up to 75,000 shares of our common stock
at an exercise price of $7.00 per share (Allen &#38; Company
Warrant) in consideration of Allen &#38; Company&#146;s
agreement to provide certain advisory services to us. Warrants
to purchase a total of 2,610,643 shares of our common stock will
be exchanged for a total of 1,305,321 shares of our common stock
based on an exchange ratio of one share of our common stock for
every two shares of our common stock purchasable under the
warrants (Warrant Exchange).
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
After completion of the Warrant Exchange, the only warrants that
will remain outstanding as of the date of this offering are the
Allen &#38; Company Warrant, the underwriters&#146; warrant (see
&#147;Underwriting&#148;) and warrants to purchase an aggregate
of 146,571 shares of our series&nbsp;C preferred stock, which
assuming conversion of our preferred stock will be exercisable
for an aggregate of 73,280 shares of our common stock.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</B><I>Options</I>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
From inception to May&nbsp;15, 2005, we have granted on
aggregate of 523,489 options to our current directors and named
executive officers, with exercise prices ranging from $0.46 to
$10.00 per share.
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>PRINCIPAL STOCKHOLDERS</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The following tables set forth as of May&nbsp;15, 2005, and as
adjusted to reflect the sale of the shares offered hereby,
certain information regarding beneficial ownership of our common
stock by:
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    each person or group of affiliated persons known to us to
    beneficially own more than 5% of our common stock;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    each named executive officer;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    each of our directors; and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    all of our executive officers and directors as a group.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The percentage of ownership indicated in the following table is
based on 6,513,164 shares of common stock outstanding on
May&nbsp;15, 2005 and <FONT face="wingdings">l</FONT> shares of
common stock outstanding immediately following the completion of
this offering, each of which assumes the conversion of all
outstanding shares of our preferred
</DIV>

<P align="center" style="font-size: 10pt;">73
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="left" style="font-size: 10pt;">
stock and consummation of the Warrant Exchange. The table
assumes no exercise of the underwriters&#146; over-allotment
option.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Information with respect to beneficial ownership has been
furnished by each director, officer, beneficial owner of more
than 5% of our common stock or selling stockholder and is
determined in accordance with the rules of the SEC. Except as
indicated by footnote and subject to community property laws
where applicable, to our knowledge, the persons named in the
table below have sole voting and investment power with respect
to all shares of common stock shown as beneficially owned by
them. In computing the number of shares beneficially owned by a
person and the percentage of ownership of that person, shares of
common stock subject to options or warrants held by that person
that are currently exercisable or will become exercisable within
60&nbsp;days after May&nbsp;15, 2005 are deemed outstanding,
while such shares are not deemed outstanding for purposes of
computing percentage ownership of any other person.
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="3%">&nbsp;</TD>
    <TD width="45%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
</TR>


<TR style="font-size: 8pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>Number of</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>Shares of Common</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="7">&nbsp;</TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>Stock Beneficially</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>Percentage of Shares</B></TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>Owned</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>Beneficially Owned</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Options and</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="7">&nbsp;</TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Warrants</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="7">&nbsp;</TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Exercisable</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="7">&nbsp;</TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Within 60</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Before the</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>After the</B></TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="2" align="left" nowrap><B>Name of Beneficial Owner</B></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Shares</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Days</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Offering</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Offering</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <B>Named Executive Officers</B></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Joseph V. Gulfo, M.D.&nbsp;</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>81,753</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1.2</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="wingdings">l</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Marek Elbaum, Ph.D.(1)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>462,500</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>14,070</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>7.3</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="wingdings">l</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Karen Krumeich</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>60,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>*</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="wingdings">l</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    William R. Bronner</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>4,850</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>70,285</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1.1</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="wingdings">l</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Jon I. Klippel</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>45,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>*</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="wingdings">l</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="18">&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <B>Directors</B></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Breaux Castleman</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>91,570</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>6,168</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1.5</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="wingdings">l</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Sidney Braginsky(2)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>51,500</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>*</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="wingdings">l</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    George C. Chryssis(3)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>94,717</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>12,500</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1.6</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="wingdings">l</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Dan W. Lufkin(4)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>356,231</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>29,187</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5.9</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="wingdings">l</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    All directors and named executive</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    officers as a group (all 9 persons)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,061,368</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>323,963</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>20.3</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="wingdings">l</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="18">&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <B>Holders of more than 5%</B></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Patricia and Stanley Brilliant(5)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>349,532</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2,342</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5.4</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="wingdings">l</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Caremi Partners Ltd.(6)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>917,767</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>11,693</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>14.2</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="wingdings">l</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Eric Dobkin(7)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>351,523</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>7,015</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5.5</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="wingdings">l</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

</TABLE>
</CENTER>

<DIV align="left" style="font-size: 3pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<DIV style="width: 18%; border-top: 1.0pt solid black; font-size: 1pt">&nbsp;</DIV>
</DIV>

<DIV style="margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="5%"></TD>
    <TD width="95%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp; *&nbsp;&nbsp;</TD>
    <TD align="left">
    Less than one percent.</TD>
</TR>

</TABLE>

<DIV style="margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="4%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>(1)&nbsp;</TD>
    <TD align="left">
    Marek Elbaum, Ph.D. resigned as a director and our Chief Science
    and Technology Officer effective as of May&nbsp;31, 2005.</TD>
</TR>

<TR>
    <TD style="font-size: 3pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>(2)&nbsp;</TD>
    <TD align="left">
    Includes 51,500 shares of common stock held by Double D Venture
    Fund, LLC, an investment fund with which Mr.&nbsp;Braginsky is
    affiliated. Mr. Braginsky expressly disclaims ownership of these
    shares.</TD>
</TR>

<TR>
    <TD style="font-size: 3pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>(3)&nbsp;</TD>
    <TD align="left">
    Includes 94,717 shares of common stock held by Arcadian Venture
    Partners, L.P., an investment fund with which Mr.&nbsp;Chryssis
    is affiliated. Mr. Chryssis expressly disclaims ownership of
    these shares.</TD>
</TR>

<TR>
    <TD style="font-size: 3pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>(4)&nbsp;</TD>
    <TD align="left">
    Includes 140,570 shares of common stock held by trusts the
    beneficiaries of which are family members of Mr.&nbsp;Lufkin and
    5,840 shares of common stock issuable upon exercise of
    Series&nbsp;C preferred stock warrants. Mr.&nbsp;Lufkin
    expressly disclaims ownership of the shares held by these trusts.</TD>
</TR>

<TR>
    <TD style="font-size: 3pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>(5)&nbsp;</TD>
    <TD align="left">
    Patricia and Stanley Brilliant are husband and wife. Their
    business address is: 180 East End Avenue, Apt.&nbsp;4A, New
    York, NY 10128.</TD>
</TR>

</TABLE>

<P align="center" style="font-size: 10pt;">74

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV style="margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="4%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>(6)&nbsp;</TD>
    <TD align="left">
    The business address of Caremi Partners, Ltd. is: c/o Steven B.
    Ruchefsky, 2 American Lane, Greenwich, CT 06836.</TD>
</TR>

<TR>
    <TD style="font-size: 3pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>(7)&nbsp;</TD>
    <TD align="left">
    The business address of Eric Dobkin is: 160 Old Church Lane,
    Pound Ridge, NY 10576.</TD>
</TR>

</TABLE>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>DESCRIPTION OF CAPITAL STOCK</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The following information describes our common stock and
preferred stock and provisions of our fourth amended and
restated certificate of incorporation and our third amended and
restated bylaws as in effect upon the closing of this offering.
This description is only a summary. You should also refer to the
fourth restated certificate of incorporation and third amended
and restated bylaws which will be filed with the SEC as exhibits
to our registration statement of which this prospectus forms a
part. The descriptions of the common stock and preferred stock
reflect changes to our capital structure that will occur upon
the receipt of the requisite board and stockholder approvals and
upon the closing of this offering in accordance with the terms
of the fourth amended and restated certificate of incorporation.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Upon completion of this offering, and after giving effect to the
conversion of all outstanding convertible preferred stock into
common stock and the amendment of our fourth amended and
restated certificate of incorporation, our authorized capital
stock will consist of 30,000,000 shares of common stock, $0.001
par value per share, and 10,000,000 shares of preferred stock,
$0.10 par value per share. As of May&nbsp;15, 2005, there were
6,513,164 shares of our common stock outstanding held of record
by 242 stockholders.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Common Stock</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Subject to preferences that may be applicable to any shares of
preferred stock outstanding at the time, the holders of common
stock are entitled to the following:
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Dividends.</I> The holders of outstanding shares of our
common stock are entitled to receive dividends out of assets
legally available for the payment of dividends at the times and
in the amounts as our board of directors from time to time may
determine, subject to any preferential dividend rights of any
holder of outstanding shares of our preferred stock.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Voting.</I> Each holder of common stock is entitled to one
vote for each share of common stock held on all matters
submitted to a vote of stockholders, including the election of
directors. We have not provided for cumulative voting for the
election of directors in our fourth restated certificate of
incorporation. This means that the holders of a majority of the
shares voted can elect all of the directors then standing for
election.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Preemptive rights, conversion and redemption.</I> Our common
stock is not entitled to preemptive rights and is not subject to
conversion or redemption.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Liquidation, dissolution and winding-up.</I> Upon our
liquidation, dissolution or winding-up, the holders of common
stock are entitled to share ratably in all assets remaining
after payment of liabilities and the liquidation preferences of
any preferred stock.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Each outstanding share of common stock is, and all shares of
common stock to be issued in this offering when they are paid
for, will be duly and validly issued, fully paid and
non-assessable.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Options</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
As of May&nbsp;15, 2005, options to purchase a total of 899,875
shares of common stock were outstanding, which amount is 54,391
shares less than the number of shares issuable under such option
plans as of March&nbsp;31, 2005 due to the effect of a
formula-based option granted to our President and Chief
Executive Officer&nbsp;&#151; see &#147;Management&nbsp;&#151;
Employment Agreement&#148;. All options issued under the 2003
Plan or issuable under the 2005 Plan are subject to 180-day
lock-up provisions under the terms of the 2003 Plan and the 2005
Plan, respectively. Options to purchase a total of 1,000,000
shares of common stock remain available for grant under the 2005
Plan. Following this offering, no options to purchase, or other
equity-based awards with respect to shares of our common stock,
will be available under the 2003 Plan or the 1996 Plan.
</DIV>

<P align="center" style="font-size: 10pt;">75
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Preferred Stock</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Upon the closing of this offering, all outstanding shares of our
preferred stock will convert into an aggregate of 3,398,105
shares of common stock.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Following the offering, our board of directors will be
authorized, subject to the limits imposed by the Delaware
General Corporation Law, to issue 10,000,000 shares of preferred
stock in one or more series, to establish from time to time the
number of shares to be included in each series, to fix the
rights, preferences and privileges of the shares of each wholly
unissued series and any of its qualifications, limitations and
restrictions. Our board of directors can also increase or
decrease the number of shares of any series, but not below the
number of shares of that series then outstanding, without any
further vote or action by our stockholders.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Our board of directors may authorize the issuance of preferred
stock with voting or conversion rights that adversely affect the
voting power or other rights of our common stockholders. The
issuance of preferred stock, while providing flexibility in
connection with possible acquisitions, financings and other
corporate purposes, could have the effect of delaying, deferring
or preventing a change in control and may cause the market price
of our common stock to decline or impair the voting and other
rights of the holders of our common stock. We have no current
plans to issue shares of preferred stock.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Warrants</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
See &#147;Related Party Transactions&nbsp;&#151;&nbsp;Warrants
to Purchase Preferred Stock&#148; and &#147;Related Party
Transactions&nbsp;&#151;&nbsp;Warrants to Purchase Common
Stock.&#148;
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Registration Rights</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Under a second amended and restated investors&#146; rights
agreement, following this offering, the holders of
<FONT face="wingdings">l</FONT> shares of common stock have the
right to require us to register their shares with the SEC so
that those shares may be publicly resold or to include their
shares in any registration statement we file with the SEC.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</B><I>Demand Rights</I>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
At any time after the earlier of October&nbsp;26, 2009 or the
date which is one year after the effective date of this
offering, if the holders of more than 20% of the outstanding
shares of common stock issued or issuable upon conversion of our
existing series&nbsp;B preferred stock or series&nbsp;C
preferred stock or upon exercise of warrants to purchase our
common stock held by holders of our existing series&nbsp;B
preferred stock or series&nbsp;C preferred stock, request that
we file a registration statement with the SEC having an
aggregate offering price to the public (after deduction of
underwriter&#146;s discounts and expenses) of not less than
$2,000,000, we are obligated to use our commercially reasonable
efforts to cause such shares to be registered and to include in
such registration, if requested, additional shares of our common
stock requested to be included by holders of registration rights
who deliver a written notice to us within 20&nbsp;days of our
receipt of notice from the initiating holders. We are only
required to effect two such registrations, and we are not
required to effect any such registration during period
commencing 90&nbsp;days before a company initiated registration
and ending 90&nbsp;days after a company initiated registration.
Our board of directors has the right to defer for not more than
90&nbsp;days and not more than twice in any 12-month period any
such registration if in its good faith judgment such
registration would be detrimental to us and not in our best
interest.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
If we are eligible to file a registration statement on
Form&nbsp;S-3, holders of shares having registration rights have
the right to demand on or prior to the fifth anniversary of the
effective date of this offering that we file a registration
statement on Form&nbsp;S-3. We are only required to effect two
such registrations in any 12-month period, and we are not
required to effect any such registration during period
commencing 90&nbsp;days before a company-initiated registration
and ending 90&nbsp;days after a company-initiated registration.
</DIV>

<P align="center" style="font-size: 10pt;">76

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</B><I>Piggy Back Registration
Rights</I>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The holders of shares having registration rights are entitled to
unlimited &#147;piggy-back&#148; registration rights on all
registrations of our stock other than a registration relating
solely to employee benefit plans, a registration on
Form&nbsp;S-4 or any other form that does not permit secondary
sales or a registration pursuant to the demand rights described
above. Pursuant to the lock-up agreements we expect to enter
into with our directors, officers and certain stockholders, any
such person holding &#147;piggy-back&#148; registration rights
will waive such rights with respect to this offering.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</B><I>Limitations on
Registration Rights</I>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We and the underwriters of any underwritten offering will have
the right to limit the number of shares having registration
rights to be included in the registration statement. The
underwriters have excluded any sales by existing investors in
this offering.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</B><I>Expenses of
Registration</I>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We shall bear all registration expenses, exclusive of
underwriting discounts, selling commissions, stock transfer
taxes and fees and disbursements of counsel for the holders of
registration rights (other than customary fees of one counsel in
the case of a demand registration), of all demand and piggy-back
registrations.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Delaware Anti-Takeover Law</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We are subject to the provisions of Section&nbsp;203 of the
Delaware General Corporation Law, or Delaware law, regulating
corporate takeovers. In general, these provisions prohibit a
Delaware corporation from engaging in any business combination
with any interested stockholder for a period of three years
following the date that the stockholder became an interested
stockholder, unless:
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    the transaction is approved by the board of directors before the
    date the interested stockholder attained that status;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    upon consummation of the transaction that resulted in the
    stockholder becoming an interested stockholder, the interested
    stockholder owned at least 85% of the voting stock of the
    corporation outstanding at the time the transaction commenced; or</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    on or after the date the business combination is approved by the
    board of directors and authorized at a meeting of stockholders,
    by at least two-thirds of the outstanding voting stock that is
    not owned by the interested stockholder.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
Section&nbsp;203 defines &#147;business combination&#148; to
include the following:
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    any merger or consolidation involving the corporation and the
    interested stockholder;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    any sale, transfer, pledge or other disposition of 10% or more
    of the assets of the corporation involving the interested
    stockholder;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    subject to certain exceptions, any transaction that results in
    the issuance or transfer by the corporation of any stock of the
    corporation to the interested stockholder;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    any transaction involving the corporation that has the effect of
    increasing the proportionate share of the stock of any class or
    series of the corporation beneficially owned by the interested
    stockholder; or</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    the receipt by the interested stockholder of the benefit of any
    loans, advances, guarantees, pledges or other financial benefits
    provided by or through the corporation.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In general, Section&nbsp;203 defines an interested stockholder
as any entity or person beneficially owning 15% or more of the
outstanding voting stock of the corporation and any entity or
person affiliated with or controlling or controlled by any of
these entities or persons.
</DIV>

<P align="center" style="font-size: 10pt;">77

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
A Delaware corporation may opt out of this provision either with
an express provision in its original certificate of
incorporation or in an amendment to its certificate of
incorporation or bylaws approved by its stockholders. However,
we have not opted out of this provision. The statute could
prohibit or delay mergers or other takeover or change in control
attempts and, accordingly, may discourage attempts to acquire us.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Provisions of our Certificate of Incorporation and Bylaws and
Certain Regulatory Requirements That May Have an Anti-Takeover
Effect or Entrench Current Management</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Our fourth amended and restated certificate of incorporation and
third amended and restated bylaws will contain certain
provisions that are intended to enhance the likelihood of
continuity and stability in the composition of our board of
directors and the policies formulated by our board of directors.
These provisions are also expected to discourage certain types
of coercive takeover practices and inadequate takeover bids and
to encourage persons seeking to acquire control of us to first
negotiate with us. These provisions, as well as certain
provisions of contracts to which we are a party, may discourage
or hinder attempts to acquire us or remove incumbent directors
or management even if some, or a majority, of our stockholders
believe that such action is in their best interest.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Certificate of Incorporation
and Bylaws.</I>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The provisions in our fourth amended and restated certificate of
incorporation and third amended and restated bylaws with the
intent described above include:
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    <I>Vacancies Filled by the Board.</I> Vacancies on our board of
    directors may be filled by a majority of the remaining directors
    (even if they constitute less than a quorum), or by a sole
    remaining director.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    <I>Removal of Directors.</I> None of our directors may be
    removed other than for cause.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    <I>Stockholder Meetings.</I> Only our board of directors, the
    chairman of our board of directors or our chief executive
    officer may call special meetings of stockholders. Stockholders
    cannot call special meetings of stockholders.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    <I>No Action by Written Consent.</I> Stockholders may take
    action only at an annual or special meeting of stockholders.
    Stockholders may not act by written consent.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    <I>Requirements for Advance Notification of Stockholder
    Proposals and Director Nominations</I>. Stockholders must comply
    with advance notice procedures with respect to stockholder
    proposals and the nomination of candidates for election as
    directors. In general, these provisions will provide that notice
    of intent to nominate a director or raise matters at such
    meetings must be received in writing by us not less than 90 nor
    more than 120&nbsp;days prior to the anniversary of the date of
    the proxy statement for the previous year&#146;s annual meeting
    of stockholders, and must contain certain information concerning
    the person to be nominated or the matters to be brought before
    the meeting and concerning the stockholder submitting the
    proposal.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    <I>No Cumulative Voting.</I> There is no cumulative voting in
    the election of directors.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    <I>&#147;Blank Check&#148; Preferred Stock</I>. We will be
    authorized to issue, without any further vote or action by the
    stockholders, up to 10,000,000 shares of preferred stock in one
    or more classes or series and, with respect to each such class
    or series, to fix the number of shares constituting the class or
    series and the designation of the class or series, the voting
    powers (if any) of the shares of the class or series, and the
    preferences and relative, participating, optional and other
    special rights, if any, and any qualifications, limitations or
    restrictions, of the shares of such class or series.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    <I>Regulatory Approval.</I> We are also required to obtain the
    approval of certain regulatory agencies, such as the NASD, for
    certain transactions that could result in a change of control.
    See &#147;Our Business&nbsp;&#151; Regulation.&#148;</TD>
</TR>

</TABLE>

<P align="center" style="font-size: 10pt;">78

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Transfer Agent and Register</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The transfer agent and registrar for the common stock is the
American Stock Transfer and Trust&nbsp;Company.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Listing</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We have applied to have our common stock approved for listing,
subject to official notice of issuance, on the NASDAQ National
Market under the symbol &#147;MELA&#148;. We have not applied to
list our common stock on any other exchange or quotation system.
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>SHARES ELIGIBLE FOR FUTURE SALE</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Prior to this offering, there has been no market for our common
stock, and a liquid trading market for our common stock may not
develop or be sustained after this offering. Future sales of
substantial amounts of our common stock, including shares issued
upon exercise of outstanding options and warrants or in the
public market after this offering, or the anticipation of those
sales, could adversely affect the price of our common stock from
time to time and could impair our ability to raise capital
through sales of our equity securities. Upon completion of this
offering, we will have outstanding an aggregate of
<FONT face="wingdings">l</FONT> shares of common stock, after
giving effect to the issuance of <FONT face="wingdings">l</FONT>
shares of common stock in this offering and the conversion of
all outstanding shares of our convertible preferred stock into
an aggregate of 3,398,105 shares of our common stock.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Sales of Restricted Shares</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Of the shares to be outstanding after the completion of this
offering, the <FONT face="wingdings">l</FONT> shares sold in
this offering will be freely tradable without restriction under
the Securities Act of 1933, as amended (Securities Act) unless
purchased by our &#147;affiliates,&#148; as that term is defined
in Rule&nbsp;144 under the Securities Act. Of the remaining
<FONT face="wingdings">l</FONT> shares of common stock,
<FONT face="wingdings">l</FONT> are held by
&#147;affiliates&#148; and therefore are &#147;restricted
securities&#148; within the meaning of Rule&nbsp;144. All of
these restricted securities and all other shares of common stock
other than those sold in this offering will be subject to the
270-day lock-up period described below. After the 270-day
lock-up period, these restricted securities may be sold in the
public market only if registered or if they qualify for an
exemption from registration under Rules&nbsp;144, 144(k) or 701
promulgated under the Securities Act, which are summarized
below. Sales of the restricted securities in the public market,
or the availability of such shares for sale, could adversely
affect the market price of our common stock.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Our directors, officers and certain significant stockholders
intend to enter into lock-up agreements in connection with the
offering generally providing that they will not offer, sell,
contract to sell or grant any option to purchase or otherwise
dispose of our common stock or any securities exercisable for or
convertible into our common stock owned by them for a period of
270&nbsp;days after the date of this prospectus without the
prior written consent of the underwriters, which consent may be
withheld in their sole discretion. Such shareholders may make
gifts of our common stock within the restricted period provided
the recipient agrees in advance to be bound by the lock-up
restrictions. Taking into account the lock-up agreements, and
assuming the underwriters do not release any stockholders from
these agreements, the number of restricted shares that will be
available for sale in the public market under the provisions of
Rule&nbsp;144, 144(k) and 701 will be as follows:
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    beginning on the effective date of this prospectus, only the
    shares sold in the offering will be immediately available for
    sale in the public market; and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    beginning 180&nbsp;days after the effective date, approximately
    <FONT face="wingdings">l</FONT> shares of our restricted shares
    will be eligible for sale subject to the volume, manner of sale
    and other limitations under Rule&nbsp;144.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    beginning 365&nbsp;days after the effective date, approximately
    <FONT face="wingdings">l</FONT> shares of our restricted shares
    will be eligible for sale subject to the volume, manner of sale
    and other limitations under Rule&nbsp;144.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    beginning 180&nbsp;days after the effective date, approximately
    <FONT face="wingdings">l</FONT> shares of our restricted shares
    will be eligible for sale as unrestricted shares under
    Rule&nbsp;144(k).</TD>
</TR>

</TABLE>

<P align="center" style="font-size: 10pt;">79

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In general, under Rule&nbsp;144 as currently in effect, after
the expiration of the lock-up agreements, a person who has
beneficially owned restricted securities for at least one year
would be entitled to sell within any three-month period a number
of shares that does not exceed the greater of:
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    one percent of the number of shares of common stock then
    outstanding, which will equal approximately
    <FONT face="wingdings">l</FONT> shares immediately after the
    offering; or</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    the average weekly trading volume of our common stock during the
    four calendar weeks preceding the filing of a notice on
    Form&nbsp;144 with respect to that sale.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Sales under Rule&nbsp;144 are also subject to requirements with
respect to manner of sale, notice and the availability of
current public information about us. Under Rule&nbsp;144(k),
generally, a person who is not deemed to have been our affiliate
at any time during the three months preceding a sale and who has
beneficially owned the shares proposed to be sold for at least
two years, is entitled to sell such shares without complying
with the manner of sale, public information, volume limitation
or notice provisions of Rule&nbsp;144.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Rule&nbsp;701</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In general, under Rule&nbsp;701 of the Securities Act as
currently in effect, any of our employees, directors or
consultants who purchased shares of our common stock from us in
connection with our stock option plans before the effective date
of the registration statement of which this prospectus is a
part, or who hold stock options as of that date, may rely on the
resale provisions of Rule&nbsp;701. Under Rule&nbsp;701, these
persons who are not our affiliates may generally sell their
eligible securities, commencing 90&nbsp;days after the effective
date of the registration statement in reliance on Rule&nbsp;144,
but without compliance with some of the restrictions, including
the holding period and volume limitations contained in
Rule&nbsp;144. Rule&nbsp;152 under the Securities Act provides a
safe harbor for transactions not involving any public offering
even if the issuer subsequently files a registration statement.
Also, Rule&nbsp;701 states that offers and sales exempt under
Rule&nbsp;701 are deemed to be part of a single, discrete
offering and are not subject to integration with other offers or
sales (whether registered or not). We therefore believe that the
issuance of common stock upon the exercise of options by our
employees, directors or consultants should not be integrated
with the issuance of common stock in this offering.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Subject to the 180-day lock-up period described above, as of
<FONT face="wingdings">l</FONT>, holders of vested options
exercisable for approximately <FONT face="wingdings">l</FONT>
shares of our common stock will be eligible to exercise their
options and to sell their shares in accordance with
Rule&nbsp;701.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Stock Options</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We intend to file a registration statement under the Securities
Act covering the shares of common stock reserved for issuance
upon exercise of outstanding options under our 2005 Plan, our
2003 Plan and our 1996 Plan. The registration statement is
expected to be filed 270&nbsp;days after the closing of this
offering and become effective as soon as practicable after
filing. Accordingly, shares registered under the registration
statement will be available for sale in the open market after
the effective date of the registration statement subject to
manner of sale, public information, volume limitation and notice
provisions of Rule&nbsp;144 applicable to our affiliates, and
any limitations on sale under the applicable option plan and the
lock-up agreements described above. See &#147;Risk
Factors&nbsp;&#151; If there are substantial sales of our common
stock, our stock price could decline.&#148;
</DIV>

<P align="center" style="font-size: 10pt;">80

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>MATERIAL US FEDERAL INCOME AND</B>
</DIV>

<DIV align="center" style="font-size: 10pt;">
<B>ESTATE TAX CONSIDERATIONS FOR NON-US HOLDERS</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The following is a general discussion of the material US federal
income and estate tax consequences of the ownership and
disposition of our common stock by a non-US holder that
purchases shares pursuant to this offer. As used in this
discussion, the term non-US holder means a beneficial owner of
our common stock that is not, for US federal income tax purposes:
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    an individual who is a citizen or resident of the US;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    a corporation or partnership (including any entity treated as a
    corporation or partnership for US federal income tax purposes)
    created or organized in or under the laws of the US or any State
    thereof or the District of Columbia, other than a partnership
    treated as foreign under US Treasury regulations;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    an estate whose income is includible in gross income for US
    federal income tax purposes regardless of its source; or</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    a trust (1)&nbsp;if a US court is able to exercise primary
    supervision over the administration of the trust and one or more
    US persons have authority to control all substantial decisions
    of the trust, or (2)&nbsp;that has a valid election in effect
    under applicable Treasury regulations to be treated as a US
    person.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
This discussion does not consider:
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    US federal gift tax consequences, US state or local or non-US
    tax consequences;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    specific facts and circumstances that may be relevant to a
    particular non-US holder&#146;s tax position, including, if the
    non-US holder is a partnership or trust that the US tax
    consequences of holding and disposing of our common stock may be
    affected by certain determinations made at the partner or
    beneficiary level;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    the tax consequences for the stockholders, partners or
    beneficiaries of a non-US holder;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    special tax rules that may apply to particular non-US holders,
    such as financial institutions, insurance companies, tax-exempt
    organizations, hybrid entities, US expatriates, broker-dealers,
    and traders in securities; or</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    special tax rules that may apply to a non-US holder that holds
    our common stock as part of a straddle, hedge, conversion
    transaction, synthetic security or other integrated investment.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The following discussion is based on provisions of the Code,
applicable US Treasury regulations and administrative and
judicial interpretations, all as in effect on the date of this
prospectus, and all of which are subject to change,
retroactively or prospectively. The following summary assumes
that a non-US holder holds our common stock as a &#147;capital
asset&#148; within the meaning of section 1221 of the Code
(generally, property held for investment). Each non-US holder
should consult a tax advisor regarding the US federal, state,
local and non-US income and other tax consequences of acquiring,
holding and disposing of shares of our common stock.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Dividends</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We do not plan to pay any dividends on our common stock for the
foreseeable future. However, in the event that we pay dividends
on our common stock, we will have to withhold a US federal
withholding tax at a rate of 30%, or a lower rate under an
applicable income tax treaty, from the gross amount of dividends
paid to a non-US holder.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Dividends that are effectively connected with a non-US
holder&#146;s conduct of a trade or business in the US or, if an
income tax treaty applies, attributable to a permanent
establishment in the US (effectively connected income or ECI),
are taxed on a net income basis at the regular graduated rates
and in the manner applicable to US persons. In that case, we
will not have to withhold US federal withholding tax if the
non-US holder complies with applicable certification and
disclosure requirements. In addition to the US tax on ECI, in the
</DIV>

<P align="center" style="font-size: 10pt;">81

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="left" style="font-size: 10pt;">
case of a holder that is a foreign corporation and has ECI, a
branch profits tax may be imposed at a 30% rate, or a lower rate
under an applicable income tax treaty, on the dividend
equivalent amount.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In order to claim the benefit of an income tax treaty or claim
exemption from withholding because the income is effectively
connected with the conduct of a trade or business in the US, the
non-US holder must provide a properly executed Form&nbsp;W-8BEN,
for treaty benefits, or W-8ECI, for effectively connected
income, prior to the payment of dividends. These forms must be
periodically updated. Non-US holders should consult their tax
advisors regarding their entitlement to benefits under a
relevant income tax treaty and their ability to claim exemption
from withholding because the income is effectively connected
with the conduct of a trade or business in the US, and related
certification requirements.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
A non-US holder that is eligible for a reduced rate of US
federal withholding tax under an income tax treaty may obtain a
refund or credit of any excess amounts withheld by filing an
appropriate claim for a refund with the US Internal Revenue
Service (IRS)&nbsp;in a timely manner.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Gain on Disposition of Common Stock</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
A non-US holder generally will not be taxed on gain recognized
on a disposition of our common stock unless:
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    the gain is effectively connected with a non-US holder&#146;s
    conduct of a trade or business in the US or, alternatively, if
    an income tax treaty applies, is attributable to a permanent
    establishment maintained by the non-US holder in the US; in
    these cases, the gain will be taxed on a net income basis at the
    regular graduated rates and in the manner applicable to US
    persons, unless an applicable treaty provides otherwise, and, if
    the non-US holder is a foreign corporation, the branch profits
    tax described above may also apply;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    the non-US holder is an individual who holds our common stock as
    a capital asset, is present in the US for 183&nbsp;days or more
    in the taxable year of the disposition and meets other
    requirements; in this case, the non-US holder will be subject to
    a 30% tax on the gain derived from the disposition; or</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    we are or have been a US real property holding corporation
    (USRPHC) for US federal income tax purposes at any time during
    the shorter of the five-year period ending on the date of
    disposition or the period that the non-US holder held our common
    stock; in this case, the non-US holder may be subject to US
    federal income tax on its net gain derived from the disposition
    of our common stock at regular graduated rates. Generally, a
    corporation is a USRPHC if the fair market value of its US real
    property interests equals or exceeds 50% of the sum of the fair
    market value of its worldwide real property interests plus its
    other assets used or held for use in a trade or business. If we
    are, or were to become, a USRPHC, gain realized upon disposition
    of our common stock by a non-US holder that did not directly or
    indirectly own more than 5% of our common stock during the
    shorter of the five-year period ending on the date of
    disposition or the period that the non-US holder held our common
    stock generally would not be subject to US federal income tax,
    provided that our common stock is &#147;regularly traded on an
    established securities market&#148; within the meaning of
    Section&nbsp;897(c)(3) of the Code. We believe that we are not
    currently, and we do not anticipate becoming in the future, a
    USRPHC.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Federal Estate Tax</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Common stock owned or treated as owned by an individual who is a
non-US holder at the time of death, unless an applicable estate
tax or other treaty provides otherwise, will be included in the
individual&#146;s gross estate for US federal estate tax
purposes, and therefore may be subject to US federal estate tax.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Information Reporting and Backup Withholding Tax</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We must report annually to the IRS and to each non-US holder the
amount of dividends paid to that holder and the tax withheld
from those dividends. These reporting requirements apply
regardless of whether withholding was reduced or eliminated by
an applicable income tax treaty. Copies of the information
returns
</DIV>

<P align="center" style="font-size: 10pt;">82

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="left" style="font-size: 10pt;">
reporting those dividends and withholding may also be made
available to the tax authorities in the country in which the
non-US holder is a resident under the provisions of an
applicable income tax treaty or agreement.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Under some circumstances, US Treasury regulations require
additional information reporting and backup withholding
(currently at a rate of 28%) on some payments on our common
stock. The gross amount of dividends paid to a non-US holder
that fails to certify its non-US holder status in accordance
with applicable US Treasury regulations generally will be
reduced by backup withholding at the applicable rate.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The payment of the proceeds of the disposition of our common
stock by a non-US holder to or through the US office of any
broker generally will be reported to the IRS and reduced by
backup withholding unless the non-US holder either certifies its
status as a non-US holder under penalties of perjury or
otherwise establishes an exemption. The payment of the proceeds
of the disposition of our common stock by a non-US holder to or
through a non-US office of a non-US broker generally will not be
reduced by backup withholding or reported to the IRS unless the
non-US broker has certain enumerated connections with the US. In
general, the payment of proceeds from the disposition of our
common stock by or through a non-US office of a broker that is a
US person or that has certain enumerated connections with the US
will be reported to the IRS and may, in limited circumstances,
be reduced by backup withholding, unless the broker receives a
statement from the non-US holder, signed under penalty of
perjury, certifying its non-US status or the broker has
documentary evidence in its files that the holder is a non-US
holder.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Non-US holders should consult their own tax advisors regarding
the application of the information reporting and backup
withholding rules to them.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Backup withholding is not an additional tax. Any amounts
withheld under the backup withholding rules from a payment to a
non-US holder will be refunded, or credited against the
holder&#146;s US federal income tax liability, if any, provided
that the required information or appropriate claim for refund is
furnished to the IRS in a timely manner.
</DIV>

<P align="center" style="font-size: 10pt;">83

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>UNDERWRITING</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Under the terms and subject to the conditions in an underwriting
agreement
dated &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face="wingdings">l</FONT>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;,
2005, we have agreed to sell to the underwriters named below,
for whom Ladenburg Thalmann&nbsp;&#38; Co. Inc. and Stanford
Group Company are acting as the representatives, the following
respective numbers of shares of common stock:
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="76%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="10%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="10%">&nbsp;</TD>
</TR>

<TR style="font-size: 8pt;">
    <TD align="left" nowrap><B>Underwriters</B></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Number of Shares</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;&nbsp;&nbsp;<FONT face="wingdings">l</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Total</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;&nbsp;&nbsp;<FONT face="wingdings">l</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

</TABLE>
</CENTER>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Subject to the terms and conditions of the underwriting
agreement, the underwriters have agreed to purchase from
us &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face="wingdings">l</FONT>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
of our common stock at the public offering price, less the
underwriting discounts and commissions set forth on the cover
page of this prospectus. The underwriting agreement provides
that the underwriters&#146; obligations to purchase our shares
are subject to approval of legal matters by counsel and to the
satisfaction of other conditions. The underwriters are obligated
to purchase all of the shares (other than those covered by the
over-allotment option described below) if they purchase any
shares. The underwriting agreement also provides that, if an
underwriter defaults, the purchase commitments of non-defaulting
underwriters may be increased or this offering may be terminated.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Commissions and Expenses</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The underwriters propose to offer the shares to the public at
the public offering price set forth on the cover of this
prospectus. The underwriters may offer the shares to securities
dealers at the price to the public less a concession not in
excess of
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face="wingdings">l</FONT>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;per
share. Securities dealers may reallow a concession not in excess
of
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face="wingdings">l</FONT>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;per
share to other dealers. After the shares are released for sale
to the public, the underwriters may vary the offering price and
other selling terms from time to time. The underwriters will
also receive a nonaccountable expense allowance equal to 1% of
the public offering price set forth on the cover of this
prospectus for the sale of all the shares sold (excluding shares
sold pursuant to the overallotment option, if any).
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The following table shows the underwriting discounts and
commissions that we are to pay to the underwriters in connection
with this offering. These amounts are shown assuming no exercise
and full exercise of the underwriters&#146; over-allotment
option to purchase additional shares.
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="64%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>No Exercise</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Full Exercise</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Per Share</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;&nbsp;&nbsp;<FONT face="wingdings">l</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;&nbsp;&nbsp;<FONT face="wingdings">l</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Total</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;&nbsp;&nbsp;<FONT face="wingdings">l</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;&nbsp;&nbsp;<FONT face="wingdings">l</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

</TABLE>
</CENTER>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We estimate that the total expenses of this offering, excluding
underwriting discounts and commissions, will be approximately
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face="wingdings">l</FONT>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Warrant</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We have agreed to sell to the representatives, for nominal
consideration, a warrant (Underwriters&#146; Warrant) to
purchase up to a total
of &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face="wingdings">l</FONT>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
of our common stock. The Underwriters&#146; Warrant is not
exercisable during the first year after the date of this
prospectus and thereafter is exercisable at an exercise price
equal to 125% of the public offering price per share set forth
on the cover of this prospectus for a period commencing on the
first anniversary of the date of this prospectus and ending on
the fifth anniversary of the date of this prospectus. The
Underwriters&#146; Warrant contains customary antidilution
provisions and certain demand and participatory registration
rights. The Underwriters&#146; Warrant also includes a
&#147;cashless&#148; exercise provision entitling the holder to
convert the Underwriters&#146; Warrant into shares of our common
stock. The Underwriters&#146; Warrant may not be sold,
transferred, assigned or hypothecated for a period of one year
from the date of this prospectus, except to officers or partners
of the underwriters and members of the selling group and/or
their officers or partners.
</DIV>

<P align="center" style="font-size: 10pt;">84

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Over-Allotment Option</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We have granted to the underwriters an option, exercisable not
later than 45&nbsp;days after the date of this prospectus, to
purchase up to an aggregate
of &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face="wingdings">l</FONT>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;additional
shares of common stock at the public offering price set forth on
the cover page of this prospectus less the underwriting
discounts and commissions. The underwriters may exercise this
option in whole or in part only to cover over-allotments, if
any, made in connection with the sale of shares offered hereby.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Lock-Up and Related Agreements</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Except as noted below, our directors, executive officers and
principal stockholders will agree with the representatives that
for a period of 270&nbsp;days following the date of this
prospectus, they will not offer, sell, assign, transfer, pledge,
contract to sell or otherwise dispose of or hedge any of our
shares of common stock or any securities convertible into or
exchangeable for shares of common stock. Such shareholders may
make gifts of our common stock within the restricted period
provided the recipient agrees in advance to be bound by the
lock-up restrictions. The representatives may, in their sole
discretion, at any time without prior notice, release all or any
portion of the shares from the restrictions in any such
agreement. We have entered into an agreement with the
representatives, stating that we will not issue additional
shares (with the exception of shares issued pursuant to the
over-allotment option) of our common stock prior to the end of
the 270&nbsp;day period following the date of this prospectus,
other than with respect to our issuing shares pursuant to
employee benefit plans, qualified option plans or other employee
compensation plans already in existence, or pursuant to
currently outstanding options, warrants or other rights to
acquire shares of our common stock. There are no agreements
between the representatives and any of our directors, executive
officers or principal stockholder releasing them from these
lock-up agreements, or with us pertaining to our issuance of
additional shares, prior to the expiration of the 270&nbsp;day
period.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Indemnification</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We have agreed to indemnify the underwriters against certain
civil liabilities, including liabilities under the Securities
Act and liabilities arising from breaches of representations and
warranties contained in the underwriting agreement, and to
contribute to payments the underwriters may be required to make
in respect of any such liabilities.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Stabilization, Short Positions and Penalty Bids</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The representatives may engage in over-allotment, stabilizing
transactions, syndicate covering transactions, and penalty bids
or purchases for the purpose of pegging, fixing or maintaining
the price of the common stock, in accordance with
Regulation&nbsp;M under the Securities Exchange Act of 1934:
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    Over-allotment transactions involve sales by the underwriters of
    shares in excess of the number of shares the underwriters are
    obligated to purchase, which creates a syndicate short position.
    The short position may be either a covered short position or a
    naked short position. In a covered short position, the number of
    shares over-allotted by the underwriters is not greater than the
    number of shares that they may purchase in the over-allotment
    option. In a naked short position, the number of shares involved
    is greater than the number of shares in the over-allotment
    option. The underwriters may close out any short position by
    either exercising their over-allotment option and/or purchasing
    shares in the open market.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    Stabilizing transactions permit bids to purchase the underlying
    security so long as the stabilizing bids do not exceed a
    specific maximum.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    Syndicate covering transactions involve purchases of the common
    stock in the open market after the distribution has been
    completed in order to cover syndicate short positions. In
    determining the source of shares to close out the short
    position, the underwriters will consider, among other things,
    the price of shares available for purchase in the open market as
    compared to the price at which they may purchase shares through
    the over-allotment option. If the underwriters sell more shares
    than could be</TD>
</TR>

</TABLE>

<P align="center" style="font-size: 10pt;">85

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD></TD>
    <TD align="left">
    covered by the over-allotment option, a naked short position,
    the position can only be closed out by buying shares in the open
    market. A naked short position is more likely to be created if
    the underwriters are concerned that there could be downward
    pressure on the price of the shares in the open market after
    pricing that could adversely affect investors who purchase in
    the offering.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    Penalty bids permit the representatives to reclaim a selling
    concession from a syndicate member when the common stock
    originally sold by the syndicate member is purchased in a
    stabilizing or syndicate covering transaction to cover syndicate
    short positions.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
These stabilizing transactions, syndicate covering transactions
and penalty bids may have the effect of raising or maintaining
the market price of our common stock or preventing or retarding
a decline in the market price of our common stock. As a result,
the price of our common stock may be higher than the price that
might otherwise exist in the open market. These transactions may
be effected on the NASDAQ National Market or otherwise and, if
commenced, may be discontinued at any time. Neither we nor any
of the underwriters make any representation or prediction as to
the direction or magnitude of any effect that the transactions
described above may have on the price of our common stock. In
addition, neither we nor any of the underwriters make any
representation that the representatives will engage in these
stabilizing transactions or that any transaction, once
commenced, will not be discontinued without notice.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Offering Price Determination</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Prior to this offering, there has been no market for our common
stock. The public offering price has been, due to our lack of
operating history, arbitrarily determined by negotiations
between us and the representatives, bears no relationship to our
earnings, book value, net worth or other financial criteria of
value and may not be indicative of the market price for the
common stock after this offering. After completion of this
offering, the market price of the common stock will be subject
to change as a result of market conditions and other factors.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Discretionary Accounts</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The representatives of the underwriters have advised us that
they do not intend to confirm sales of the shares to
discretionary accounts.
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>LEGAL MATTERS</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The validity of the common stock being offered hereby is being
passed upon for us by Dreier LLP. We have received certain
advice from our legal counsel in connection with the matters
described herein. Such legal advice is solely for our benefit
and not for any stockholder or prospective investor. Purchasers
of common stock offered hereby are not entitled to rely on any
such advice and should not consider any such counsel to
represent them or their interests. Certain legal matters
relating to the offering will be passed upon for the
underwriters by Greenberg Traurig, LLP, New York, New York.
Prospective investors should consult with their own legal and
other counsel.
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>EXPERTS</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The financial statements of Electro-Optical Sciences, Inc. as of
December&nbsp;31, 2003 and 2004, and for each of the three years
in the period ended December&nbsp;31, 2004, as set forth in
their report, have been included herein and in the Registration
Statement in reliance upon the report of Eisner LLP, independent
registered public accounting firm, appearing elsewhere herein,
and upon the authority of said firm as experts in accounting and
auditing.
</DIV>

<P align="center" style="font-size: 10pt;">86
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>WHERE YOU CAN FIND MORE INFORMATION</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We have filed with the SEC a registration statement on
Form&nbsp;S-1 under the Securities Act with respect to the
shares of common stock we are offering to sell. This prospectus,
which constitutes part of the registration statement, does not
include all of the information contained in the registration
statement. You should refer to the registration statement and
its exhibits for additional information. Whenever we make
reference in this prospectus to any of our contracts, agreements
or other documents, the references are not necessarily complete
and you should refer to the exhibits attached to the
registration statement for copies of the actual contract,
agreement or other document. When we complete this offering, we
will also be required to file annual, quarterly and special
reports, proxy statements and other information with the SEC. We
anticipate making these documents publicly available, free of
charge, on our website at www.eo-sciences.com as soon as
reasonably practicable after filing such documents with the
Securities and Exchange Commission.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
You can read the registration statement and our future filings
with the SEC, over the internet at the SEC&#146;s website at
http://www.sec.gov. You may also read and copy any document that
we file with the Securities and Exchange Commission at its
public reference room at 450 Fifth Street,&nbsp;N.W.,
Washington, DC&nbsp;20549.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
You may also obtain copies of the documents at prescribed rates
by writing to the Public Reference Section of the SEC at 450
Fifth Street,&nbsp;NW, Washington, DC 20549. Please call the SEC
at 1-800-SEC-0330 for further information on the operation of
the public reference room.
</DIV>

<P align="center" style="font-size: 10pt;">87

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>ELECTRO-OPTICAL SCIENCES, INC.</B>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>CONTENTS</B>
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 12pt; ">

<TR style="font-size: 1pt;">
    <TD width="3%">&nbsp;</TD>
    <TD width="90%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Financial Statements:</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Report of Independent Registered Public Accounting Firm</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>F-2</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Balance sheets as of December&nbsp;31, 2004 and 2003 and
    March&nbsp;31, 2005 (unaudited)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>F-3</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Statements of operations for the years ended December&nbsp;31,
    2004, 2003 and 2002 and three months ended March&nbsp;31, 2005
    and 2004 (unaudited)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>F-4</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Statements of changes in stockholders&#146; (deficiency) equity
    for the years ended December&nbsp;31, 2004, 2003 and 2002 and
    three months ended March&nbsp;31, 2005 (unaudited)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>F-5</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Statements of cash flows for the years ended December&nbsp;31,
    2004, 2003 and 2002 and three months ended March&nbsp;31, 2005
    and 2004 (unaudited)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>F-6</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Notes to financial statements</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>F-7</TD>
    <TD>&nbsp;</TD>
</TR>

</TABLE>
</CENTER>

<P align="center" style="font-size: 10pt;">F-1
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
To the Board of Directors and Stockholders <BR>
 Electro-Optical Sciences, Inc.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The following report is in the form that will be signed upon the
effectiveness of the one-for-two reverse common stock split
described in Note&nbsp;1 to the financial statements.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 24pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
/s/&nbsp;Eisner LLP
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
New York, New York
</DIV>

<DIV align="left" style="font-size: 10pt;">
June&nbsp;3, 2005
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
The Board of Directors and Stockholders <BR>
 Electro-Optical Sciences, Inc.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We have audited the accompanying balance sheets of
Electro-Optical Sciences, Inc. (the &#147;Company&#148;) as of
December&nbsp;31, 2004 and 2003, and the related statements of
operations, stockholders&#146; (deficiency) equity and cash
flows for each of the years in the three year period ended
December&nbsp;31, 2004. These financial statements are the
responsibility of the Company&#146;s management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of Electro-Optical Sciences, Inc. as of December&nbsp;31, 2004
and 2003, and the results of its operations and its cash flows
for each of the years in the three year period ended
December&nbsp;31, 2004, in conformity with accounting principles
generally accepted in the United States of America.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 24pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
Eisner LLP
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
New York, New York
</DIV>

<DIV align="left" style="font-size: 10pt;">
May&nbsp;31, 2005
</DIV>

<P align="center" style="font-size: 10pt;">F-2
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>ELECTRO-OPTICAL SCIENCES, INC.</B>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>BALANCE SHEETS</B>
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 9pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="45%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Pro-Forma</B></TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>March 31,</B></TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>December</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>December</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>March 31,</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2005</B></TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>31,</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>31,</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2005</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2003</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2004</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>(audited)</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>(audited)</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>(unaudited)</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>(unaudited)</B></TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>(Note&nbsp;1)</B></TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="19" align="center" valign="top">
    <B>ASSETS</B></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <B>Current Assets:</B></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Cash and cash equivalents</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>116,691</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>108,705</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>190,818</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>190,818</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Marketable securities</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>6,594,751</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5,108,796</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5,108,796</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Accounts receivable, net</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>16,679</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>7,128</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>7,075</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>7,075</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Inventories</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>72,865</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>69,755</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>82,756</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>82,756</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Prepaid expenses and other current assets</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>10,697</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>32,844</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>23,263</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>23,263</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <B>Total Current Assets</B></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>216,932</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>6,813,183</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5,412,708</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5,412,708</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Property and equipment, net</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>18,418</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>89,306</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>130,671</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>130,671</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Patents and trademarks, net</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>178,157</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>163,459</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>160,817</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>160,817</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Other assets</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>18,248</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>30,201</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>30,201</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>30,201</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <B>Total Assets</B></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>431,755</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>7,096,149</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>5,734,397</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>5,734,397</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="19" align="center" valign="top">
    <B>LIABILITIES AND STOCKHOLDERS&#146; (DEFICIENCY) EQUITY</B></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <B>Current Liabilities:</B></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Accounts payable</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>211,810</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>338,821</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>150,385</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>150,385</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Accrued expenses</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>363,270</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>228,583</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>324,984</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>324,984</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Deferred revenues</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>106,335</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Notes payable&nbsp;&#151; stockholders</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>48,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Notes payable&nbsp;&#151; other</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>15,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Other current liabilities</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>11,976</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>17,284</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>17,898</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>17,898</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <B>Total Current Liabilities</B></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>650,056</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>691,023</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>493,267</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>493,267</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <B>REDEEMABLE CONVERTIBLE PREFERRED STOCK</B></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Redeemable Preferred Stock Series&nbsp;B Convertible 992,986
    shares designated (liquidation preference $2.26 per share);
    issued and outstanding 992,986 shares at December&nbsp;31, 2003
    and 2004 and March&nbsp;31, 2005 and 0 shares at
    March&nbsp;31,2005, pro forma</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2,244,147</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2,244,147</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2,244,147</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Redeemable Preferred Stock Series&nbsp;C Convertible 5,744,340
    shares designated (liquidation preference $2.26 per share);
    issued and outstanding 907,077 shares at December&nbsp;31, 2003
    and 5,414,779 shares at December&nbsp;31, 2004 and
    March&nbsp;31, 2005 and 0 shares at March&nbsp;31, 2005, pro
    forma</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,822,950</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>6,340,666</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>6,761,796</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    COMMITMENTS AND CONTINGENCIES</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <B>Stockholders&#146; (Deficiency) Equity:</B></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Preferred stock&nbsp;&#151; $.10 par value; authorized
    16,936,704 shares:</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Series&nbsp;A Convertible Preferred Stock, 199,380 shares
    designated - (liquidation preference $5.00 per share); issued
    and outstanding 198,000 shares at December&nbsp;31, 2003 and
    2004 and March&nbsp;31, 2005 and 0 shares at March&nbsp;31,
    2005, pro forma</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>972,311</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>972,311</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>972,311</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Common stock&nbsp;&#151; $.001 par value; authorized 30,000,000
    shares; issued and outstanding 1,684,760 shares at
    December&nbsp;31, 2003 and 1,809,758 shares at December&nbsp;31,
    2004 and March&nbsp;31, 2005 and 6,513,164 shares at
    March&nbsp;31, 2005, pro forma</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,685</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,810</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,810</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>6,513</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Additional paid-in capital</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5,119,923</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>10,981,455</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>10,631,125</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>20,604,676</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Notes receivable</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(69,000</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(69,000</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(69,000</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(69,000</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Deferred compensation</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(22,500</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(159,300</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(151,335</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(151,335</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Accumulated deficit</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(10,287,817</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(13,906,963</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(15,149,724</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(15,149,724</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <B>Stockholders&#146; (Deficiency) Equity</B></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(4,285,398</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(2,179,687</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(3,764,813</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5,241,130</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <B>Total Liabilities and Stockholders&#146; (Deficiency)
    Equity</B></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>431,755</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>7,096,149</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>5,734,397</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>5,734,397</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

</TABLE>
</CENTER>

<DIV align="center" style="font-size: 10pt; margin-top: 9pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
See accompanying notes to the financial statements
</DIV>

<P align="center" style="font-size: 10pt;">F-3

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>ELECTRO-OPTICAL SCIENCES, INC.</B>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>STATEMENTS OF OPERATIONS</B>
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 12pt; ">

<TR style="font-size: 1pt;">
    <TD width="3%">&nbsp;</TD>
    <TD width="32%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
</TR>


<TR style="font-size: 8pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap><B>Year Ended</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>Three Months Ended</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>December 31,</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>December 31,</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>December 31,</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>March 31,</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>March 31,</B></TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2002</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2003</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2004</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2004</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2005</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>(audited)</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>(audited)</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>(audited)</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>(unaudited)</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>(unaudited)</B></TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Revenue from Difoti&#174; sales, net (Note&nbsp;10)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>142,559</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>375,490</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>364,066</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>91,549</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>87,589</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Revenue from grants</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>547,290</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Total revenue</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>689,849</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>375,490</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>364,066</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>91,549</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>87,589</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Cost of sales</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>649,620</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>83,044</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>166,468</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>20,159</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>8,255</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Gross profit</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>40,229</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>292,446</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>197,598</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>71,390</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>79,334</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Selling, general and administrative expenses</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>769,021</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,338,760</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,858,152</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>532,732</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>712,088</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Research and development</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>404,331</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>828,239</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,891,551</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>307,690</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>636,267</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Loss from operations</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(1,133,123</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(1,874,553</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(3,552,105</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(769,032</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(1,269,021</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Interest income</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(2,189</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(1,373</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(27,935</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(178</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(26,260</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Interest expense</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>10,117</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>76,923</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>94,976</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,170</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2"><FONT style="font-size: 10pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>7,928</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>75,550</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>67,041</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>992</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(26,260</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Net loss</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(1,141,051</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(1,950,103</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(3,619,146</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(770,024</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(1,242,761</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Less:</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Preferred stock deemed dividends</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>214,245</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>321,830</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>676,218</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>110,704</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>362,039</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Preferred stock accretion</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>180,009</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>25,228</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>322,800</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>6,934</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>421,130</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Stock distribution of Preferred Series&nbsp;B shares</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>101,700</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <B>Net Loss Attributable to Common Stockholders</B></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(1,535,305</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(2,398,861</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(4,618,164</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(887,662</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(2,025,930</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Basic and diluted net loss per common share</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(1.00</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(1.49</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(2.61</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(0.53</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(1.12</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Basic and diluted weighted average number of shares outstanding</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,534,760</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,614,897</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,766,608</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,684,760</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,809,758</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Pro forma basic and diluted net loss per common share (unaudited)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(0.91</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(0.19</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Pro forma basic and diluted weighted average number of common
    shares outstanding (unaudited)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3,967,024</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>6,513,164</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

</TABLE>
</CENTER>

<DIV align="center" style="font-size: 10pt; margin-top: 9pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
See accompanying notes to financial statements
</DIV>

<P align="center" style="font-size: 10pt;">F-4

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>ELECTRO-OPTICAL SCIENCES, INC.</B>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>STATEMENT OF STOCKHOLDERS&#146; (DEFICIENCY)&nbsp;EQUITY</B>
</DIV>

<DIV align="center" style="font-size: 10pt;">
<B>Years ended December&nbsp;31, 2002, 2003 and 2004, and the
three months ended March&nbsp;31, 2005</B>
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 8pt; margin-top: 12pt; ">

<TR style="font-size: 1pt;">
    <TD width="25%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>


<TR style="font-size: 7pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>Convertible</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
</TR>

<TR style="font-size: 7pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>Preferred Stock</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="7">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
</TR>

<TR style="font-size: 7pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>Series A</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>Common Stock</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Additional</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Total</B></TD><TD></TD>
</TR>

<TR style="font-size: 7pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Paid-in</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Notes</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Deferred</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Accumulated</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Stockholders&#146;</B></TD><TD></TD>
</TR>

<TR style="font-size: 7pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Shares</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Amount</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Shares</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Amount</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Capital</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Receivable</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Compensation</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Deficit</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>(Deficiency)</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Balance at January&nbsp;1, 2002</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>198,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>972,311</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,534,760</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>1,535</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>2,932,174</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(117,000</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(7,196,663</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(3,407,643</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Amortization of deferred compensation</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>72,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>72,000</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Net loss</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(1,141,051</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(1,141,051</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Preferred stock accretion</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(180,009</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(180,009</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Balance at December&nbsp;31, 2002</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>198,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>972,311</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,534,760</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>1,535</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>2,752,165</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(45,000</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(8,337,714</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(4,656,703</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Preferred stock accretion</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(25,228</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(25,228</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Amortization of deferred compensation</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>22,500</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>22,500</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Issuance of common stock in exchange for notes receivable</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>150,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>150</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>68,850</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(69,000</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Adjustment for reduction to liquidation value of Series&nbsp;B
    preferred stock</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2,125,600</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2,125,600</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Stock distribution of preferred Series&nbsp;B shares</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>101,700</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>101,700</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Common stock options issued for consulting fees</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>96,836</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>96,836</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Net loss</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(1,950,103</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(1,950,103</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Balance at December&nbsp;31, 2003</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>198,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>972,311</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,684,760</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>1,685</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>5,119,923</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(69,000</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(22,500</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(10,287,817</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(4,285,398</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Sale of common stock</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>124,998</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>125</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>137,375</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>137,500</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Deferred compensation-stock option awards to employees</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>159,300</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(159,300</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Issuance of option to non-employee directors</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>150,450</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>150,450</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Preferred stock accretion</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(322,800</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(322,800</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Warrants issued in connection with preferred Series&nbsp;C stock</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3,158,948</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3,158,948</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Beneficial conversion in connection with preferred Series&nbsp;C
    stock</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2,385,063</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2,385,063</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Issuance of options to consultants</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>72,800</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>72,800</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Issuance of warrants to consultant</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>120,396</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>120,396</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Amortization of deferred compensation</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>22,500</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>22,500</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Net loss</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(3,619,146</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(3,619,146</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Balance at December&nbsp;31, 2004</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>198,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>972,311</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,809,758</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>1,810</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>10,981,455</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(69,000</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(159,300</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(13,906,963</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(2,179,687</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Preferred stock accretion</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(421,130</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(421,130</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Issuance of options for employee compensation</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>70,800</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>70,800</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Amortization of deferred compensation</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>7,965</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>7,965</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Net loss</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(1,242,761</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(1,242,761</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Balance at March&nbsp;31, 2005 (unaudited)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>198,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>972,311</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,809,758</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>1,810</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>10,631,125</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(69,000</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(151,335</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(15,149,724</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(3,764,813</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

</TABLE>
</CENTER>

<DIV align="center" style="font-size: 10pt; margin-top: 9pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
See accompanying notes to the financial statements
</DIV>

<P align="center" style="font-size: 10pt;">F-5

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>ELECTRO-OPTICAL SCIENCES, INC.</B>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>STATEMENTS OF CASH FLOWS</B>
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 9pt; margin-top: 12pt; ">

<TR style="font-size: 1pt;">
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="32%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
</TR>


<TR style="font-size: 8pt;">
    <TD colspan="4">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap><B>Year Ended</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>Three Months Ended</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="4">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="4">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>December 31,</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>December 31,</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>December 31,</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>March 31,</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>March 31,</B></TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="4">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2002</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2003</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2004</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2004</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2005</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="4">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="4">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>(audited)</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>(audited)</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>(audited)</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>(unaudited)</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>(unaudited)</B></TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="4" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Cash flows from operating activities:</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Net loss</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(1,141,051</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(1,950,103</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(3,619,146</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(770,024</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(1,242,761</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Adjustments to reconcile net loss to net cash used in operating
    activities:</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Allowance for doubtful accounts</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(13,288</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(9,000</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Depreciation and amortization</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>33,329</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>30,987</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>35,860</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>7,286</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>13,212</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Noncash compensation and amortization of deferred compensation</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>72,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>22,500</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>172,950</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>78,765</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Common stock options and warrant issued for consulting fees</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>96,836</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>193,196</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Amortization of discount on marketable securities</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(10,001</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(30,072</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Accrued interest receivable</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(1,056</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(15,293</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(6,189</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Accrued interest payable</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>8,985</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,170</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Interest expense attributable to preferred Series&nbsp;C</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>45,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Interest expense from bridge loan</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>80,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Changes in operating assets and liabilities:</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    (Increase) decrease in accounts receivable</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(3,326</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>53,585</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>20,662</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(31,249</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>53</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Decrease (increase)&nbsp;in inventories</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>67,279</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(39,296</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3,110</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(31,287</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(13,001</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Decrease (increase)&nbsp;in prepaid expenses and other current
    assets</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>6,060</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(2,408</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(20,918</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2,399</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>15,770</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Increase (decrease)&nbsp;in accounts payable and accrued expenses</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>237,660</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>128,429</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(7,676</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(38,336</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(92,035</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    (Decrease) increase in deferred revenues</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(57,300</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>106,335</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>10,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(106,335</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Increase (decrease)&nbsp;in other current liabilities</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>44,373</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(21,879</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5,308</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(11,976</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>614</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="4">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <B>Net cash used in operating activities</B></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(683,676</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(1,699,008</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(3,064,613</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(862,017</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(1,381,979</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="4">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="4" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Cash flows from investing activities:</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Patent costs</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(5,986</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(3,166</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(2,165</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(1,831</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Purchases of property and equipment</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(2,432</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(88,884</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(5,244</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(50,104</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Redemption (purchase) of marketable securities</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>518,050</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(6,584,750</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,516,027</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="4">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <B>Net cash provided by (used in) investing activities</B></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>518,050</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(8,418</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(6,676,800</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(7,409</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,464,092</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="4">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD colspan="4" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Cash flows from financing activities:</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Proceeds from issuance of Series&nbsp;C preferred stock</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,500,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>9,171,480</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,100,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Expenses related to Series&nbsp;C preferred stock offering</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(252,278</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(447,553</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Proceeds from (repayment of) notes payable to stockholders</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>48,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(48,000</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Proceeds from issuance of notes payable</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>520,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>920,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Proceeds from sale of common stock</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>137,500</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="4">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <B>Net cash provided by financing activities</B></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>-</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,815,722</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>9,733,427</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,100,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="4">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="4" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Net (decrease)&nbsp;increase in cash and cash equivalents</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(165,626</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>108,296</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(7,986</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>230,574</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>82,113</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="4" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Cash and cash equivalents at beginning of period</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>174,021</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>8,395</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>116,691</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>116,691</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>108,705</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="4">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="4" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <B>Cash and cash equivalents at end of period</B></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>8,395</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>116,691</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>108,705</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>347,265</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>190,818</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="4">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD colspan="4" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <B>Supplemental Cash Flow Information:</B></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="4" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Cash paid for interest</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>24,378</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>14,976</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="4" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <B>Supplemental Schedule of Noncash Financing Activities:</B></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="4" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Notes&nbsp;payable exchanged for Series&nbsp;C preferred stock</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>505,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>1,015,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="4" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Notes&nbsp;receivable in exchange for common stock</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>69,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="4" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Preferred stock accretion</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>180,009</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>25,228</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>322,800</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>6,934</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>421,130</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="4" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Reduction to liquidation value Series&nbsp;B</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>2,125,600</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="4" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Beneficial conversion issued in connection with Series&nbsp;C</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>2,385,063</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="4" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Fair value of warrants issued in connection with Series&nbsp;C
    preferred stock</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>3,158,948</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

</TABLE>
</CENTER>

<DIV align="center" style="font-size: 10pt; margin-top: 9pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
See accompanying notes to financial statements
</DIV>

<P align="center" style="font-size: 10pt;">F-6
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>ELECTRO-OPTICAL SCIENCES, INC.</B>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>NOTES TO FINANCIAL STATEMENTS</B>
</DIV>

<DIV align="center" style="font-size: 10pt;">
<B>(In thousands, except for share and per share date)</B>
</DIV>

<DIV align="center" style="font-size: 10pt;">
<B>(Information for the three months ended March&nbsp;31, 2005
and 2004 is unaudited)</B>
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="4%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD><B>1.</B></TD>
    <TD>
    <B>PRINCIPAL BUSINESS ACTIVITIES AND SUMMARY OF SIGNIFICANT
    ACCOUNTING POLICIES:</B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Organization and Business</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Electro-Optical Sciences, Inc., a Delaware corporation (the
&#147;Company&#148;) is focused on the design and development of
a non-invasive, point-of-care instrument for assisting in the
early diagnosis of melanoma. The Company has entered into a
Protocol Agreement with the Food and Drug Administration
(FDA)&nbsp;which is an agreement for the conduct of the pivotal
trial and to establish the safety and effectiveness of the
MelaFind&#174; device. Upon obtaining premarket approval, or
PMA, from the FDA, the Company plans to launch MelaFind&#174; in
the United States.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The Company discontinued all operations associated with its
DIFOTI&#174; product effective as of April&nbsp;5, 2005, in
order to focus its resources on the development and
commercialization of MelaFind&#174;. The Company is currently
seeking a buyer for the DIFOTI&#174; assets, and does not expect
to have any significant continuing responsibility for the
DIFOTI&#174; business after the sale of the DIFOTI&#174; assets.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Pro Forma Balance Sheet</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The accompanying balance sheet as of March&nbsp;31, 2005, and
the statements of operations, stockholders&#146; equity
(deficiency)&nbsp;and cash flows for the three months ended
March&nbsp;31, 2005 and 2004 are unaudited. The unaudited
interim financial statements have been prepared on the same
basis as the annual financial statements and, in the opinion of
management, reflect all adjustments, which include only normal
recurring adjustments necessary to present fairly the
Company&#146;s financial position and results of operations and
cash flows for the three months ended March&nbsp;31, 2005 and
2004. The financial data and other information disclosed in
these notes to financial statements related to the three month
periods are unaudited. The results for the three months ended
March&nbsp;31, 2005 are not necessarily indicative of the
results to be expected for the year ending December&nbsp;31,
2005.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The Pro Forma Balance Sheet gives effect as of March&nbsp;31,
2005 to the conversion of all of the Company&#146;s outstanding
preferred stock into 3,398,105 shares of common stock which will
occur upon the closing of the proposed initial public offering.
Upon such conversion, the deemed dividends on the convertible
preferred stock will be forfeited. Additionally, it is assumed
for pro forma purposes that 2,610,643 of the Company&#146;s
warrants to purchase the Company&#146;s common stock will be
exchanged for a total of 1,305,321 shares of the Company&#146;s
common stock based on an exchange ratio of one share of the
Company&#146;s common stock for every two shares of the
Company&#146;s common stock purchaseable under the warrants and
will occur prior to the closing of the proposed initial public
offering.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Reverse Stock Split</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The Board of Directors approved on May&nbsp;13, 2005, a
one-for-two reverse common stock split, which will become
effective upon the earlier of the conversion of the preferred
stock or September&nbsp;30, 2005. All references to common
stock, common shares outstanding, average number of common
shares outstanding, per share amounts, common stock options and
warrants in these financial statements and notes to financial
statements have been restated to reflect the one-for- two common
stock reverse split on a retroactive basis.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Cash and Cash Equivalents</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The Company maintains cash in bank deposit accounts which, at
times, may exceed federally insured limits. The Company has not
experienced any losses on these accounts. Cash equivalents
include all highly-liquid debt instruments with an original
maturity of three months or less at the date of acquisition.
</DIV>

<P align="center" style="font-size: 10pt;">F-7

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="center" style="font-size: 10pt;">
<B>ELECTRO-OPTICAL SCIENCES, INC.</B>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>NOTES TO FINANCIAL STATEMENTS&nbsp;&#151;&nbsp;(Continued)</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 24pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Accounts Receivable</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Accounts receivable are reported at their outstanding unpaid
principal balances reduced by an allowance for doubtful
accounts. The Company estimates doubtful accounts based on
historical bad debts, factors related to specific
customers&#146; ability to pay and current economic trends. The
Company writes off accounts receivable against the allowance
when a balance is determined to be uncollectible.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Inventories</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Inventories, which consist primarily of DIFOTI&#174; supplies,
are stated at the lower of cost, determined by the first-in,
first-out method, or market.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Property and Equipment</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Depreciation of property and equipment is provided for by the
straight-line method over the estimated useful lives of the
related assets. Leasehold improvements are amortized over the
lesser of the assets&#146; useful lives or the remaining term of
the lease.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Patents</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Patents are carried at cost less accumulated amortization which
is calculated on a straight-line basis over a period of
15&nbsp;years.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Revenue Recognition</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Revenue from DIFOTI&#174; product sales is recognized at the
time of delivery and acceptance, and after consideration of all
the terms and conditions of the customer contract. Certain of
the Company&#146;s products which were being sold prior to
December&nbsp;31, 2004 included a 30-day return policy. Revenue
on these products is recognized after the shipment is made and
the 30-day return period has elapsed. Effective January 1, 2005
all products are sold without a right of return and revenue is
therefore recognized after the shipment is made. Deferred
revenues at December&nbsp;31, 2004 consist of revenues that were
billed and paid in advance of the shipment of the product.
During April 2005, the Company discontinued the sale of the
DIFOTI&#174; product line.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The Company has not received FDA approval for the sale of
MelaFind&#174; or any other product line, and has had no
revenues from products other than DIFOTI&#174;.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Grant revenue generated in 2002 represents federal grants
received by the Company in conjunction with an undertaking to
perform certain research. Cost of sales for the year ended
December&nbsp;31, 2002 includes expenses attributable to the
grant revenue, principally payroll and related costs amounting
to $564.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Warranty Costs</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The Company generally warrants its products for one year after
sale. Warranty costs have been de minimus to the Company and are
recorded when incurred.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Shipping Costs</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Shipping costs are included in selling, general and
administrative expenses and amounted to approximately $18, $24
and $28 for the years ended December&nbsp;31, 2002, 2003 and
2004, respectively, and $7 and $9 for the three months ended
March&nbsp;31, 2004 and 2005, respectively.
</DIV>

<P align="center" style="font-size: 10pt;">F-8

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="center" style="font-size: 10pt;">
<B>ELECTRO-OPTICAL SCIENCES, INC.</B>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>NOTES TO FINANCIAL STATEMENTS&nbsp;&#151;&nbsp;(Continued)</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 24pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Income Taxes</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Deferred tax assets and liabilities are recognized for the
estimated future tax consequences attributable to differences
between the amounts of existing assets and liabilities carried
on the financial statements and their respective tax bases and
the benefits arising from the realization of operating loss and
tax credit carryforwards. Deferred tax assets and liabilities
are measured using tax rates in effect for the year in which
those temporary differences are expected to be recovered or
settled. A valuation allowance is established when necessary to
reduce deferred tax assets to the amount expected to be realized.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Estimates</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires the use of estimates and assumptions by
management that affect reported amounts of assets and
liabilities and disclosures 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.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Long-lived Assets</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The Company reviews long-lived assets for impairment annually
whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. An asset is
considered to be impaired when the sum of the undiscounted
future net cash flows expected to result from the use of the
asset and its eventual disposition exceeds its carrying amount.
The amount of impairment loss, if any, is measured as the
difference between the net book value of the asset and its
estimated fair value.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Advertising Costs</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Costs incurred for producing and communicating advertising are
expensed as incurred and are included in selling, general and
administrative expenses in the accompanying statements of
operations. Advertising expenses were approximately $0, $3 and
$57 for the years ended December&nbsp;31, 2002, 2003 and 2004,
respectively, and $0 and $15 for the three months ended
March&nbsp;31, 2004 and 2005, respectively.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Research and Development</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Research and development costs are expensed as incurred.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Stock-Based Compensation</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The Company applies the intrinsic-value method of accounting
prescribed by the Accounting Principles Board (APB)&nbsp;Opinion
No.&nbsp;25 and related interpretations to account for the
Company&#146;s fixed-plan employee stock options. Under this
method, compensation expense is recorded on the date of grant
only if the then current market price of the underlying stock
exceeded the exercise price. Statement of Financial Accounting
Standards (SFAS) No.&nbsp;123, Accounting for Stock-Based
Compensation, as amended by SFAS&nbsp;No.&nbsp;148,
<I>Accounting for Stock-Based Compensation, Transition and
Disclosure,</I> established accounting and disclosure
requirements using a fair-value based method of accounting for
stock-based employee compensation plans. As allowed by
SFAS&nbsp;No.&nbsp;123 and No.&nbsp;148, the Company has elected
to continue to apply the intrinsic-value based method of
accounting for employee stock options described above, and has
adopted only the disclosure requirements of
SFAS&nbsp;No.&nbsp;123. Had the Company elected to recognize
compensation cost based on the fair
</DIV>

<P align="center" style="font-size: 10pt;">F-9

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="center" style="font-size: 10pt;">
<B>ELECTRO-OPTICAL SCIENCES, INC.</B>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>NOTES TO FINANCIAL STATEMENTS&nbsp;&#151;&nbsp;(Continued)</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
value of the options granted at the grant date, as prescribed by
SFAS&nbsp;No.&nbsp;123, the Company&#146;s net loss and net loss
per share would have been adjusted to the pro forma amounts
indicated below:
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="50%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>


<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap><B>December 31,</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>March 31,</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2002</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2003</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2004</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2004</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2005</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Net loss attributable to common stockholders, as reported</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(1,535</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(2,399</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(4,618</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(888</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(2,026</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Add: stock-based employee compensation included in reported net
    loss, net of income tax effect</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>72</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>23</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>173</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>6</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>79</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Deduct: stock-based employee compensation expense determined
    under fair-value-based method, net of related tax effect</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(75</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(65</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(186</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(8</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(82</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Pro Forma Net Loss</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(1,538</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(2,441</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(4,631</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(890</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(2,029</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Basic and Diluted Loss per Share, as reported</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(1.00</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(1.49</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(2.61</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(0.53</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(1.12</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Basic and Diluted Loss per Share, pro forma</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(1.00</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(1.51</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(2.62</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(0.53</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(1.12</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

</TABLE>
</CENTER>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The per share weighted-average fair value of stock options
granted during 2002, 2003 and 2004 was $.26, $.34, and $3.00,
respectively, on the dates of grant using the Black-Scholes
option-pricing model.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
During the three months ended March&nbsp;31, 2005, the Company
did not grant any stock options. The per share weighted average
fair value of stock options granted during the three months
ended March&nbsp;31, 2004 was determined using the Black-Scholes
option pricing model resulting in a weighted average fair value
of $0.23 per share. The following weighted-average assumptions
were used:
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="60%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>


<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap><B>December 31,</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>March 31,</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2002</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2003</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2004</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2004</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2005</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Expected volatility</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1%</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>60%</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>60%</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Risk-free interest rate</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>4.52</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>4.52%</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3.17%</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3.39%</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>to</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>to</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>to</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5.43</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5.43%</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3.94%</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Expected option life (in years)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>10</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>10</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Expected dividend yield</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>0</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>0%</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>0%</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>0%</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

</TABLE>
</CENTER>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Options or warrants issued to non-employees for services are
recorded at fair value and accounted for in accordance with
Emerging Issues Task Force (EITF) Issue&nbsp;No.&nbsp;96-18,
<I>Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services. </I>For equity instruments that are not
immediately vested, compensation cost is measured on the date
such instruments vest or a performance commitment, as defined in
EITF Issue&nbsp;96-18, is reached. The costs are classified in
the accompanying statements of operations based on the nature of
the services performed.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Deferred Compensation</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Deferred compensation attributable to unvested common stock
options is measured at the measurement date for the respective
grants, and reflected as a deduction from stockholders&#146;
equity. Compensation expense is recognized ratably over the
vesting period.
</DIV>

<P align="center" style="font-size: 10pt;">F-10

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="center" style="font-size: 10pt;">
<B>ELECTRO-OPTICAL SCIENCES, INC.</B>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>NOTES TO FINANCIAL STATEMENTS&nbsp;&#151;&nbsp;(Continued)</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 24pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Financial Instruments</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The Company&#146;s financial instruments consist principally of
cash and cash equivalents, marketable securities, accounts
receivable and accounts payable. The Company believes the
financial instruments&#146; recorded values approximate current
values because of their nature and respective durations. The
Company maintains cash in bank deposit accounts, which, at
times, may exceed federally insured limits. The Company has not
experienced any losses on these accounts.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Net Loss per Common Share</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Net loss per share is presented in accordance with the
provisions of SFAS&nbsp;No.&nbsp;128, &#147;Earnings Per
Share&#148; (&#147;EPS&#148;). Basic EPS excludes dilution for
potentially dilutive securities and is computed by dividing net
loss attributable to common stockholders by the weighted average
number of common shares outstanding during the period. Diluted
EPS gives effect to dilutive options, warrants and other
potential common shares outstanding during the period. Diluted
net loss per common share is equal to basic net loss per common
share since all potentially dilutive securities are
anti-dilutive for each of the periods presented. Diluted net
loss per common share for the years ended December&nbsp;31,
2002, 2003 and 2004 does not include the effects of options to
purchase 142,581, 290,678 and 965,203 shares of common stock,
respectively, and 412,182 and 954,266 shares for the three
months ended March&nbsp;31, 2004 and 2005 respectively; 690,
369,993 and 2,758,923 common stock warrants for the years ended
December&nbsp;31, 2002, 2003 and 2004, respectively, and 613,356
and 2,758,923 common stock warrants for the three months ended
March&nbsp;31, 2004 and 2005, respectively.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The pro forma basic and diluted net loss per common share for
the year ended December&nbsp;31, 2004 and for the three months
ended March&nbsp;31, 2005 gives effect to the conversion of the
existing shares of preferred stock into 3,398,105 shares of
common stock at the conversion ratios which would apply upon
consummation of the proposed initial public offering and the
exchange of 2,610,643 warrants for 1,305,321 shares of common
stock as described in Note&nbsp;9. In addition, the net loss
attributable to the Company&#146;s common stockholders used in
the computation of basic and diluted net loss per share for the
unaudited pro forma net loss attributable to the Company&#146;s
common stockholders has been adjusted to reverse the accretion
on the Company&#146;s preferred stock and also excludes the
preferred stock dividends for the respective periods.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Recently Issued Pronouncements</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In December 2004, the Financial Accounting Standards Board
(FASB)&nbsp;issued the revised SFAS&nbsp;No.&nbsp;123,
Share-Based Payment (&#147;SFAS&nbsp;123R&#148;), which
addresses the accounting for share-based payment transactions in
which the Company obtains employee services in exchange for
(a)&nbsp;equity instruments of the Company or
(b)&nbsp;liabilities that are based on the fair value of the
Company&#146;s equity instruments or that may be settled by the
issuance of such equity instruments. SFAS&nbsp;123R eliminates
the ability to account for employee share-based payment
transactions using APB No. 25 and requires instead that such
transactions be accounted for using the grant-date fair value
based method. SFAS&nbsp;123R will be effective as of the
beginning of the first interim or annual reporting period that
begins after December&nbsp;15, 2005 (January&nbsp;1, 2006 for
the Company) and applies to all awards granted or modified after
the effective date. In addition, compensation cost for the
unvested portion of previously granted awards that remain
outstanding on the effective date shall be recognized on or
after the effective date, as the related services are rendered,
based on the awards&#146; grant-date fair value as previously
calculated for the pro-forma disclosure under SFAS&nbsp;123. The
Company expects that upon the adoption of SFAS&nbsp;123R it will
apply the modified prospective application transition method, as
permitted by the statement. Under such transition method, upon
the adoption of SFAS&nbsp;123R, the Company&#146;s financial
statements for periods prior to the effective date of the
statement will not be restated. The impact of this statement on
the Company&#146;s financial statements or its results of
operations in 2005 and beyond will depend upon various factors,
among them, its future compensation strategy. The Company
</DIV>

<P align="center" style="font-size: 10pt;">F-11

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="center" style="font-size: 10pt;">
<B>ELECTRO-OPTICAL SCIENCES, INC.</B>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>NOTES TO FINANCIAL STATEMENTS&nbsp;&#151;&nbsp;(Continued)</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
expects that the effect of applying this statement on its
results of operations in 2005 as it relates to existing option
plans would not be materially different from the SFAS&nbsp;123
pro forma effect previously reported.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In March 2004, the FASB issued EITF Issue No.&nbsp;03-1,
&#147;The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments,&#148; which provides new
guidance for assessing impairment losses on debt and equity
investments. Additionally, EITF Issue No.&nbsp;03-1 includes new
disclosure requirements for investments that are deemed to be
temporarily impaired. In September 2004, the FASB delayed the
accounting provisions of EITF Issue No.&nbsp;03-1; however, the
disclosure requirements remain effective and have been adopted
by the Company in the financial statements. The Company will
evaluate the effect, if any, of EITF Issue No.&nbsp;03-1 when
final guidance is released.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>2.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;MARKETABLE SECURITIES:</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Marketable securities consist of debt securities that the
Company has the intent and ability to hold to maturity. The
Company classifies the marketable securities as held-to maturity
in accordance with SFAS No.&nbsp;115, &#147;Accounting for
Certain Investments in Debt and Equity Securities&#148;.
Held-to-maturity securities are recorded at amortized cost. The
Company&#146;s investments mature within one year. Investments
in securities are summarized as follows at December&nbsp;31,
2004 and March&nbsp;31, 2005:
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="3%">&nbsp;</TD>
    <TD width="33%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
</TR>


<TR style="font-size: 8pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap><B>December&nbsp;31, 2004</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap><B>March&nbsp;31, 2005</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Gross</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="7">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Gross</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="7">&nbsp;</TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Unrealized</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Fair</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Amortized</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Unrealized</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Fair</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Amortized</B></TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Loss</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Value</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Cost</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Loss</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Value</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Cost</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Corporate commercial paper</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(&#151;</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>2,500</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>2,500</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(&#151;</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>1,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>1,000</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Corporate debt</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(10</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2,497</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2,507</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(8</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2,511</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2,519</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    United States Treasury note</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(8</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,580</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,588</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(10</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,580</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,590</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD colspan="2"><FONT style="font-size: 10pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(18</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>6,577</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>6,595</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(18</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>5,091</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>5,109</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

</TABLE>
</CENTER>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>3.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;PROPERTY AND EQUIPMENT:</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Property and equipment, at cost, consists of the following:
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="57%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
</TR>


<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>December 31,</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>March 31,</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Estimated</B></TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2003</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2004</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2005</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Useful Life</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Leasehold improvements</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>23</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>32</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>35</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5-10 years</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Laboratory and research equipment</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>61</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>119</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>119</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5 years</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Office furniture and equipment</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>112</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>134</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>158</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5 years</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>197</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>286</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>312</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Less accumulated depreciation and amortization</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>179</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>197</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>182</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>18</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>89</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>130</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

</TABLE>
</CENTER>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Depreciation expense amounted to approximately $16, $15 and $18,
for the years ended December&nbsp;31, 2002, 2003 and 2004,
respectively and $3 and $9 for the three months ended
March&nbsp;31, 2004 and 2005 respectively.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>4.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;PATENTS:</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Patents are shown in the accompanying balance sheets net of
accumulated amortization of $83 and $101 at December&nbsp;31,
2003 and 2004, respectively, and $105 at March&nbsp;31, 2005.
Amortization expense related to
</DIV>

<P align="center" style="font-size: 10pt;">F-12

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="center" style="font-size: 10pt;">
<B>ELECTRO-OPTICAL SCIENCES, INC.</B>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>NOTES TO FINANCIAL STATEMENTS&nbsp;&#151;&nbsp;(Continued)</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
the patents was approximately $17, $17 and $18 for the years
ended December&nbsp;31, 2002, 2003 and 2004, respectively, and
$4 and $4 for the three months ended March&nbsp;31, 2004 and
2005, respectively.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The estimated future amortization expense related to the patents
is as follows:
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="3%">&nbsp;</TD>
    <TD width="89%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Year ended December 31,</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    2005</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>18</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    2006</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>18</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    2007</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>18</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    2008</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>18</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    2009</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>18</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Thereafter</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>73</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD colspan="2"><FONT style="font-size: 10pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>163</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

</TABLE>
</CENTER>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>5.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;NOTES
PAYABLE-STOCKHOLDERS:</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
During 2003, the Company had notes payable to two of its
stockholders totaling $48. These notes were payable in October
2004, bore interest at 6%, and were repaid during 2004. Interest
expense amounted to approximately $1 and $2 for the years ended
December&nbsp;31, 2003 and 2004, respectively.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In addition, the Company had a demand note payable to one of its
stockholders in the amount of $15 with interest accruing at 12%
per annum. During October 2004, the note and accrued interest of
$1 were converted into 6,999 shares of Series&nbsp;C preferred
stock.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>6.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;COMMITMENTS AND
CONTINGENCIES:</B>
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    The Company is obligated under two non cancelable operating
    leases for office space expiring June 2005 and November 2010.
    The leases are subject to escalations for increases in operating
    expenses. The approximate aggregate minimum future payments
    under these leases are due as follows:</TD>
</TR>

</TABLE>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="3%">&nbsp;</TD>
    <TD width="89%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Year ended December 31,</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    2005</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>155</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    2006</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>102</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    2007</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>108</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    2008</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>109</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    2009</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>115</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Thereafter</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>105</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD colspan="2"><FONT style="font-size: 10pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>694</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

</TABLE>
</CENTER>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Rent expense charged to operations amounted to approximately
$88, $113 and $110 for the years ended December&nbsp;31, 2002,
2003 and 2004, respectively, and $27 and $25 for the three
months ended March&nbsp;31, 2004 and 2005, respectively.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
During January 2004, the Company entered into an employment
agreement with its President and CEO through December&nbsp;31,
2005, which provides for a base salary of $175, stock options
and performance bonuses. The agreement provides for automatic
one year renewal terms.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
During January 2004 the Company amended its employment agreement
with its former president, who now holds the title of Chief
Science and Technology Officer. The agreement was originally
entered into in May 2003 with a three-year term. The agreement
now includes a salary of $175 and provides for stock
</DIV>

<P align="center" style="font-size: 10pt;">F-13

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="center" style="font-size: 10pt;">
<B>ELECTRO-OPTICAL SCIENCES, INC.</B>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>NOTES TO FINANCIAL STATEMENTS&nbsp;&#151;&nbsp;(Continued)</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
options and performance bonuses. As of May&nbsp;31, 2005 this
former employee is now a consultant to the Company.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The Company had been involved in various claims and legal
actions arising in the ordinary course of business. The ultimate
outcome of these matters did not have a material adverse impact
on the financial position of the Company or the results of its
operations.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>7.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;EMPLOYEE BENEFIT PLAN:</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The Company has a defined contribution plan under
Section&nbsp;401(k) of the Internal Revenue Code covering all
qualified employees. An officer of the Company serves as trustee
of the plan. The Company provides a matching contribution of up
to 3% of each employee&#146;s salary. Contributions to this plan
amounted to approximately $29, $12 and $25 for the years ended
December&nbsp;31, 2002, 2003 and 2004, respectively, and $5 and
$10 for the three months ended March&nbsp;31, 2004 and 2005,
respectively.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="4%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD><B>8</B></TD>
    <TD>
    <B>STOCKHOLDERS&#146; (DEFICIENCY) EQUITY AND REDEEMABLE
    PREFERRED STOCK:</B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
During January 2003, the Company received $180 in exchange for
issuing a convertible promissory note bearing interest at 10%
per annum, The note was convertible at a discount of 20% on the
next round of financing. In June 2003, the note was converted
into Series&nbsp;C preferred stock. (See discussion below.) Upon
conversion of the note the Company recorded a charge of $45 to
reflect the value of the beneficial conversion of the shares
since the shares were converted at $1.81 per share, a 20%
discount. In addition, the Company granted the note holder
five-year warrants to purchase 25% of the total number of
securities issued upon conversion of the note, which amounted to
99,558 shares (or 24,890 warrants), at an exercise price equal
to the per share price of the next financing as defined in the
loan agreement. The value of these warrants was de minimus for
the year ended December&nbsp;31, 2003, interest on these notes
amounted to approximately $8.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
During February 2003, certain stockholders loaned the Company
$325 bearing interest at 12% per annum. In June 2003, these
loans were converted into 143,802 shares of Series&nbsp;C
preferred stock at $2.26 per share. For the year ended
December&nbsp;31, 2003, interest on these notes amounted to
approximately $21.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
During June 2003, the Company completed a private placement
whereby investors agreed to acquire up to 1,400,000 Preferred
Series&nbsp;C units. Each unit consists of one share of
Series&nbsp;C preferred stock and one warrant to purchase
one&nbsp;half share of common stock at an exercise price of
$6.50 per share. Of the 1,400,000 units, the first tranche of
663,717 units was sold for an aggregate of $1,500. Costs
associated with this issuance amounted to $252. This amount will
be accreted to the Series&nbsp;C over the redemption period. For
the year ended December&nbsp;31, 2003, $25 was accreted. The
value of the warrants was de minimus.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In order to complete the private placement, the Series&nbsp;A
and B stockholders consented to modifications to certain of
their rights, preferences, and privileges. The Series&nbsp;A
preferred shares were split 1,000 for 1 and due to the
anti-dilution provision, the conversion ratio of Series&nbsp;A
was changed to 0.5818 to 1 (totaling 16,202 shares of common
stock). Additionally, the Company granted a stock distribution
of 45,000 shares to the Series&nbsp;B stockholders, valued at
$102 or $2.26 per share. As a result of these modifications, the
Company adjusted the carrying amount of the Series&nbsp;B
preferred stock. Due to the anti-dilution provision, the
conversion ratio of Series&nbsp;B was changed to 0.5796 to
1(totaling 79,043 shares of common stock). The Series&nbsp;C
preferred stock converts to common stock at a ratio of
0.50&nbsp;to&nbsp;1.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In connection with the private placement, 150,000 shares of
common stock were sold to the promoters at $.46 per share. A
note of $69 was exchanged for this purchase and is shown as a
reduction in stockholders&#146; equity (deficiency). The note
bears interest at 3.06% and is due June&nbsp;20, 2008. Interest
income amounted to approximately $2 and $1 for the years ended
December&nbsp;31, 2004 and 2003, respectively.
</DIV>

<P align="center" style="font-size: 10pt;">F-14

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="center" style="font-size: 10pt;">
<B>ELECTRO-OPTICAL SCIENCES, INC.</B>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>NOTES TO FINANCIAL STATEMENTS&nbsp;&#151;&nbsp;(Continued)</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
During 2004, the second tranche of the Series&nbsp;C private
placement was completed and an additional 486,725 of
Series&nbsp;C units were issued for total proceeds of $1,100. An
additional 427 units were distributed in order to comply with
minimum ownership provisions. The value of the distribution was
de minimus. In order to induce the investment in this second
tranche, the Company issued additional warrants to purchase
121,681 shares of Series&nbsp;C preferred stock at a price of
$2.26 per share, for waiving a development milestone. These
warrants were valued at $179.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
During May 2004, the Company obtained bridge loans in the amount
of $1,000 from related parties. The loans bears interest at
1.57% and were payable on December&nbsp;31, 2004. During October
2004 these loans were converted into 442,469 Preferred
Series&nbsp;C units at a price of $2.26 per unit. The warrants
were valued at $327. The Company also sold approximately 125,000
shares of common stock to the lenders at $.46 per share for $57.
The Company ascribed a value to the common stock and recorded an
imputed interest charge of $80.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
During October 2004, the Company completed a second private
placement and sold 3,578,081 Preferred Series&nbsp;C units for
total proceeds of approximately $8,100 at a price of $2.26 per
unit. The warrants were valued at $2,653. Costs of the
Series&nbsp;C private placement amounted to approximately $448.
This amount will be accreted to the Series&nbsp;C over the
redemption period. For the year ended December&nbsp;31, 2004,
$71 was accreted.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
As a result of the October 2004 Preferred Series&nbsp;C
transactions, the Company recorded a beneficial conversion
feature of $2,385.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The total accretion to redemption value for the Series&nbsp;C
amounted to $25, $323, and $421 for the years ended
December&nbsp;31, 2003, 2004 and the three months ended
March&nbsp;31, 2005, respectively.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The rights, preferences, and privileges of the Series&nbsp;B and
C redeemable preferred stock are as follows:
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Voting Rights</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
All holders of redeemable convertible preferred stock have
voting rights equal to the number of shares of common stock into
which the respective preferred stock is convertible.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Liquidation Preference</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In the event of liquidation, dissolution, or winding-up of the
Company, and before any distribution to common stockholders, the
holders of Series&nbsp;B and C redeemable convertible preferred
stock are entitled to receive $2.26 per share plus all accrued
but unpaid dividends.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Deemed Dividends</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Dividends on the Series&nbsp;B and Series&nbsp;C preferred stock
may be declared at the discretion of the board of directors at
an annual rate equal to 10%, as adjusted, of the accreted value
per share and shall be payable in preference and priority to any
declaration or payment of any distribution on Series&nbsp;A
preferred stock or common stock and will be cumulative. At
December&nbsp;31, 2004 and March&nbsp;31, 2005 there are
approximately $1,506 and $1,674 of deemed but unpaid dividends.
In the event the preferred stock is converted into common stock,
any related deemed dividends would be forfeited.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Redemption Provisions</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Pursuant to the modification of the Series&nbsp;B preferred
stock terms adopted at the closing of the Series&nbsp;C private
placement, the requirement to redeem the preferred shares, at
the option of the holder, has been extended to June 2008. The
redemption of Series&nbsp;B requires approval of the
Series&nbsp;C shareholders. The preferred Series&nbsp;C stock is
redeemable at the option of the holder, on the fifth and sixth
anniversary of the first
</DIV>

<P align="center" style="font-size: 10pt;">F-15

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="center" style="font-size: 10pt;">
<B>ELECTRO-OPTICAL SCIENCES, INC.</B>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>NOTES TO FINANCIAL STATEMENTS&nbsp;&#151;&nbsp;(Continued)</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
issuance of Series&nbsp;C preferred stock (June 2003). Both the
Series&nbsp;B and C have been classified as mezzanine capital at
their redemption values.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>9.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;STOCK OPTIONS AND
WARRANTS:</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Warrants</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Warrants outstanding consist principally of warrants issued in
connection with the Company&#146;s Series&nbsp;C financing and
generally expire seven years from the date of grant.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
During 2003 and 2004, in connection with the sale of preferred
Series&nbsp;C stock, 2,683,923 warrants at exercise prices
ranging from $4.52 to $13.00 per share were issued and have been
valued at $3,159.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
During 2004, the Company issued a 5&nbsp;year warrant to
purchase 75,000 shares of common stock at an exercise price of
$7.00 per share to one of its consultants. These warrants have
been valued at $120.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Warrant activity during the periods indicated is as follows:
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="72%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Weighted-</B></TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Average</B></TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Exercise</B></TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Warrants</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Price</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Outstanding at January&nbsp;1, 2002</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>10,505</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>10.00</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Expired</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(9,815</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>10.00</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Outstanding at December&nbsp;31, 2002</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>690</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>10.00</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Granted</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>369,303</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>12.72</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Outstanding at December&nbsp;31, 2003</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>369,993</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>12.70</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Granted</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2,389,620</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>12.60</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Expired</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(690</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>10.00</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Outstanding at December&nbsp;31, 2004</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2,758,923</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>12.61</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

</TABLE>
</CENTER>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
There was no warrant activity during the quarter ended
March&nbsp;31, 2005.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
On April&nbsp;5, 2005, the Board of Directors approved, subject
to stockholder approval, the issuance of 1,305,321 shares of the
Company&#146;s common stock in exchange for 2,610,643
outstanding warrants (a conversion ratio of one share of common
stock for two warrants.) The Company considers this transaction
to be an exchange of equity instruments at fair value which will
have no net effect on stockholders&#146; equity.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The value of the warrants was determined using the Black-Scholes
option pricing model.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Stock Options</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The Company has two stock option plans (the &#147;Plans&#148;)
which allow the board of directors to grant incentives to
employees, directors and collaborating scientists in the form of
incentive stock options, nonqualified stock options and
restricted stock. At December&nbsp;31, 2004 and March 31, 2005,
options to purchase 965,203 and 954,266 shares of common stock
respectively at exercise prices ranging from $.40 to $10.00 per
share are outstanding and are exercisable at various dates
through 2013. The total number of shares reserved under the
Company&#146;s stock option plans is 1,000,000.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In January 2003, the Company issued an option to acquire 24,209
shares of common at an exercise price of $1.00 valued at
approximately $97 to outside consultants. During 2004, the
Company issued options to acquire 22,750 shares of common stock
at an exercise price of $.46 to outside consultants. These
options had a nominal value.
</DIV>

<P align="center" style="font-size: 10pt;">F-16
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="center" style="font-size: 10pt;">
<B>ELECTRO-OPTICAL SCIENCES, INC.</B>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>NOTES TO FINANCIAL STATEMENTS&nbsp;&#151;&nbsp;(Continued)</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
During 2004 the Company issued 262,500 options to certain
employees and Board members. The value of the options resulted
in a charge to operations in the amount of $150 and $71 during
the year ended December&nbsp;31, 2004 and for the three months
ended March&nbsp;31, 2005, respectively. In addition, during
2003 and 2004 the Company issued options to consultants that
resulted in a charge to operations of $97 and $73 during the
years ended December&nbsp;31, 2003 and 2004, respectively.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Stock option activity during the periods indicated is as follows:
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="72%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Weighted-</B></TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>average</B></TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Number</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Exercise</B></TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>of Shares</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Price</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Outstanding at January&nbsp;1, 2002</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>128,050</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>2.28</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Granted</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>14,531</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1.00</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Outstanding at December&nbsp;31, 2002</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>142,581</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2.16</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Granted</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>158,565</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>.94</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Expired/ Forfeited</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(10,468</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>.96</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Outstanding at December&nbsp;31, 2003</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>290,678</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1.12</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Granted</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>679,525</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>.46</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Expired/ Forfeited</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(5,000</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1.00</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Outstanding at December&nbsp;31, 2004</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>965,203</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>.66</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Expired/ Forfeited</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(10,937</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3.49</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Outstanding at March&nbsp;31, 2005</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>954,266</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>.63</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Options exercisable at December&nbsp;31, 2004</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>428,729</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>.89</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Options exercisable at March&nbsp;31, 2005</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>446,675</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>.82</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

</TABLE>
</CENTER>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The following table summarizes information about fixed stock
options outstanding at December&nbsp;31, 2004:
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="37%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
</TR>


<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap><B>Options Outstanding</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="7">&nbsp;</TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>Options Exercisable</B></TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Weighted-</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>average</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Weighted-</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Weighted-</B></TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Remaining</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>average</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>average</B></TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD align="center" nowrap><B>Range of</B></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Number</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Contractual</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Exercise</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Number</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Exercise</B></TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD align="center" nowrap><B>Exercise Prices</B></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Outstanding</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Life</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Price</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Exercisable</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Price</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    $.01-$.46</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>694,525</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>4.7 years</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>.46</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>173,989</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>.46</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    $.47-$1.00</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>265,678</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>6.5 years</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1.00</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>249,740</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1.00</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    $1.01-$10.00</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>.4 years</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>10.00</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>10.00</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    $.01-$10.00</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>965,203</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5.7 years</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>.66</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>428,729</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>.89</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

</TABLE>
</CENTER>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In May 2005, the Company amended option agreements for 125,000
shares in the aggregate, of three key employees to immediately
vest upon the completion of a successful initial public
offering. The Company will record a charge to operations based
upon the initial public offering price.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>10.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;INCOME TAXES:</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
At December&nbsp;31, 2004, the Company had net operating loss
carryforwards of approximately $12,208 available to offset
future taxable income expiring at various dates through the year
2024. The Company&#146;s ability to utilize its net operating
losses may be significantly limited due to changes in the
Company&#146;s ownership as defined by federal income tax
regulations. Without regard to any such limitations, the Company
had a deferred tax asset of approximately $3,443 and $4,883 at
December&nbsp;31, 2003 and 2004, respectively. Because the
Company anticipates continued losses for the foreseeable future,
the Company has recorded a
</DIV>

<P align="center" style="font-size: 10pt;">F-17

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="center" style="font-size: 10pt;">
<B>ELECTRO-OPTICAL SCIENCES, INC.</B>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>NOTES TO FINANCIAL STATEMENTS&nbsp;&#151;&nbsp;(Continued)</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
100% valuation allowance against its deferred income tax assets
for all years. The increase in the valuation allowance for the
years ended December&nbsp;31, 2002, 2003, and 2004 amounted to
$428, $753, and $1,440, respectively.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>11.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;SUBSEQUENT EVENTS:</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
On March 9 through March&nbsp;21, 2005, the Company was
inspected by the FDA in connection with its DIFOTI&#174;
product, a non-invasive imaging device for the detection of
dental cavities. On March&nbsp;21, 2005, the Company was cited
for failures to comply fully with FDA quality system regulation,
or QSR, mandated procedures. These inspectional findings were
discussed in a subsequent meeting with the FDA on April&nbsp;28,
2005. The Company is in the process of addressing the
deficiencies noted.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The Company decided to discontinue all operations associated
with its DIFOTI&#174; product effective as of April&nbsp;5,
2005, in order to focus its resources and attention on the
development and commercialization of MelaFind. The Company is
currently seeking an acquirer for the DIFOTI&#174; assets, and
does not expect to have any significant continuing
responsibility for the DIFOTI&#174; business after its
disposition.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Losses attributable to DIFOTI&#174; operations discontinued in
April 2005 amounted to $201, $12, $426, $81, and $129 for the
years ended December&nbsp;31, 2002, 2003, 2004, and the three
months ended March&nbsp;31, 2004 and 2005, respectively.
</DIV>

<P align="center" style="font-size: 10pt;">F-18

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="center" style="font-size: 10pt; margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<IMG src="y09078eoslogo.gif" alt="LOGO">
</DIV>

<DIV align="center" style="font-size: 14pt; margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face="wingdings">l</FONT>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Shares</B>
</DIV>

<DIV align="center" style="font-size: 24pt; margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Electro-Optical Sciences, Inc.</B>
</DIV>

<DIV align="center" style="font-size: 14pt; margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Common Stock</B>
</DIV>

<DIV align="center" style="font-size: 3pt; margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<DIV style="width: 31%; border-top: 1.0pt solid black; font-size: 1pt">&nbsp;</DIV>
</DIV>

<DIV align="center" style="font-size: 12pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>PROSPECTUS</B>
</DIV>

<DIV align="center" style="font-size: 3pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<DIV style="width: 31%; border-top: 1.0pt solid black; font-size: 1pt">&nbsp;</DIV>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 9pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Until &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;,
2005, all dealers that effect transactions in these securities,
whether or not participating in this offering, may be required
to deliver a prospectus. This is in addition to the
dealers&#146; obligation to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or
subscriptions.
</DIV>

<DIV style="margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 18pt;">

<TR>
    <TD width="50%"></TD>
    <TD width="50%"></TD>
</TR>

<TR valign="top">
    <TD align="left"><B>Ladenburg Thalmann&nbsp;&#38; Co. Inc.</B></TD>
    <TD align="right"><B>Stanford Group Company</B></TD>
</TR>

</TABLE>

<DIV align="center" style="font-size: 10pt; margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;,
2005
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>PART&nbsp;II</B>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>INFORMATION NOT REQUIRED IN PROSPECTUS</B>
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="10%"></TD>
    <TD width="90%"></TD>
</TR>

<TR valign="top">
    <TD><B>ITEM&nbsp;13.</B></TD>
    <TD>
    <B><I>Other Expenses of Issuance and Distribution.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The following table sets forth the costs and expenses to be paid
by the Registrant in connection with the sale of the shares of
common stock being registered hereby. All amounts are estimates
except for the SEC registration fee, the NASD filing fee and the
NASDAQ National Market filing fee.
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="3%">&nbsp;</TD>
    <TD width="82%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Securities and Exchange Commission registration fee</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>3,884.10</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    NASD filing fee</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>4,640.00</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    NASDAQ National Market filing fee</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5,000.00</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Accounting fees and expenses</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>*</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Legal fees and expenses</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>*</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Road show expenses</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>*</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Printing and engraving expenses</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>*</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Blue sky fees and expenses</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>*</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Transfer agent and registrar fees and expenses</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>*</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Miscellaneous</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>*</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Total</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>*</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

</TABLE>
</CENTER>

<DIV align="left" style="font-size: 3pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<DIV style="width: 18%; border-top: 1.0pt solid black; font-size: 1pt">&nbsp;</DIV>
</DIV>

<DIV style="margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="2%"></TD>
    <TD width="98%"></TD>
</TR>

<TR valign="top">
    <TD>*&nbsp;</TD>
    <TD align="left">
    To be completed by amendment.</TD>
</TR>

</TABLE>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="10%"></TD>
    <TD width="90%"></TD>
</TR>

<TR valign="top">
    <TD><B>ITEM&nbsp;14.</B></TD>
    <TD>
    <B><I>Indemnification of Directors and Officers.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Section&nbsp;145 of the Delaware General Corporation Law permits
a corporation to include in its charter documents, and in
agreements between the corporation and its directors and
officers, provisions expanding the scope of indemnification
beyond that specifically provided by the current law.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Article&nbsp;VIII of our third amended and restated certificate
of incorporation provides for the indemnification of directors
to the fullest extent permissible under Delaware law. Our fourth
amended and restated certification of incorporation to be filed
upon completion of this offering will contain similar
indemnification provisions.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Article&nbsp;IX of our second amended and restated bylaws
provides for the indemnification of officers, directors or other
agents acting on our behalf if such person acted in good faith
and in a manner reasonably believed to be in and not opposed to
our best interest and, with respect to any criminal action or
proceeding, the indemnified party had no reason to believe his
or her conduct was unlawful. Our third amended and restated
bylaws to be filed upon completion of this offering will contain
similar indemnification provisions.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Prior to the completion of the offering, the Registrant intends
to enter into Indemnification Agreements with each of its
current directors and officers to provide such directors and
officers additional contractual assurances regarding the scope
of the indemnification set forth in the Registrant&#146;s
restated certificate of incorporation and amended and restated
bylaws and to provide additional procedural protections. At
present, there is no pending litigation or proceeding involving
a director, officer or employee of the Registrant regarding
which indemnification is sought. Reference is also made to
Section&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face="wingdings">l</FONT>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;of
the Underwriting Agreement, which provides for the
indemnification of officers, directors and controlling persons
of the Registrant against certain liabilities. The
indemnification provision in the Registrant&#146;s restated and
amended certificate of incorporation, amended and restated
bylaws and the indemnification agreements to be entered into
between the Registrant and each of its directors and officers
may be sufficiently broad to permit indemnification of the
Registrant&#146;s directors and officers for liabilities arising
under the Securities Act.
</DIV>

<P align="center" style="font-size: 10pt;">II-1
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The Registrant has directors&#146; and officers&#146; liability
insurance for securities matters prior to the closing of this
offering.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
See also the undertakings set out in response to Item&nbsp;17.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Reference is made to the following documents filed as exhibits
to this Registration Statement regarding relevant
indemnification provisions described above and elsewhere herein:
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="87%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
</TR>

<TR style="font-size: 8pt;">
    <TD align="left" nowrap><B>Exhibit&nbsp;Document</B></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Number</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Underwriting Agreement</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1.1</TD>
    <TD align="left" valign="bottom" nowrap>*</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Registrant&#146;s Third Amended and Restated Certificate of
    Incorporation</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3.1</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Registrant&#146;s Second Amended and Restated Bylaws</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3.3</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Second Amended and Restated Investors&#146; Rights Agreement
    dated October&nbsp;26, 2004</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>4.2</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Form of Indemnification Agreement</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>10.1</TD>
    <TD align="left" valign="bottom" nowrap>*</TD>
</TR>

</TABLE>
</CENTER>

<DIV align="left" style="font-size: 3pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<DIV style="width: 18%; border-top: 1.0pt solid black; font-size: 1pt">&nbsp;</DIV>
</DIV>

<DIV style="margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="2%"></TD>
    <TD width="98%"></TD>
</TR>

<TR valign="top">
    <TD>*&nbsp;</TD>
    <TD align="left">
    To be filed by amendment.</TD>
</TR>

</TABLE>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="10%"></TD>
    <TD width="90%"></TD>
</TR>

<TR valign="top">
    <TD><B>ITEM&nbsp;15.</B></TD>
    <TD>
    <B><I>Recent Sales of Unregistered Securities.</I></B></TD>
</TR>

</TABLE>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    On June&nbsp;20, 2003, we sold 75,000&nbsp;shares of our common
    stock at a price of $0.46&nbsp;per share to Dr.&nbsp;Robert
    Friedman, a former member of our board of directors, and
    75,000&nbsp;shares of our common stock at a price of
    $0.46&nbsp;per share to Breaux Castleman, a member of our board
    of directors, and the chairman of our board.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    On June&nbsp;20, 2003, we issued an aggregate of
    45,000&nbsp;shares of our series&nbsp;B preferred stock to the
    149&nbsp;Series&nbsp;B preferred stock investors who originally
    purchased our Series&nbsp;B preferred stock in 2000 in
    consideration of certain amendments to their investment
    agreements.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    On June&nbsp;20, 2003, we issued a warrant to purchase up to
    24,890&nbsp;shares of our series&nbsp;C preferred stock at an
    exercise price of $2.26&nbsp;per share to Koji Miyazaki, one of
    our series&nbsp;C preferred stock investors.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    On June&nbsp;20, 2003, we also issued a warrant to
    Dr.&nbsp;Marek Elbaum, a former member of our board of directors
    and former Chief Science and Technology Officer, to purchase up
    to 25,000&nbsp;shares of our common stock at per share exercise
    price of $13.00.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    From June&nbsp;20, 2003 through October&nbsp;26, 2004, we issued
    an aggregate of 5,414,779&nbsp;shares of our series&nbsp;C
    preferred stock to 73 accredited investors for an aggregate
    consideration of $12,191,480.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    From June&nbsp;20, 2003 through October&nbsp;26, 2004, we issued
    warrants to purchase up to an aggregate of 2,610,643&nbsp;shares
    of our common stock with an exercise price of $13.00&nbsp;per
    share to certain purchasers of our series&nbsp;C preferred stock.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    On February&nbsp;2, 2004, we issued a warrant to purchase up to
    121,681&nbsp;shares of our series&nbsp;C preferred stock with an
    exercise price $2.26&nbsp;per share to Health Partners&nbsp;I,
    LLC.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    In May 2004, we issued 125,000&nbsp;shares of our common stock
    at a per share purchase price of $0.46 to accredited investors
    who loaned an aggregate of $1,000,000 to the company, which
    loans were evidenced by convertible promissory notes, all of
    which converted into shares of our series&nbsp;C preferred stock
    on October&nbsp;26, 2004.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    On December&nbsp;10, 2004, we issued a warrant to
    Allen&nbsp;&#38; Company LLC to purchase up to
    75,000&nbsp;shares of our common stock at an exercise price of
    $7.00&nbsp;per share in consideration of Allen&nbsp;&#38;
    Company&#146;s agreement to provide certain advisory services to
    us.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    From January&nbsp;1, 2002 to May&nbsp;15, 2005 we granted
    options to purchase&nbsp;852,621&nbsp;shares of our common stock
    to employees, directors and consultants under our 1996 Plan and
    2003 Plan.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The sales of the above securities were deemed to be exempt from
registration under the Securities Act in reliance on
Section&nbsp;4(2) of the Securities Act, or Regulation&nbsp;D
promulgated thereunder, or Rule&nbsp;701
</DIV>

<P align="center" style="font-size: 10pt;">II-2

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="left" style="font-size: 10pt;">
promulgated under Section&nbsp;3(b) of the Securities Act, as
transactions by an issuer not involving a public offering or
transactions pursuant to compensatory benefit plans and
contracts relating to compensation as provided under
Rule&nbsp;701. The recipients of securities in each of these
transactions represented their intention to acquire the
securities for investment only and not with view to or for sale
in connection with any distribution thereof and appropriate
legends were affixed to the share certificates and instruments
issued in such transactions. The sales of these securities were
made without general solicitation or advertising. All recipients
had adequate access, through their relationship with the
Registrant, to information about the Registrant.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="10%"></TD>
    <TD width="90%"></TD>
</TR>

<TR valign="top">
    <TD><B>ITEM&nbsp;16.</B></TD>
    <TD>
    <B><I>Exhibits and Financial Statement Schedules.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
(a)&nbsp;The following exhibits are filed herewith:
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="8%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="8%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="80%">&nbsp;</TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="3" align="center" nowrap><B>Number</B></TD>
    <TD>&nbsp;</TD>
    <TD align="center" nowrap><B>Exhibit Title</B></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>1</TD>
    <TD align="left" valign="top" nowrap>.1*</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Form of Underwriting Agreement.</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>3</TD>
    <TD align="left" valign="top" nowrap>.1</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Third Amended and Restated Certificate of Incorporation.</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>3</TD>
    <TD align="left" valign="top" nowrap>.2*</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Form of Amended and Restated Certificate of Incorporation of
    Registrant to be effective upon closing of the offering.</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>3</TD>
    <TD align="left" valign="top" nowrap>.3</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Second Amended and Restated Bylaws of the Registrant as
    currently in effect.</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>3</TD>
    <TD align="left" valign="top" nowrap>.4*</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Form of Amended and Restated Bylaws of the Registrant to be
    effective upon closing of the offering.</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>4</TD>
    <TD align="left" valign="top" nowrap>.1*</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Specimen Stock Certificate.</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>4</TD>
    <TD align="left" valign="top" nowrap>.2</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Second Amended and Restated Investor&#146;s Rights Agreement
    dated as of October&nbsp;26, 2004 by and among the Registrant
    and the parties listed therein.</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>5</TD>
    <TD align="left" valign="top" nowrap>.1*</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Opinion of Dreier LLP.</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>10</TD>
    <TD align="left" valign="top" nowrap>.1*</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Form of Indemnification Agreement for directors and executive
    officers.</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>10</TD>
    <TD align="left" valign="top" nowrap>.2</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    1996 Stock Option Plan.</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>10</TD>
    <TD align="left" valign="top" nowrap>.3</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    2003 Stock Incentive Plan, as amended.</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>10</TD>
    <TD align="left" valign="top" nowrap>.4*</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    2005 Stock Incentive Plan.</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>10</TD>
    <TD align="left" valign="top" nowrap>.5</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Employment Agreement dated as of January&nbsp;5, 2004 between
    the Registrant and Joseph&nbsp;V. Gulfo.</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>10</TD>
    <TD align="left" valign="top" nowrap>.6</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Consulting Agreement dated as of May&nbsp;31, 2005 between the
    Registrant and Marek Elbaum.</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>10</TD>
    <TD align="left" valign="top" nowrap>.7</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Lease Agreement dated as of December&nbsp;16, 1998, by and
    between the Registrant and Bridge Street Properties LLC, for
    office space located at One Bridge Street, Irvington, New York.</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>10</TD>
    <TD align="left" valign="top" nowrap>.8</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    First Amendment to the Lease Agreement dated as of May&nbsp;17,
    2001 by and between the Registrant and Bridge Street Properties
    LLC.</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>10</TD>
    <TD align="left" valign="top" nowrap>.9</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Second Amendment to the Lease Agreement dated as of
    June&nbsp;19, 2003 by and between the Registrant and Bridge
    Street Properties LLC.</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>10</TD>
    <TD align="left" valign="top" nowrap>.10</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Lease Agreement dated as of November&nbsp;23, 2004, by and
    between the Registrant and Bridge Street Properties LLC, for
    office space located at 3 West Main Street, Irvington, New York.</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>10</TD>
    <TD align="left" valign="top" nowrap>.11*</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Consulting Agreement dated as of June&nbsp;1, 2005 between the
    Registrant and Gerald Wagner Consulting, LLC.</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>10</TD>
    <TD align="left" valign="top" nowrap>.12*</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Consulting Agreement dated as of June&nbsp;20, 2003 between the
    Registrant and Breaux Castleman, as amended.</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>23</TD>
    <TD align="left" valign="top" nowrap>.1</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Consent of Eisner LLP, Independent Registered Public Accounting
    Firm.</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>23</TD>
    <TD align="left" valign="top" nowrap>.2*</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Consent of Counsel (included in Exhibit&nbsp;5.1).</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>24</TD>
    <TD align="left" valign="top" nowrap>.1</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Power of Attorney (included on signature page).</TD>
</TR>

</TABLE>
</CENTER>

<DIV align="left" style="font-size: 3pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<DIV style="width: 18%; border-top: 1.0pt solid black; font-size: 1pt">&nbsp;</DIV>
</DIV>

<DIV style="margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="4%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;&nbsp;*&nbsp;</TD>
    <TD align="left">
    To be filed by amendment.</TD>
</TR>

</TABLE>

<DIV style="margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR>
    <TD valign="top">
    (b)</TD>
    <TD></TD>
    <TD valign="top">
    Financial statement schedules are omitted because the
    information called for is not required or is shown either in the
    financial statements or the notes thereto.</TD>
</TR>

</TABLE>

<P align="center" style="font-size: 10pt;">II-3

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="10%"></TD>
    <TD width="90%"></TD>
</TR>

<TR valign="top">
    <TD><B>ITEM&nbsp;17.</B></TD>
    <TD>
    <B><I>Undertakings.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The undersigned Registrant hereby undertakes to provide to the
underwriters at the closing specified in the Underwriting
Agreement certificates in such denominations and registered in
such names as required by the Underwriters to permit prompt
delivery to each purchaser.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the provisions
described under Item&nbsp;14 above, or otherwise, the Registrant
has been advised that in the opinion of the SEC such
indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid
by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant
will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Securities Act and will be governed by the final
adjudication of such issue.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The undersigned Registrant hereby undertakes that:
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    (1)&nbsp;For purposes of determining any liability under the
    Securities Act, the information omitted from the form of
    prospectus filed as part of this Registration Statement in
    reliance upon Rule&nbsp;430A and contained in a form of
    prospectus filed by the Registrant pursuant to
    Rule&nbsp;424(b)(1) or&nbsp;(4) or&nbsp;497(h) under the
    Securities Act shall be deemed to be part of this Registration
    Statement as of the time it was declared effective.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    (2)&nbsp;For the purpose of determining any liability under the
    Securities Act, each post-effective amendment that contains a
    form of prospectus shall be deemed to be a new registration
    statement relating to the securities offered therein, and the
    offering of such securities at that time shall be deemed to be
    the initial bona fide offering thereof.</TD>
</TR>

</TABLE>

<P align="center" style="font-size: 10pt;">II-4

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>SIGNATURES</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Pursuant to the requirements of the Securities Act, the
Registrant has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly
authorized, in the City of New York, New York, on this 3rd day
of June, 2005.
</DIV>

<DIV style="margin-top: 24pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="40%"></TD>
    <TD width="60%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD align="left">
    ELECTRO-OPTICAL SCIENCES, INC.</TD>
</TR>

</TABLE>

<DIV style="margin-top: 48pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="40%"></TD>
    <TD width="2%"></TD>
    <TD width="58%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>By:&nbsp;</TD>
    <TD align="left">
    /s/ <FONT style="font-variant:SMALL-CAPS">Joseph V. Gulfo</FONT>
    <BR>

    <DIV style="border-top: 1pt solid #000000; font-size: 1pt; margin-top: 2pt" align="left">&nbsp;</DIV></TD>
</TR>

</TABLE>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="40%"></TD>
    <TD width="60%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD align="left">
    Joseph V. Gulfo</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD align="left">
    President and Chief Executive Officer</TD>
</TR>

</TABLE>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>POWER OF ATTORNEY</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
KNOW ALL PERSONS BY THESE PRESENTS that each individual whose
signature appears below constitutes and appoints Joseph V. Gulfo
and Karen Krumeich and each of them, his or her true and lawful
attorneys-in-fact and agents with full power of substitution,
for him or her and in his or her name, place and stead, in any
and all capacities, to sign any and all amendments (including
post-effective amendments) to this Registration Statement, and
to sign any registration statement for the same offering covered
by the Registration Statement that is to be effective upon
filing pursuant to Rule&nbsp;462(b) promulgated under the
Securities Act, and all post-effective amendments thereto, and
to file the same, with all exhibits thereto and all documents in
connection therewith, with the SEC, granting unto said
attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as
fully to all intents and purposes as he or she might or could do
in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or his, her or
their substitute or substitutes, may lawfully do or cause to be
done or by virtue hereof.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Pursuant to the requirements of the Securities Act, this
Registration Statement has been signed by the following persons
in the capacities and on the date indicated.
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="6%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="38%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="36%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="11%">&nbsp;</TD>
</TR>


<TR style="font-size: 8pt;">
    <TD colspan="3" align="center" nowrap><B>Name</B></TD>
    <TD>&nbsp;</TD>
    <TD align="center" nowrap><B>Title</B></TD>
    <TD>&nbsp;</TD>
    <TD align="center" nowrap><B>Date</B></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
</TR>

<TR>
    <TD colspan="7">&nbsp;</TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <B>Principal Executive Officer:</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="7">&nbsp;</TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    /s/ <FONT style="font-variant:SMALL-CAPS">Joseph V. Gulfo<BR>
    <DIV style="border-top: 1pt solid #000000; font-size: 1pt; margin-top: 2pt;">&nbsp;</DIV></FONT>Joseph
    V. Gulfo</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    President , Chief Executive Officer and&nbsp;Director</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    June&nbsp;3, 2005</TD>
</TR>

<TR>
    <TD colspan="7">&nbsp;</TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <B>Principal Financial Officer and Principal Accounting
    Officer:</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="7">&nbsp;</TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    /s/ <FONT style="font-variant:SMALL-CAPS">Karen Krumeich<BR>
    <DIV style="border-top: 1pt solid #000000; font-size: 1pt; margin-top: 2pt;">&nbsp;</DIV></FONT>Karen
    Krumeich</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    Vice President, Finance and Chief Financial Officer</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    June&nbsp;3, 2005</TD>
</TR>

<TR>
    <TD colspan="7">&nbsp;</TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <B>Additional Directors:</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="7">&nbsp;</TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    /s/ <FONT style="font-variant:SMALL-CAPS">Breaux Castleman<BR>
    <DIV style="border-top: 1pt solid #000000; font-size: 1pt; margin-top: 2pt;">&nbsp;</DIV></FONT>Breaux
    Castleman</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    Director, Chairman of the Board of&nbsp;Directors</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    June&nbsp;3, 2005</TD>
</TR>

<TR>
    <TD colspan="7">&nbsp;</TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    /s/ <FONT style="font-variant:SMALL-CAPS">Sidney Braginsky<BR>
    <DIV style="border-top: 1pt solid #000000; font-size: 1pt; margin-top: 2pt;">&nbsp;</DIV></FONT>Sidney
    Braginsky</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    Director</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    June&nbsp;3, 2005</TD>
</TR>

</TABLE>
</CENTER>

<P align="center" style="font-size: 10pt;">II-5

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; ">

<TR style="font-size: 1pt;">
    <TD width="6%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="38%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="36%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="11%">&nbsp;</TD>
</TR>


<TR style="font-size: 8pt;">
    <TD colspan="3" align="center" nowrap><B>Name</B></TD>
    <TD>&nbsp;</TD>
    <TD align="center" nowrap><B>Title</B></TD>
    <TD>&nbsp;</TD>
    <TD align="center" nowrap><B>Date</B></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
</TR>

<TR>
    <TD colspan="7">&nbsp;</TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    /s/ <FONT style="font-variant:SMALL-CAPS">George C. Chryssis<BR>
    <DIV style="border-top: 1pt solid #000000; font-size: 1pt; margin-top: 2pt;">&nbsp;</DIV></FONT>George
    C. Chryssis</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    Director</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    June&nbsp;3, 2005</TD>
</TR>

<TR>
    <TD colspan="7">&nbsp;</TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    /s/ <FONT style="font-variant:SMALL-CAPS">Dan W. Lufkin<BR>
    <DIV style="border-top: 1pt solid #000000; font-size: 1pt; margin-top: 2pt;">&nbsp;</DIV></FONT>Dan
    W. Lufkin</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    Director</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    June&nbsp;3, 2005</TD>
</TR>

<TR>
    <TD colspan="7">&nbsp;</TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    /s/ <FONT style="font-variant:SMALL-CAPS">Gerald Wagner<BR>
    <DIV style="border-top: 1pt solid #000000; font-size: 1pt; margin-top: 2pt;">&nbsp;</DIV></FONT>Gerald
    Wagner</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    Director</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    June&nbsp;3, 2005</TD>
</TR>

</TABLE>
</CENTER>

<P align="center" style="font-size: 10pt;">II-6

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>EXHIBIT INDEX</B>
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="8%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="8%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="80%">&nbsp;</TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="3" align="center" nowrap><B>Number</B></TD>
    <TD>&nbsp;</TD>
    <TD align="center" nowrap><B>Exhibit Title</B></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>1</TD>
    <TD align="left" valign="top" nowrap>.1*</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Form of Underwriting Agreement.</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>3</TD>
    <TD align="left" valign="top" nowrap>.1</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Third Amended and Restated Certificate of Incorporation.</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>3</TD>
    <TD align="left" valign="top" nowrap>.2*</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Form of Amended and Restated Certificate of Incorporation of
    Registrant to be effective upon closing of the offering.</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>3</TD>
    <TD align="left" valign="top" nowrap>.3</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Second Amended and Restated Bylaws of the Registrant as
    currently in effect.</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>3</TD>
    <TD align="left" valign="top" nowrap>.4*</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Form of Amended and Restated Bylaws of the Registrant to be
    effective upon closing of the offering.</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>4</TD>
    <TD align="left" valign="top" nowrap>.1*</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Specimen Stock Certificate.</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>4</TD>
    <TD align="left" valign="top" nowrap>.2</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Second Amended and Restated Investor&#146;s Rights Agreement
    dated as of October&nbsp;26, 2004 by and among the Registrant
    and the parties listed therein.</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>5</TD>
    <TD align="left" valign="top" nowrap>.1*</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Opinion of Dreier LLP.</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>10</TD>
    <TD align="left" valign="top" nowrap>.1*</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Form of Indemnification Agreement for directors and executive
    officers.</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>10</TD>
    <TD align="left" valign="top" nowrap>.2</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    1996 Stock Option Plan.</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>10</TD>
    <TD align="left" valign="top" nowrap>.3</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    2003 Stock Incentive Plan, as amended.</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>10</TD>
    <TD align="left" valign="top" nowrap>.4*</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    2005 Stock Incentive Plan.</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>10</TD>
    <TD align="left" valign="top" nowrap>.5</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Employment Agreement dated as of January&nbsp;5, 2004 between
    the Registrant and Joseph V. Gulfo.</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>10</TD>
    <TD align="left" valign="top" nowrap>.6</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Consulting Agreement dated as of May&nbsp;31, 2005 between the
    Registrant and Marek Elbaum.</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>10</TD>
    <TD align="left" valign="top" nowrap>.7</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Lease Agreement dated as of December&nbsp;16, 1998, by and
    between the Registrant and Bridge Street Properties LLC, for
    office space located at One Bridge Street, Irvington, New York.</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>10</TD>
    <TD align="left" valign="top" nowrap>.8</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    First Amendment to the Lease Agreement dated as of May&nbsp;17,
    2001 by and between the Registrant and Bridge Street Properties
    LLC.</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>10</TD>
    <TD align="left" valign="top" nowrap>.9</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Second Amendment to the Lease Agreement dated as of
    June&nbsp;19, 2003 by and between the Registrant and Bridge
    Street Properties LLC.</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>10</TD>
    <TD align="left" valign="top" nowrap>.10</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Lease Agreement dated as of November&nbsp;23, 2004, by and
    between the Registrant and Bridge Street Properties LLC, for
    office space located at 3 West Main Street, Irvington, New York.</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>10</TD>
    <TD align="left" valign="top" nowrap>.11*</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Consulting Agreement dated as of June&nbsp;1, 2005 between the
    Registrant and Gerald Wagner Consulting, LLC.</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>10</TD>
    <TD align="left" valign="top" nowrap>.12*</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Consulting Agreement dated as of June&nbsp;20, 2003 between the
    Registrant and Breaux Castleman, as amended.</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>23</TD>
    <TD align="left" valign="top" nowrap>.1</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Consent of Eisner LLP, Independent Registered Public Accounting
    Firm.</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>23</TD>
    <TD align="left" valign="top" nowrap>.2*</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Consent of Counsel (included in Exhibit&nbsp;5.1).</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>24</TD>
    <TD align="left" valign="top" nowrap>.1</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Power of Attorney (included on signature page).</TD>
</TR>

</TABLE>
</CENTER>

<DIV align="left" style="font-size: 3pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<DIV style="width: 18%; border-top: 1.0pt solid black; font-size: 1pt">&nbsp;</DIV>
</DIV>

<DIV style="margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="2%"></TD>
    <TD width="98%"></TD>
</TR>

<TR valign="top">
    <TD>*&nbsp;</TD>
    <TD align="left">
    To be filed by amendment.</TD>
</TR>

</TABLE>
</BODY>
</HTML>
[{"type": "S-1", "sequence": "1", "filename": "y09078sv1.htm", "description": "FORM S-1", "secsgml_size_bytes": 1176940}]
{"company-data": {"conformed-name": "ELECTRO OPTICAL SCIENCES INC /NY", "cik": "0001051514", "irs-number": "133986004"}, "filing-values": {"form-type": "S-1", "act": "33", "file-number": "333-125517", "film-number": "05878522"}, "business-address": {"street1": "3 WEST MAIN STREET, SUITE 201", "city": "IRVINGTON", "state": "NY", "zip": "10533", "phone": "914-591-3783"}, "mail-address": {"street1": "3 WEST MAIN STREET, SUITE 201", "city": "IRVINGTON", "state": "NY", "zip": "10533"}}
FORM S-1
As filed with the Securities and Exchange Commission on
June 3, 2005
Registration
No. 333-
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
ELECTRO-OPTICAL SCIENCES, INC.
(Exact name of registrant as specified in its charter)
Delaware
3841
13-3986004
(State or other jurisdiction of
incorporation or organization)
(Primary standard industrial
classification code number)
(I.R.S. Employer
Identification Number)
3 West Main Street, Suite 201
Irvington, New York 10533
(914) 591-3783
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive
offices)
Joseph V. Gulfo, M.D.
President and Chief Executive Officer
Electro-Optical Sciences, Inc.
3 West Main Street, Suite 201
Irvington, New York 10533
(914) 591-3783
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
Valerie A. Price, Esq.
Dreier LLP
499 Park Avenue
New York, New York 10022
(212) 328-6144 (phone)
(212) 652-3789 (facsimile)
David C. Peck, Esq.
Greenberg Traurig, LLP
200 Park Avenue
New York, New York 10166
(212) 801-9200 (phone)
(212) 801-6400 (facsimile)
Approximate date of proposed sale to the public:
As soon
as practicable after the effective date of this Registration
Statement.
If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933, as amended (the
"Securities Act") check the following
box.
o
If this form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
check the following box and list the Securities Act registration
statement number of the earlier effective registration statement
for the same
offering.
o
If this form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering.
o
If this form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering.
o
If delivery of the prospectus is expected to be made pursuant to
Rule 434, check the following
box.
o
CALCULATION OF REGISTRATION FEE
Title of Each Class of
Proposed Maximum Aggregate
Amount of
Securities to be Registered
Offering Price(1)
Registration Fee
Common stock, par value $0.001 per share
$33,000,000
$3,884.10
(1)
Estimated solely for purposes of determining the registration
    fee pursuant to Rule 457(o) under the Securities Act.
The registrant hereby amends this registration statement on
such date or dates as may be necessary to delay its effective
date until the registrant shall file a further amendment which
specifically states that this registration statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act or until the registration statement shall
become effective on such date as the Securities and Exchange
Commission, acting pursuant to said Section 8(a), may
determine.
The
information in this prospectus is not complete and may be
changed. We may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is
effective. This prospectus is not an offer to sell these
securities and it is not soliciting an offer to buy these
securities in any state where the offer and sale is not
permitted.
SUBJECT TO COMPLETION, DATED
JUNE      , 2005
PROSPECTUS
l
Shares
Electro-Optical Sciences, Inc.
Common Stock
This is the initial public offering
of
l
shares
of common stock of Electro-Optical Sciences, Inc.
We expect the public offering price to be between
$
l
and
$
l
per
share. There presently is no public market for our securities
and we cannot ensure you that a market will develop. We have
applied to list our common stock on the NASDAQ National Market
under the symbol "MELA."
Investing in our common stock is highly speculative and
involves a high degree of risk. See "Risk Factors"
beginning on Page 7.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or passed upon the adequacy or accuracy of this
prospectus. Any representation to the contrary is a criminal
offense.
Per Share
Total
Public offering price
$
l
$
l
Underwriting discounts and commissions
$
l
$
l
Proceeds, before expenses, to Electro-Optical Sciences,
    Inc.
$
l
$
l
To the extent the underwriters sell more
than
l
shares
of common stock, the underwriters have the option to purchase up
to an
additional
l
shares
from us at the public offering price less the underwriting
discount, within 45 days from the date of this prospectus
to cover over-allotments. The underwriters will also receive a
non-accountable expense allowance in the amount of one percent
(1%) of the total public offering price (excluding the
over-allotment option). In addition, upon completion of this
offering, the underwriters will receive warrants to purchase up
to an aggregate
of
l
shares
of our common stock at an exercise price equal to 125% of the
public offering price per share. The warrants will be
exercisable commencing on the first anniversary of the date of
this prospectus and ending on the fifth anniversary of the date
of this prospectus.
The underwriters expect to deliver the shares on or
about
l
,
2005.
Ladenburg Thalmann & Co. Inc.
Stanford Group Company
The date of this prospectus
is
l
,
2005.
TABLE OF CONTENTS
Prospectus Summary
1
Risk Factors
7
Special Note Regarding Forward-Looking Statements
29
Use of Proceeds
30
Dividend Policy
30
Capitalization
31
Dilution
32
Selected Financial Data
34
Management's Discussion and Analysis of Financial Condition
    and Results of Operations
36
Our Business
43
Management
62
Related Party Transactions
72
Principal Stockholders
73
Description of Capital Stock
75
Shares Eligible for Future Sale
79
Material US Federal Income and Estate Tax Considerations for
    Non-US Holders
81
Underwriting
84
Legal Matters
86
Experts
86
Where You Can Find More Information
87
Index to Financial Statements
F-1
You should rely only on the information contained in this
prospectus. We have not authorized anyone to provide you with
information different from that contained in this prospectus. We
are offering to sell shares of our common stock and seeking
offers to buy shares of our common stock only in jurisdictions
where offers and sales are permitted. The information contained
in this prospectus is accurate only as of the date of this
prospectus, regardless of the time of delivery of this
prospectus or any sale of the common stock.
For investors outside the US: Neither we nor any of the
underwriters have done anything that would permit this offering
or possession or distribution of this prospectus in any
jurisdiction where action for that purpose is required, other
than in the US. You are required to inform yourselves about, and
to observe any restrictions relating to, this offering and the
distribution of this prospectus.
We obtained statistical data and certain other industry
forecasts used throughout this prospectus from market research,
publicly available information and industry publications.
Industry publications generally state that they obtain their
information from sources that they believe to be reliable, but
they do not guarantee the accuracy and completeness of the
information. Similarly, while we believe that the statistical
and industry data and forecasts and market research used herein
are reliable, we have not independently verified such data, and
we do not make any representation as to the accuracy of the
information. We have not sought the consent of the sources to
refer to their reports in this prospectus.
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in
this prospectus. It does not contain all of the information you
should consider before buying shares of our common stock. You
should read this entire prospectus carefully, especially the
"Risk Factors" section and our financial statements
and the related notes appearing at the end of this prospectus,
before deciding to invest in shares of our common stock. Unless
otherwise stated or the context otherwise requires, reference in
this prospectus to "EOS," "we,"
"us," "our" and similar references refer to
Electro-Optical Sciences, Inc.
Our Business
We are a medical device company focused on the design and
development of a non-invasive, point-of-care instrument to
assist in the early diagnosis of melanoma. Our flagship product,
MelaFind®, features a hand-held imaging device that emits
multiple wavelengths of light to capture images of suspicious
pigmented skin lesions and extract data. The data are then
analyzed against our proprietary database of melanomas and
benign lesions using our sophisticated algorithms in order to
provide information to the physician and produce a
recommendation of whether the lesion should be biopsied.
The components of the MelaFind® system include:
•
a
hand-held imaging device,
which employs high precision
    optics and multi-spectral illumination (multiple colors of light
    including near infra-red);
•
our
proprietary database
of pigmented skin lesions, which
    we believe to be the largest in the US;
•
our
lesion classifiers,
which are sophisticated
    mathematical algorithms that extract lesion feature information
    and classify lesions; and
•
a
central server
in our offices that is intended to
    perform quality control functions and provide reports to the
    physician and in commercial use, will be connected to
    physicians' offices via the internet.
We have entered into a binding Protocol Agreement with the US
Food and Drug Administration (FDA), which is an agreement for
the conduct of the pivotal trial in order to establish the
safety and effectiveness of MelaFind®. We believe the
presence of the Protocol Agreement significantly enhances our
ability to expedite the FDA approval process. Management
estimates that the study will commence in early 2006 at over 20
US clinical study sites, and anticipates premarket approval
(PMA) to commercialize MelaFind® in 2007.
The Market Opportunity
Cancers of the skin have a higher incidence than all other
cancers combined, and the rates are rising dramatically. There
are millions of people worldwide who are diagnosed with skin
cancer; with many sadly succumbing to its effects. Melanoma is
responsible for approximately 80% of skin cancer fatalities and
is the deadliest of all skin cancers as there is currently no
cure for advanced stage melanoma. However, early detection of
melanoma can lead to virtually a 100% cure rate. Therefore, the
need for medical practitioners to be able to examine individuals
during a routine annual exam, resulting in early detection and
treatment of skin cancer cannot be overstated. Advanced stage
melanoma is costly to treat and is responsible for approximately
90% of the total spending on melanoma treatment in the US,
costing up to $170,000 per patient. If diagnosed early,
however, melanoma is almost always cured by simple resection at
a cost of approximately $1,800 per patient.
Melanoma is currently the subject of significant attention in
the medical community. In part, this attention is due to the
fact that it is the fastest growing cancer. It is also the most
common cancer in young adults ages 20-30, and currently
there are more new cases of melanoma than HIV/ AIDS. In women
ages 20-29, melanoma is the primary cause of cancer death.
In women ages 30-35, melanoma is the second leading cause
of death after breast cancer. Recent published papers identify a
strong correlation between breast cancer and melanoma.
1
Because early detection is critical to survival, the American
Cancer Society recommends that individuals 40 years and
older have complete skin examinations on an annual basis.
According to the 2000 US Census data, over 100 million
Americans in the US are over age 40. Furthermore, there are
more than 20 million individuals in the US who have
dysplastic nevi, a type of pigmented skin lesion that when
present is associated with an increased risk of melanoma. These
individuals warrant more frequent observation.
Limitations of Current Melanoma Diagnosis
Melanomas are mainly diagnosed by dermatologists and/or primary
care physicians using only visual clinical evaluation.
Physicians assess pigmented skin lesions using the
"ABCDE" criteria, Asymmetry, Border irregularity,
Color variation, Diameter greater than 6 mm, and
Evolving — change in ABCD over time. This assessment
is subjective and results in missed melanomas, as well as a
ratio of benign lesions biopsied to melanomas confirmed that is
highly variable and as high as 40 to 1 for dermatologists and as
high as 50 to 1 for primary care physicians.
Dermatologists who specialize in the management of pigmented
skin lesions may also use dermoscopy, a method of viewing
lesions under magnification. Approximately 25% of dermatologists
use dermoscopy. Although dermoscopy provides more information
than unaided visual examination, mastery of the technique
necessitates many years of training and experience. Proper use
of dermoscopy can reduce the number of unnecessary biopsies of
benign lesions, but even dermoscopy experts biopsy 3-10 benign
lesions for every melanoma detected.
In contrast, MelaFind® delivers an objective assessment
based on numerical scores assigned to the suspicious skin lesion
under evaluation and does not require extensive physician
training to operate. Further, visual clinical evaluation is
limited to the surface appearance of the suspicious pigmented
skin lesion, whereas MelaFind® utilizes information derived
from up to 2.5 mm deep into the skin. In clinical trials to
date, this objective assessment has resulted in a ratio of
benign lesions biopsied to melanomas confirmed as low as almost
2 to 1.
Clinical Results to Date
To date, MelaFind® has been studied on over 5,000 skin
lesions from over 3,500 patients at over 20 clinical
centers. Our clinical studies have demonstrated that
MelaFind® missed fewer melanomas and produced fewer false
positives than were experienced by study dermatologists, who are
skin cancer specialists. The performance of a diagnostic is
measured in terms of "sensitivity" (the ability to
detect disease when disease is present) and
"specificity" (the ability to exclude disease when
disease is not present). In the largest blinded trial that we
have performed to date on 352 suspicious pigmented skin lesions,
MelaFind® did not miss a melanoma (measured sensitivity of
100%) and achieved 48.4% specificity, compared to the study
dermatologists' sensitivity of 96.4% and specificity of
28.4%.
We believe that with the assistance provided by MelaFind®,
physicians could diagnose more melanomas at the earliest,
curable stage, which would reduce both treatment costs and the
number of unnecessary biopsies, and improve quality of life.
Our Strategy
Our objective is for MelaFind® to become an integral part
of the standard of care in melanoma detection. To achieve this
objective, we are pursuing the following strategy:
•
Pursue timely FDA approval of MelaFind®:
We have
    entered into a binding Protocol Agreement with the FDA for the
    conduct of the pivotal trial of MelaFind®. Management
    estimates that the study will commence in early 2006 at over 20
    US clinical study sites, and anticipates PMA approval to
    commercialize MelaFind® in 2007.
•
Establish MelaFind® as the leading technology for
    assisting in the detection of melanoma:
We have invested
    considerable capital and expertise into developing our core
    technology platform, which is
2
protected by six US patents. We will continue to refine and
    optimize this technology to ensure that MelaFind® is the
    leading system for assisting in the detection of melanoma.
•
Obtain third party payor reimbursement to support our
    recurring revenue pricing model:
We intend to offer
    MelaFind® on a per patient basis, creating a recurring
    revenue stream. To do so, we will seek to obtain third party
    reimbursement as well as private pay alternatives. We are
    working with experts to create an evidence-based medicine
    evaluation model consistent with those used to support positive
    coverage decisions by the federal Centers for
    Medicare & Medicaid Services (CMS) and private
    payors for similar products. The value drivers in the model
    include the treatment and diagnostic cost savings associated
    with early detection (approximately $168,000 per
    patient) and fewer biopsies. We believe that the use of
    MelaFind® could result in substantial savings to the US
    healthcare system.
•
Commercialize MelaFind® using multiple sales and
    marketing strategies:
Our sales and marketing effort will
    focus initially on "high volume/key opinion leader"
    dermatologists with specialties in the diagnosis and treatment
    of melanoma. To enter the larger US markets of general
    dermatologists, plastic surgeons, and primary care physicians,
    and for international markets, we intend to establish
    partnerships with pharmaceutical and/or diagnostic device
    companies with an established presence in these markets.
Company Information
We were incorporated under the laws of the State of New York in
1989 and subsequently reincorporated under the laws of the State
of Delaware in 1997. Our executive offices are located at 3 West
Main Street, Suite 201, Irvington, New York 10533. Our
telephone number is (914) 591-3783. Our websites include
www.eo-sciences.com and www.melafind.com. The information
contained on our websites is not a part of this prospectus and
should not be relied upon. We have included our website
addresses in this document as inactive textual references only.
This prospectus contains references to our US registered
trademarks: MelaFind®, DIFOTI®, and the corporate logo
for "eos — electro-optical sciences, inc."
All other trademarks, tradenames and service marks appearing in
this prospectus are the property of their respective owners.
3
THE OFFERING
Common stock offered by us
l
shares
Common stock outstanding after the offering
l
shares
Use of proceeds
We estimate that our net proceeds from this offering will be
    approximately
    $
l
million
    at an assumed initial public offering price of
    $
l
per
    share, which is the mid-point of our filing range, after
    deducting estimated underwriting discounts and commissions and
    offering expenses payable by us. We intend to use these net
    proceeds to fund our research and development activities,
    including our clinical studies, to build our sales and marketing
    capabilities, and for general corporate purposes, including
    working capital needs, facilities expansion and potential
    acquisitions. See "Use of Proceeds."
Risk factors
You should read the "Risk Factors" section of this
    prospectus for a discussion of factors to consider carefully
    before deciding to invest in shares of our common stock.
Proposed NASDAQ National Market symbol
MELA
The number of shares of our common stock to be outstanding after
this offering is based on 6,513,164 shares outstanding as
of May 15, 2005, and unless otherwise indicated, excludes:
•
899,875 shares of common stock issuable as of the date of
    this prospectus upon the exercise of outstanding stock options
    under our 2003 Stock Incentive Plan and our 1996 Stock Option
    Plan, respectively, at a weighted average exercise price of
    approximately $0.63 per share, which amount is 54,391
    shares less than the number of shares issuable under such option
    plans as of March 31, 2005 due to the effect of a
    formula-based option granted to our President and Chief
    Executive Officer — see "Management —
    Employment Agreement";
•
up to 1,000,000 shares of common stock reserved for future
    grants under our 2005 Stock Incentive Plan;
•
75,000 shares of common stock issuable upon exercise of
    outstanding warrants to purchase common stock at an exercise
    price of $7.00 per share;
•
73,280 shares of common stock issuable upon exercise of
    outstanding warrants to purchase our series C convertible
    preferred stock (assuming conversion of our series C
    convertible preferred stock) at an exercise price of
    $4.52 per share; and
•
l
shares
    of common stock issuable upon exercise of warrants to be issued
    to the underwriters upon completion of this offering at an
    exercise price equal to 125% of the public offering price per
    share.
Unless we specifically state otherwise, all information in this
prospectus assumes:
•
that all outstanding shares of our series A convertible
    preferred stock, series B convertible preferred stock and
    series C convertible preferred stock are converted into
    shares of our common stock immediately prior to completion of
    this offering;
•
that all outstanding warrants to purchase our common stock with
    an exercise price of $13.00 per share have been exchanged
    for our common stock based on an exchange rate of one share of
    common stock for every two shares of common stock purchasable
    under such warrants in a cashless exchange. See the full
    discussion in "Related Party Transactions —
    Warrants to Purchase Common Stock";
•
no exercise of the underwriters' over-allotment option;
•
the adoption of our fourth amended and restated certificate of
    incorporation and third amended and restated bylaws; and
•
a 1-for-2 reverse stock split of our common stock which was
    approved by our board of directors on May 13, 2005,
    effective upon the earlier of the conversion of our preferred
    stock or September 30, 2005.
4
SUMMARY FINANCIAL DATA
The following summary financial data for the fiscal years ended
December 31, 2002, 2003 and 2004 have been derived from our
historical audited financial statements. The summary financial
data for the three month periods ended March 31, 2004 and
2005 have been derived from our unaudited financial statements.
The unaudited summary financial data include, in our opinion,
all adjustments, consisting only of normal, recurring
adjustments, necessary to present fairly the financial position
and results of operations for the periods presented. Our
historical results for any prior or interim period are not
necessarily indicative of results to be expected for a full
fiscal year or for any future period. The summary financial data
shown below include revenues and related expenses for our
DIFOTI® product, a non-invasive imaging device for the
detection of dental cavities. We decided to discontinue all
operations associated with our DIFOTI® product, effective
as of April 5, 2005, in order to focus our resources on the
development and commercialization of MelaFind®. See the
footnote to the Financial Statements relating to subsequent
events included elsewhere in this prospectus. You should read
this information together with our financial statements and the
related notes appearing at the end of this prospectus and the
"Management's Discussion and Analysis of Financial
Condition and Results of Operations" section of this
prospectus.
Three Months Ended
Year Ended December 31,
March 31,
2002
2003
2004
2004
2005
(unaudited)
(In thousands, except share and per share data)
Statement of Operations Data:
Revenue from DIFOTI® sales, net
$
143
$
375
$
364
$
91
$
88
Revenue from grants
547
—
—
—
—
Total revenues
690
375
364
91
88
Cost of goods sold
650
83
166
20
8
Gross profit
40
292
198
71
80
Operating expenses:
Research and development
404
828
1,892
307
636
Selling, general and administrative
769
1,339
1,858
533
713
Total operating expenses
1,173
2,167
3,750
840
1,349
Loss from operations
(1,133
)
(1,875
)
(3,552
)
(769
)
(1,269
)
Interest (income)/expense
8
75
67
1
(26
)
Net loss
(1,141
)
(1,950
)
(3,619
)
(770
)
(1,243
)
Preferred stock deemed dividends
214
322
676
111
362
Preferred stock accretion
180
25
323
7
421
Stock distribution on series B preferred shares
—
102
—
—
—
Net loss attributable to common stockholders
$
(1,535
)
$
(2,399
)
$
(4,618
)
$
(888
)
$
(2,026
)
Basic and diluted net loss per share
$
(1.00
)
$
(1.49
)
$
(2.61
)
$
(0.53
)
$
(1.12
)
Basic and diluted weighted average shares outstanding
1,534,760
1,614,897
1,766,608
1,684,760
1,809,758
Pro forma basic and diluted net loss per common share
    (unaudited)(1)
$
(0.91
)
$
(0.19
)
Pro forma basic and diluted weighted average number of common
    shares outstanding (unaudited)(1)
3,967,024
6,513,164
5
(1)
Pro forma basic and diluted net loss per common share reflects
    the effect of the assumed conversion of the company's
    preferred stock, as if this offering had occurred at the date of
    original issuance into 3,398,105 shares of our common stock
    for the year ended December 31, 2004 and three months ended
    March 31, 2005 which will occur upon closing of this public
    offering. Additionally, it is assumed that 2,610,643 warrants to
    purchase the company's common stock will be exchanged for a
    total of 1,305,321 shares of the company's common
    stock based on an exchange ratio of one share of our common
    stock for every two shares of our common stock purchasable under
    the warrants and will occur prior to the closing of this
    offering. The net loss attributable to our common stockholders
    used in the computation of basic and diluted net loss per share
    to compute the unaudited pro forma net loss attributable to
    common stockholders, has been adjusted to reverse the accretion
    on our preferred stock and also excludes the preferred stock
    dividends for the respective period.
The following table presents summary balance sheet data, derived
from our historical audited financial statements, as of
December 31, 2003 and December 31, 2004. The table
also presents summary balance sheet data, derived from our
historical unaudited financial statements, as of March 31,
2005:
•
On an actual basis; and
•
On an as adjusted basis to give effect to (1) the
    conversion of all outstanding shares of our convertible
    preferred stock into an aggregate of 3,398,105 shares of
    common stock upon the completion of this offering; (2) the
    exchange of 2,610,643 warrants to purchase the company's
    common stock for a total of 1,305,321 shares of the
    company's common stock based on an exchange ratio of one
    share of our common stock for every two shares of our common
    stock purchaseable under the warrants that is assumed to occur
    prior to the closing of this offering; and (3) the sale
    of
l
shares
    of common stock in this offering at an assumed initial public
    offering price of
    $
l
per
    share, after deducting estimated underwriting discounts and
    commissions and offering expenses paid and payable by us.
As of December 31,
As of March 31, 2005
2003
2004
Pro Forma
Actual
Actual
Actual
As Adjusted
(unaudited)
(In thousands)
Balance sheet data:
Cash, cash equivalents and marketable securities
$
117
$
6,703
$
5,300
l
Working capital
(433
)
6,122
4,919
l
Total assets
432
7,096
5,734
l
Total liabilities
650
691
493
l
Redeemable convertible preferred stock
4,067
8,585
9,006
l
Total stockholders' (deficiency)/equity
(4,285
)
(2,180
)
(3,765
)
l
6
RISK FACTORS
Investing in our common stock involves a high degree of risk.
You should carefully consider the following risk factors, as
well as the other information in this prospectus, before
deciding whether to invest in shares of our common stock. If any
of the following risks actually occur, our business, financial
condition and results of operations would suffer. In that case,
the trading price of our common stock would likely decline and
you might lose all or part of your investment in our common
stock. The risks described below are not the only ones we face.
Additional risks that we currently do not know about or that we
currently believe to be immaterial may also impair our business,
financial conditions and results of operations.
Risks Relating to Our Business
We currently do not have,
and may never develop, any commercialized products.
We currently do not have any commercialized products or any
significant source of revenue. We have invested substantially
all of our time and resources over the last five years in
developing MelaFind®. MelaFind® will require
additional development, clinical evaluation, regulatory
approval, significant marketing efforts and substantial
additional investment before it can provide us with any revenue.
Our efforts may not lead to commercially successful products for
a number of reasons, including:
•
we may not be able to obtain regulatory approvals for
    MelaFind®, or the approved indication may be narrower than
    we seek;
•
MelaFind® may not prove to be safe and effective in
    clinical trials;
•
physicians may not receive any reimbursement from third-party
    payors, or the level of reimbursement may be insufficient to
    support widespread adoption of MelaFind®;
•
we may experience delays in our development program;
•
any products that are approved may not be accepted in the
    marketplace by physicians or patients;
•
we may not have adequate financial or other resources to
    complete the development and commercialization of MelaFind®
    or other products;
•
we may not be able to manufacture our products in commercial
    quantities or at an acceptable cost; and
•
rapid technological change may make our technology and products
    obsolete.
We do not expect to be able to commercialize MelaFind®
before 2007. If we are unable to develop, obtain regulatory
approval for or successfully commercialize MelaFind®, we
will be unable to generate revenue.
We have not received, and
may never receive, FDA approval to market MelaFind®
.
We do not have the necessary regulatory approvals to market
MelaFind® in the US or in any foreign market. We have not
filed, and currently do not have plans to file, for regulatory
approval in any foreign market. We plan initially to launch
MelaFind®, once approved, in the US. The regulatory
approval process for MelaFind® in the US involves, among
other things, successfully completing clinical trials and
obtaining PMA approval from the FDA. We commenced the PMA
application process for MelaFind® by filing a proposed
outline for a Modular PMA on September 30, 2002. The PMA
process requires us to prove the safety and effectiveness of
MelaFind® to the FDA's satisfaction. This process is
expensive and uncertain, and requires detailed and comprehensive
scientific and human clinical data. FDA review may take years
after a PMA application is filed. The FDA may never grant
approval. The FDA can delay, limit or deny approval of a PMA
application for many reasons, including:
•
MelaFind® may not be safe or effective to the FDA's
    satisfaction;
•
the data from our pre-clinical studies and clinical trials may
    be insufficient to support approval;
•
the manufacturing process or facilities we use may not meet
    applicable requirements; and
7
•
changes in FDA approval policies or adoption of new regulations
    may require additional data.
No precedent has been established for FDA approval of a device
such as MelaFind® to assist in determining the
appropriateness of biopsies of suspicious pigmented skin
lesions. Before submitting a PMA application (the final module),
we must successfully complete a pivotal clinical trial to
demonstrate that MelaFind® is safe and effective. Product
development, including clinical trials, is a long, expensive and
uncertain process, and is subject to delays and failure at any
stage. Furthermore, the data obtained from the trial may be
inadequate to support approval of a PMA application. While we
obtained a Protocol Agreement from the FDA, FDA approval of a
Protocol Agreement does not mean that the FDA will consider the
data gathered in the trial sufficient to support approval of a
PMA application, even if the trial's intended endpoints are
achieved. There may be unexpected findings, particularly those
that may only become evident from the larger scale of the
pivotal clinical trial, as compared with the smaller scale tests
done to date. For example, we initiated a clinical trial and
encountered several technical problems which required us to
refine the MelaFind® system. The data obtained in the
pivotal trial may not be sufficient to support the anticipated
indication for use, and may not support a more limited
indication for use. The occurrence of unexpected findings in
connection with the pivotal trial or any subsequent clinical
trial required by the FDA may prevent or delay obtaining PMA
approval, and may adversely affect coverage or reimbursement
determinations. The FDA may also determine that additional
clinical trials are necessary, in which case the PMA approval
may be delayed for several months or even years while the trials
are conducted and the data acquired are submitted in an
amendment to the PMA. If we are unable to complete the clinical
trials necessary to successfully support the MelaFind® PMA
application, our ability to commercialize MelaFind®, and
our business, financial condition, and results of operations
would be materially adversely affected, thereby threatening our
ability to continue operations.
If MelaFind®
is approved by the FDA, it may be approved only for narrow
indications.
Even if approved, MelaFind® may not be approved for the
indications that are necessary or desirable for successful
commercialization. Our preference is to obtain a broad
indication for use in diagnosing almost all pigmented melanomas
(other than those on palms, soles of the feet, in or near the
eye, and inaccessible areas such as the edge of the nose). The
final MelaFind® lesion classifier should be able to
identify the maximum number of types of melanoma possible. The
indications for use must specify those lesion types for which
the classifier has not been trained. Approximately five percent
of melanoma lesions may be amelanotic, meaning they are not
pigmented. These lesions cannot be differentiated by
MelaFind®, which will be restricted to pigmented lesions.
Approximately ten percent of pigmented melanoma lesions are of
the nodular type. If nodular melanoma lesions are not
sufficiently well-represented in the MelaFind® training
database, the classifier may not differentiate nodular melanomas
from non-melanomas with sufficient sensitivity and specificity.
If we restrict the indications for use of MelaFind® to
exclude certain melanoma lesion types, in addition to the other
restrictions, then the size of the market for MelaFind® and
the rate of acceptance of MelaFind® by physicians may be
adversely affected.
If we wish to modify MelaFind® after receiving FDA
approval, including changes in indications or other
modifications that could affect safety and effectiveness,
additional approvals could be required from the FDA. We may be
required to submit extensive pre-clinical and clinical data,
depending on the nature of the changes. Any request by the FDA
for additional data, or any requirement by the FDA that we
conduct additional clinical studies, could delay the
commercialization of MelaFind® and require us to make
substantial additional research, development and other
expenditures. We may not obtain the necessary regulatory
approvals to market MelaFind® in the US or anywhere else.
Any delay in, or failure to receive or maintain, approval for
MelaFind® could prevent us from generating revenue or
achieving profitability, and our business, financial condition,
and results of operations would be materially adversely affected.
8
MelaFind®
may not be commercially
    viable if we fail to obtain an adequate level of reimbursement
    by Medicare and other third party payors. The markets for
    MelaFind®
may also be limited by the
    indications for which its use may be reimbursed.
The availability of medical insurance coverage and reimbursement
for newly approved medical devices is uncertain. In the US,
physicians and other healthcare providers performing biopsies
for suspicious skin lesions are generally reimbursed for all or
part of the cost of the diagnosis and biopsy by Medicare,
Medicaid, or other third-party payors. The commercial success of
MelaFind® in both domestic and international markets will
significantly depend on whether third-party coverage and
reimbursement are available for services involving
MelaFind®. Medicare, Medicaid, health maintenance
organizations and other third-party payors are increasingly
attempting to contain healthcare costs by limiting both the
scope of coverage and the level of reimbursement of new medical
devices, and as a result, they may not cover or provide adequate
payment for the use of MelaFind®. In order to obtain
satisfactory reimbursement arrangements, we may have to agree to
a fee or sales price lower than the fee or sales price we might
otherwise charge. Even if Medicare and other third-party payors
decide to cover procedures involving our product, we cannot be
certain that the reimbursement levels will be adequate.
Accordingly, even if MelaFind® or future products we
develop are approved for commercial sale, unless government and
other third-party payors provide adequate coverage and
reimbursement for our products, some physicians may be
discouraged from using them, and our sales would suffer.
Medicare reimburses for medical devices in a variety of ways,
depending on where and how the device is used. However, Medicare
only provides reimbursement if CMS determines that the device
should be covered and that the use of the device is consistent
with the coverage criteria. A coverage determination can be made
at the local level by the Medicare administrative contractor
(formerly called carriers and fiscal intermediaries), a private
contractor that processes and pays claims on behalf of CMS for
the geographic area where the services were rendered, or at the
national level by CMS through a national coverage determination.
There are new statutory provisions intended to facilitate
coverage determinations for new technologies, but it is unclear
how these new provisions will be implemented. Coverage
presupposes that the device has been cleared or approved by the
FDA and further, that the coverage will be no broader than the
approved intended uses of the device as approved or cleared by
the FDA, but coverage can be narrower. A coverage determination
may be so limited that relatively few patients will qualify for
a covered use of the device. Should a very narrow coverage
determination be made for MelaFind®, it may undermine the
commercial viability of MelaFind®.
Obtaining a coverage determination, whether local or national,
is a time-consuming, expensive and highly uncertain proposition,
especially for a new technology, and inconsistent local
determinations are possible. On average, according to an
industry report, Medicare coverage determinations for medical
devices lag 15 months to five years or more behind FDA
approval for that device. The Medicare statutory framework is
also subject to administrative rulings, interpretations and
discretion that affect the amount and timing of reimbursement
made under Medicare. Medicaid coverage determinations and
reimbursement levels are determined on a state by state basis,
because Medicaid, unlike Medicare, is administered by the states
under a state plan with the Secretary of the US Department of
Health and Human Services (HHS). Medicaid generally reimburses
at lower levels than Medicare. Moreover, Medicaid programs and
private insurers are frequently influenced by Medicare coverage
determinations.
Any adverse results in our clinical trials, or
    difficulties in conducting our clinical trials, could have a
    material adverse effect on our business.
Clinical studies in the US have been ongoing for over five
years, and we have a Protocol Agreement with the FDA, but we
have not conducted the pivotal clinical trial required for PMA
approval. We initiated a trial under the terms of the Protocol
Agreement at the end of 2004. However, technical operational
issues with the systems were experienced, requiring further
refinement. We currently anticipate commencing the pivotal
clinical trial in early 2006. The pivotal clinical trial and
supporting clinical studies will require the involvement of
larger numbers of clinical sites than we have previously engaged
at any single time, and the recruitment of large numbers of
patients. If the clinical sites, which enroll patients on a best
efforts basis, do not provide
9
cases at rates anticipated for any reason (such as, for example,
lower than forecasted clinical site productivity), we may face
delays or may be unable to complete the development of
MelaFind®.
Risk of delay in product
development.
We could encounter delays in our pivotal trial or in obtaining
PMA approval because of a number of factors. We will require the
receipt of all information specified in our Protocol Agreement
on the required number of melanomas before the pivotal clinical
trial can be concluded. The MelaFind® classifier will then
be utilized to evaluate the lesions acquired during the trial,
and the results will be analyzed to determine if we have
achieved the endpoints specified in the Protocol Agreement.
The final training of the classifier, required to be completed
before the classifier is utilized as described above, is
expected to take approximately two months. Accordingly, the
classifier must be ready for final training two months before
the end of the pivotal trial. For the classifier to be ready for
final training, approximately 300 melanoma lesions are targeted
to have been received. Therefore, in addition to acquiring the
melanoma lesions required to complete the pivotal trial
(approximately 100), we must have completed the acquisition of
approximately 300 training melanoma lesions on schedule.
Currently, approximately 225 melanoma lesions are in the
training database. The current classifier has been trained on
113 of these melanoma lesions.
Our schedule for the acquisition of these lesions is based upon
the projected numbers of imaging devices to be located at
participating sites, the projected productivity of those sites
in terms of melanomas and other lesions biopsied per month, and
the projected efficiency of the study pathologists in
classifying the lesion slides presented for
dermatohistopathological analysis and reporting their results.
If we are unable to produce and maintain a sufficient number of
imaging devices at participating sites, if the clinicians do not
maintain sufficient productivity, or if the pathologists do not
produce reports with sufficient efficiency, then our ability to
maintain our schedule will be adversely affected, the start or
conclusion of the pivotal trial may be delayed, and the
submission of the completed PMA will be delayed.
To date, the lesion images in the training database have been
acquired using first-generation hand-held devices, which also
extract data from the lesions that are used by the classifiers.
Pre-commercialization hand-held devices are being developed for
use in the pivotal trial. If the lesion data obtained with
pre-commercialization devices are not consistent with data from
the first generation hand-held devices, the classifier will need
to be trained solely on lesions imaged using only one or the
other generation of hand-held devices. Were this need to arise,
significant delay and expense could be incurred, which could
jeopardize our ability to complete the development of
MelaFind®.
We have incurred losses for a number of years, and
    anticipate that we will incur continued losses for the
    foreseeable future.
We began operations in December 1989. At that time we provided
research services, mostly to US government agencies, on
classified projects. We have financed our operations since 1999
primarily through private placements of our equity securities,
and have devoted substantially all of our resources to research
and development relating to MelaFind®. Our net loss for the
three months ended March 31, 2005 was $1.2 million,
and as of March 31, 2005, we had an accumulated deficit of
approximately $15.1 million. We expect our research and
development expenses to increase in connection with our clinical
trials and other development activities related to
MelaFind®. If we receive PMA approval for MelaFind®
from the FDA, we expect to incur significant sales and marketing
expenses, and manufacturing expenses. Additionally, if we
complete our initial public offering, we expect that our general
and administrative expenses will increase due to the additional
operational and regulatory burdens applicable to public
companies. As a result, we expect to continue to incur
significant and increasing operating losses for the foreseeable
future. These losses, among other things, have had and will
continue to have an adverse effect on our stockholders'
equity.
10
We expect to operate in a highly competitive market, we
    may face competition from large, well-established medical device
    manufacturers with significant resources, and we may not be able
    to compete effectively.
We do not know of any product possessing the diagnostic
assistance capabilities of MelaFind®. We believe that
electro-optical products designed to enhance the visualization
and analysis of potential melanomas have been approved or are
under development by: Welch Allyn, Inc.; Heine Optotechnik;
3Gen, LLC; Derma Medical Systems, Inc.; Medical High
Technologies S.p.A.; ZN Vision Technologies AG; Polartechnics,
Ltd.; Astron Clinica, Ltd.; LINOS Photonics, Inc.; and Biomips
Engineering. The broader market for precision optical imaging
devices used for medical diagnosis is intensely competitive,
subject to rapid change, and significantly affected by new
product introductions and other market activities of industry
participants. If our products are approved for marketing, we
will potentially be subject to competition from major optical
imaging companies, such as: General Electric Co.; Siemens AG;
Bayer AG; Eastman Kodak Company; Welch Allyn, Inc.; Olympus
Corporation; Carl Zeiss AG Deutschland; and others, each of
which manufactures and markets precision optical imaging
products for the medical market, and could decide to develop or
acquire a product to compete with MelaFind®. These
companies enjoy numerous competitive advantages, including:
•
significantly greater name recognition;
•
established relations with healthcare professionals, customers
    and third-party payors;
•
established distribution networks;
•
additional lines of products, and the ability to offer rebates,
    higher discounts or incentives to gain a competitive advantage;
•
greater experience in conducting research and development,
    manufacturing, clinical trials, obtaining regulatory approval
    for products, and marketing approved products; and
•
greater financial and human resources for product development,
    sales and marketing, and patent litigation.
As a result, we may not be able to compete effectively against
these companies or their products.
Technological breakthroughs in the diagnosis or treatment
    of melanoma could render MelaFind®
obsolete.
The precision optical imaging field is subject to rapid
technological change and product innovation. MelaFind® is
based on our proprietary technology, but a number of companies
and medical researchers are pursuing new technologies. Companies
in the medical device industry with significantly greater
financial, technical, research, marketing, sales and
distribution and other resources have expertise and interest in
the exploitation of computer-aided diagnosis, medical imaging,
and other technologies MelaFind® utilizes. Some of these
companies are working on potentially competing products or
therapies, including confocal microscopy, various forms of
spectroscopy, other imaging modalities, and molecular and
genetic screening tests. In addition, the National Institutes of
Health and other supporters of cancer research are presumptively
seeking ways to improve the diagnosis or treatment of melanoma
by sponsoring corporate and academic research. There can be no
assurance that one or more of these companies will not succeed
in developing or marketing technologies and products or services
that demonstrate better safety or effectiveness, superior
clinical results, greater ease of use or lower cost than
MelaFind®, or that such competitors will not succeed in
obtaining regulatory approval for introducing or commercializing
any such products or services prior to us. FDA approval of a
commercially viable alternative to MelaFind® produced by a
competitor could significantly reduce market acceptance of
MelaFind®. Any of the above competitive developments could
have a material adverse effect on our business, financial
condition, and results of operations. There is no assurance that
products, services, or technologies introduced prior to or
subsequent to the commercialization of MelaFind® will not
render MelaFind® less marketable or obsolete.
11
We depend on clinical investigators and clinical sites to
    enroll patients in our clinical trials and other third parties
    to manage the trials and to perform related data collection and
    analysis, and, as a result, we may face costs and delays that
    are outside of our control.
We rely on clinical investigators and clinical sites, some of
which are private practices, and some of which are research
university or government-affiliated, to enroll patients in our
clinical trials. We rely on: pathologists and pathology
laboratories; a contract research organization to assist in
monitoring, collection of data, and ensuring FDA Good Clinical
Practices (GCP) are observed at our sites; a consultant
biostatistician; and other third parties to manage the trial and
to perform related data collection and analysis. However, we may
not be able to control the amount and timing of resources that
clinical sites and other third parties may devote to our
clinical trials. If these clinical investigators and clinical
sites fail to enroll a sufficient number of patients in our
clinical trials, or if the clinical sites fail to comply
adequately with the clinical protocols, we will be unable to
complete these trials, which could prevent us from obtaining
regulatory approvals for MelaFind®. Our agreements with
clinical investigators and clinical sites for clinical testing
place substantial responsibilities on these parties and, if
these parties fail to perform as expected, our trials could be
delayed or terminated. If these clinical investigators, clinical
sites or other third parties do not carry out their contractual
duties or obligations or fail to meet expected deadlines, or if
the quality or accuracy of the clinical data they obtain are
compromised due to their failure to adhere to our clinical
protocols or for other reasons, our clinical trials may be
extended, delayed or terminated, and we may be unable to obtain
regulatory approval for, or successfully commercialize,
MelaFind®.
In addition to the foregoing, our clinical trial may be delayed
or halted, or be inadequate to support approval of a PMA
application, for numerous other reasons, including, but not
limited to, the following:
•
the FDA, an Institutional Review Board (IRB), or other
    regulatory authorities place our clinical trial on hold;
•
patients do not enroll in clinical trials at the rate we expect;
•
patient follow-up is not at the rate we expect;
•
IRBs and third-party clinical investigators may delay or reject
    our trial protocol;
•
third-party organizations do not perform data collection and
    analysis in a timely or accurate manner;
•
regulatory inspections of our clinical trials or manufacturing
    facilities may, among other things, require us to undertake
    corrective action or suspend or terminate our clinical trials,
    or invalidate our clinical trials;
•
changes in governmental regulations or administrative actions;
    and
•
the interim or final results of the clinical trial are
    inconclusive or unfavorable as to safety or effectiveness.
If MelaFind®
is approved for
    reimbursement, we anticipate experiencing significant pressures
    on pricing.
Even if Medicare covers a device for certain uses, that does not
mean that the level of reimbursement will be sufficient for
commercial success. We expect to experience pricing pressures in
connection with the commercialization of MelaFind® and our
future products due to efforts by private and government-funded
payors to reduce or limit the growth of healthcare costs, the
increasing influence of health maintenance organizations, and
additional legislative proposals to reduce or limit increase in
public funding for healthcare services. Private payors,
including managed care payors, increasingly are demanding
discounted fee structures and the assumption by healthcare
providers of all or a portion of the financial risk. Efforts to
impose greater discounts and more stringent cost controls upon
healthcare providers by private and public payors are expected
to continue. Payors frequently review their coverage policies
for existing and new diagnostic tools and can, sometimes without
advance notice, deny or change their coverage policies.
Significant limits on the scope of services covered or on
reimbursement rates and fees on those services that are covered
could have a
12
material adverse effect on our ability to commercialize
MelaFind® and therefore, on our liquidity and our business,
financial condition, and results of operations.
In some foreign markets, which we may seek to enter in the
future, pricing and profitability of medical devices are subject
to government control. In the US, we expect that there will
continue to be federal and state proposals for similar controls.
Also, the trends toward managed healthcare in the US and
proposed legislation intended to control the cost of publicly
funded healthcare programs could significantly influence the
purchase of healthcare services and products, and may force us
to reduce prices for MelaFind® or result in the exclusion
of MelaFind® from reimbursement programs.
MelaFind®
may never achieve market
    acceptance even if we obtain regulatory approvals.
To date, only those patients who were treated by physicians
involved in our clinical trials have been evaluated using
MelaFind® and even if we obtain regulatory approval
patients with suspicious lesions and physicians evaluating
suspicious lesions may not endorse MelaFind®. Physicians
tend to be slow to change their diagnostic and medical treatment
practices because of perceived liability risks arising from the
use of new products and the uncertainty of third party
reimbursement. Physicians may not utilize MelaFind® until
there is long-term clinical evidence to convince them to alter
their existing methods of diagnosing or evaluating suspicious
lesions and there are recommendations from prominent physicians
that MelaFind® is effective. We cannot predict the speed at
which physicians may adopt the use of MelaFind®. If
MelaFind® receives the appropriate regulatory approvals but
does not achieve an adequate level of acceptance by patients,
physicians and healthcare payors, we may not generate
significant product revenue and we may not become profitable.
The degree of market acceptance of MelaFind® will depend on
a number of factors, including:
•
perceived effectiveness of MelaFind®;
•
convenience of use;
•
cost of the use of MelaFind®;
•
availability and adequacy of third-party coverage or
    reimbursement;
•
approved indications and product labeling;
•
publicity concerning MelaFind® or competitive products;
•
potential advantages over alternative diagnostic methodologies;
•
introduction and acceptance of competing products or
    technologies; and
•
extent and success of our sales, marketing and distribution
    efforts.
The identification and screening of melanomas is now dominated
by visual clinical evaluation, with a minority of dermatologists
using dermoscopy. Even if MelaFind® proves to be as
effective as visual inspection by an expert dermatologist, and
if all approvals are obtained, the success of MelaFind®
will depend upon the acceptance by dermatologists and other
physicians who perform skin examinations and treat skin
disorders, including industry opinion leaders, that the
diagnostic information provided by MelaFind® is medically
useful and reliable. We will be subject to intense scrutiny
before physicians will be comfortable incorporating
MelaFind® in their diagnostic approaches. We believe that
recommendations by respected physicians will be essential for
the development and successful marketing of MelaFind®, and
there can be no assurance that any such recommendations will be
obtained. To date, the medical community outside the limited
circle of certain dermatologists specializing in melanoma has
had little exposure to us and MelaFind®. Because the
medical community is often skeptical of new companies and new
technologies, we may be unable to gain access to potential
customers in order to demonstrate the operation and
effectiveness of MelaFind®. Even if we gain access to
potential customers, no assurance can be given that members of
the dermatological, or later the general practice, medical
community will perceive a need for or accept MelaFind®. In
particular, given the potentially fatal consequences of failing
to detect melanoma at the early, curable stages, practitioners
may remain reluctant to rely upon MelaFind® even after we
receive approval from the FDA for marketing the product.
13
Any of the foregoing factors, or other currently unforeseen
factors, could limit or detract from market acceptance of
MelaFind®. Insufficient market acceptance of MelaFind®
would have a material adverse effect on our business, financial
condition and results of operations.
We may be unable to complete the development and
    commercialization of MelaFind®
or other
    products without additional funding.
We currently believe that our available cash, cash equivalents
and marketable securities, together with our net proceeds from
this offering, will be sufficient to fund our anticipated levels
of operations through mid 2008. However, our operations have
consumed substantial amounts of cash for each of the last six
years. We expect to continue to spend substantial amounts on
research and development, including conducting a clinical trial
for MelaFind®. Even before we receive approval to market
MelaFind®, we expect to spend significant additional
amounts to ready the product for commercial distribution
following FDA approval, including development of a direct sales
force and expansion of manufacturing capacity. We expect that
our cash used by operations will increase significantly in each
of the next several years, and should we encounter any material
delays or impediments, we may need additional funds to complete
the development and commercialization of MelaFind®. Any
additional financing may be dilutive to stockholders, or may
require us to grant a lender a security interest in our assets.
The amount of funding we will need will depend on many factors,
including:
•
the schedule, costs, and results of our clinical trials;
•
the success of our research and development efforts;
•
the costs and timing of regulatory approval;
•
reimbursement amounts for the use of MelaFind® that we are
    able to obtain from Medicare and third party payors, or the
    amount of direct payments we are able to obtain from patients
    and/or physicians utilizing MelaFind®;
•
the cost of commercialization activities, including product
    marketing and building a domestic direct sales force;
•
the emergence of competing or complementary technological
    developments;
•
the costs of filing, prosecuting, defending and enforcing any
    patent claims and other rights, including litigation costs and
    the results of such litigation;
•
the costs involved in defending any patent infringement actions
    brought against us by third parties; and
•
our ability to establish and maintain any collaborative,
    licensing or other arrangements, and the terms and timing of any
    such arrangements.
Additional financing may not be available to us when we need it,
or it may not be available on favorable terms. If we are unable
to obtain adequate financing on a timely basis, we may be
required to significantly curtail or cease one or more of our
development and marketing programs. We could be required to seek
funds through arrangements with collaborators or others that may
require us to relinquish rights to some of our technologies,
product candidates or products that we would otherwise pursue on
our own. We also may have to reduce marketing, customer support
and other resources devoted to our products. If we raise
additional funds by issuing equity securities, our then-existing
stockholders will experience ownership dilution, could
experience declines in our share price and the terms of any new
equity securities may have preferences over our common stock.
If we are unable to establish sales, marketing and
    distribution capabilities or enter into and maintain
    arrangements with third parties to sell, market and distribute
    MelaFind®, our business may be harmed.
We do not have a sales organization, and have no experience as a
company in the marketing and distribution of devices such as
MelaFind®. To achieve commercial success for
MelaFind®, we must develop a sales and marketing force and
enter into arrangements with others to market and sell our
products. Following product approval, we currently plan to
establish a small direct sales force to market MelaFind® in
the US,
14
focused on introducing it at high volume dermatologists'
offices and training their staff in its use, but we have not
made any final determinations regarding the use of a particular
marketing channel. Developing such a sales force is expensive
and time consuming, and could delay or limit the success of any
product launch. We may not be able to develop this capacity on a
timely basis or at all. Qualified direct sales personnel with
experience in the medical device market are in high demand, and
there is no assurance that we will be able to hire or retain an
effective direct sales team. Similarly, qualified, independent
medical device representatives both within and outside the US
are in high demand, and we may not be able to build an effective
network for the distribution of our product through such
representatives. We have no assurance that we will be able to
enter into contracts with representatives on terms acceptable or
reasonable to us. Similarly, there is no assurance that we will
be able to build an alternate distribution framework, should we
attempt to do so.
We will need to contract with third parties in order to sell and
install our products in larger markets, including non-specialist
dermatologists and primary care physicians. To the extent that
we enter into arrangements with third parties to perform
marketing and distribution services in the US, our product
revenue could be lower and our costs higher than if we directly
marketed MelaFind®. Furthermore, to the extent that we
enter into co-promotion or other marketing and sales
arrangements with other companies, any revenue received will
depend on the skills and efforts of others, and we do not know
whether these efforts will be successful. If we are unable to
establish and maintain adequate sales, marketing and
distribution capabilities, independently or with others, we will
not be able to generate product revenue, and may not become
profitable.
We have limited manufacturing capabilities and
    manufacturing personnel, and if our manufacturing capabilities
    are insufficient to produce an adequate supply of
    MelaFind®, our growth could be limited and our business
    could be harmed.
We have not yet completed the development and testing of
MelaFind®, and as a result have no experience in
manufacturing MelaFind® for commercial distribution. We
currently have limited resources, facilities and experience to
commercially manufacture MelaFind®. In order to produce
MelaFind® in the quantities we anticipate to meet market
demand, we will need to increase our manufacturing capacity by a
significant factor over the current level, or procure
manufacturing services from others. There are technical
challenges to increasing manufacturing capacity, including
equipment design and automation, material procurement, problems
with production yields, and quality control and assurance.
Developing commercial-scale manufacturing facilities that meet
FDA requirements would require the investment of substantial
additional funds and the hiring and retaining of additional
management and technical personnel who have the necessary
manufacturing experience.
We currently plan to outsource certain production aspects to
contract manufacturers. Any difficulties in the ability of
third-party manufacturers to supply devices of the quality, at
the times, and in the quantities we need, could have a material
adverse effect on our business, financial condition, and results
of operations. Similarly, if we enter into contracts for third
party manufacture of our devices, any revenue received will
depend on the skills and efforts of others, and we do not know
whether these efforts will be successful. Manufacturers often
encounter difficulties in scaling up production of new products,
including problems involving product yields, controlling and
anticipating product costs, quality control and assurance,
component supply, and shortages of qualified personnel. We
cannot assure you that the third-party contract manufacturers
with whom we are developing relationships will have or sustain
the ability to produce the quantities of MelaFind® needed
for development or commercial sales, or will be willing to do so
at prices that allow MelaFind® to compete successfully in
the market.
Assuming that MelaFind® receives regulatory approval, if we
are unable to manufacture or obtain a sufficient supply of
product, maintain control over expenses, or otherwise adapt to
anticipated growth, or if we underestimate growth, we may not
have the capability to satisfy market demand, and our business
will suffer. Additionally, if MelaFind® receives regulatory
approval and we then need to make manufacturing changes, we may
need to obtain additional approval for these changes.
MelaFind® is complex and may contain undetected design
defects and errors when first introduced, or errors that may be
introduced when enhancements are released. Such defects and
errors may occur despite
15
our testing, and may not be discovered until after our devices
have been shipped to and used by our customers. The existence of
these defects and errors could result in costly repairs, returns
of devices, diversion of development resources and damage to our
reputation in the marketplace. Any of these conditions could
have a material adverse impact on our business, financial
condition and results of operations. In addition, if we contract
with third-party manufacturers for the production of our
products, these manufacturers may inadvertently produce devices
that vary from devices we have produced in unpredictable ways
that cause adverse consequences.
Our manufacturing operations are dependent upon
    third-party suppliers, making us vulnerable to supply problems
    and price fluctuations, which could harm our business. We
    anticipate contracting for final device assembly and
    integration, but no contract for such services on a commercial
    basis has yet been procured.
Our manufacturing efforts currently rely on FillFactory, a
subsidiary of Cypress Semiconductor Corp., to manufacture and
supply the complementary metal oxide semiconductor sensor in
MelaFind®, on Pracownia Optyki Instrumentalnej (Optyka) for
lens elements and on Fairchild Semiconductor Corp., Panasonic
Corp., and others for light-emitting diodes, or LEDs, printed
circuit boards, and other elements or components of our devices.
We have written agreements with several of these vendors, under
which the vendor is obligated to perform services or produce
components for us. There can be no assurance that these third
parties will meet their obligations under the agreements. Each
of these suppliers is a sole-source supplier. Our contract
manufacturers also rely on sole-source suppliers to manufacture
some of the components used in our products. Our manufacturers
and suppliers may encounter problems during manufacturing due to
a variety of reasons, including failure to follow specific
protocols and procedures, failure to comply with applicable
regulations, equipment malfunction and environmental factors,
any of which could delay or impede their ability to meet our
demand. Our reliance on these outside manufacturers and
suppliers also subjects us to other risks that could harm our
business, including:
•
suppliers may make errors in manufacturing components that could
    negatively affect the effectiveness or safety of our products,
    or cause delays in shipment of our products;
•
we may not be able to obtain adequate supply in a timely manner
    or on commercially reasonable terms;
•
we may have difficulty locating and qualifying alternative
    suppliers for our sole-source suppliers;
•
switching components may require product redesign and submission
    to the FDA of a PMA supplement or possibly a separate PMA,
    either of which could significantly delay production;
•
our suppliers manufacture products for a range of customers, and
    fluctuations in demand for the products these suppliers
    manufacture for others may affect their ability to deliver
    components to us in a timely manner; and
•
our suppliers may encounter financial hardships unrelated to our
    demand for components, which could inhibit their ability to
    fulfill our orders and meet our requirements.
Any interruption or delay in the supply of components or
materials, or our inability to obtain components or materials
from alternate sources at acceptable prices in a timely manner,
could impair our ability to meet the demand of our customers and
cause them to cancel orders.
We have entered into a development agreement with ASKION GmbH
(ASKION) to complete developmental engineering and testing
of our hand-held imaging device, and have entered into a
non-binding Letter of Intent with ASKION to assemble the
components and produce initial quantities of our hand-held
imaging devices for clinical trials. We intend to enter into a
contract for commercial production of the hand-held imaging
devices once specifications for MelaFind® have been
finalized, but we may not be able to enter such an agreement on
mutually acceptable terms. Failure to enter into such an
agreement with ASKION would require us to expand our own
manufacturing facilities or obtain such services elsewhere. Our
planned reliance upon an outside provider for assembly and
production services subjects us to the risk of adverse
consequences from delays and defects caused by the failure of
such outside supplier to meet its contractual
16
obligations. The failure by us or our supplier to produce a
sufficient number of hand-held imaging devices that can operate
according to our specifications could delay the pivotal clinical
trial and/or the commercial sale of MelaFind®, and would
adversely affect both our ability to successfully commercialize
MelaFind® and our business, financial condition and results
of operations.
We will not be able to sell MelaFind®
unless and until its design is verified and validated in
    accordance with current good manufacturing practices as set
    forth in the US medical device Quality System Regulation.
We are in the process, but have not yet successfully completed,
all the steps necessary to verify and validate the design of the
MelaFind® system that are required to be performed prior to
commercialization. If we are delayed or unable to complete
verification and validation successfully, we will not be able to
sell MelaFind®, and we will not be able to meet our plans
for the commercialization of MelaFind® in 2007.
Assuming that regulatory approval of MelaFind® is granted,
the approval may be subject to limitations on the indicated uses
for which the product may be marketed, or may contain
requirements for costly post-marketing testing and surveillance
to monitor the safety or effectiveness of the device. Later
discovery of previously unknown problems with MelaFind®,
including manufacturing problems, or failure to comply with
regulatory requirements such as the Quality System Regulation
(QSR), may result in restrictions on MelaFind® or its
manufacturing processes, withdrawal of MelaFind® from the
market, patient or physician notification, voluntary or
mandatory recalls, fines, withdrawal of regulatory approvals,
refusal to approve pending applications or supplements to
approved applications, refusal to permit the import or export of
our products, product seizures, injunctions or the imposition of
civil or criminal penalties. Should any of these enforcement
actions occur, our business, financial condition and results of
operations could be materially and adversely affected.
Assuming that MelaFind®
is approved by
    regulatory authorities, if we or our suppliers fail to comply
    with ongoing regulatory requirements, or if we experience
    unanticipated problems with MelaFind®, it could be subject
    to restrictions or withdrawal from the market.
Any product for which we obtain marketing approval, along with
the manufacturing processes, post-approval clinical data and
promotional activities for such product, will be subject to
continuous review and periodic inspections by the FDA and other
regulatory bodies. In particular, we and our suppliers are
required to comply with the QSR and other regulations which
cover the methods and documentation of the design, testing,
production, control, quality assurance, labeling, packaging,
storage, promotion, distribution, and shipping of
MelaFind®, and with record keeping practices. We also will
be subject to ongoing FDA requirements, including required
submissions of safety and other post-market information and
reports and registration and listing requirements. To the extent
that we contract with third parties to manufacture some of our
products, our manufacturers will be required to adhere to
current Good Manufacturing Practices (cGMP) requirements
enforced by the FDA as part of QSR, or similar regulations
required by regulatory agencies in other countries. The
manufacturing facilities of our contract manufacturers must be
inspected or must have been inspected, and must be in full
compliance with cGMP requirements before approval for marketing.
The FDA enforces the QSR and other regulatory requirements
through unannounced inspections. We have not yet been inspected
by the FDA for MelaFind®, and will have to complete such an
inspection successfully before we ship any commercial
MelaFind® devices. However, we were previously inspected in
connection with DIFOTI®, which we have discontinued for
business reasons, and were cited for failures to comply fully
with QSR mandated procedures. We have discussed the findings in
a subsequent meeting with the FDA and are in the process of
addressing the deficiencies. The FDA inspectors observed
deficiencies that were documented on FDA Form 483 that was
issued to us following the inspection. We have had a follow-up
meeting with the FDA, and are working with the FDA and
consultants to address the inspectional findings, particularly
as they relate to current MelaFind® design development and
ultimate MelaFind® commercial manufacturing. If we are not
successful in convincing the FDA that we are capable of
addressing its concerns, or if our efforts to address the
deficiencies should prove unsuccessful, we might be subject to
additional FDA action of a type described below, which could
negatively affect our ability to commercialize MelaFind®.
17
There can be no assurance that the future interpretations of
legal requirements made by the FDA or other regulatory bodies
with possible retroactive effect, or the adoption of new
requirements or policies, will not adversely affect us. We may
be slow to adapt, or may not be able to adapt to these changes
or new requirements. Failure by us or one of our suppliers to
comply with statutes and regulations administered by the FDA and
other regulatory bodies, or failure to take adequate response to
any observations, could result in, among other things, any of
the following actions:
•
warning letters;
•
fines and civil penalties;
•
unanticipated expenditures;
•
delays in approving or refusal to approve MelaFind®;
•
withdrawal of approval by the FDA or other regulatory bodies;
•
product recall or seizure;
•
interruption of production;
•
operating restrictions;
•
injunctions; and
•
criminal prosecution.
If any of these actions were to occur, it would harm our
reputation and cause our product sales and profitability to
suffer.
We are involved in a heavily regulated sector, and our
    ability to remain viable will depend on favorable government
    decisions at various points by various agencies.
From time to time, legislation is introduced in the US Congress
that could significantly change the statutory provisions
governing the approval, manufacture and marketing of a medical
device. Additionally, healthcare is heavily regulated by the
federal government, and by state and local governments. The
federal laws and regulations affecting healthcare change
constantly, thereby increasing the uncertainty and risk
associated with any healthcare related venture, including our
business and MelaFind®. In addition, FDA regulations and
guidance are often revised or reinterpreted by the agency in
ways that may significantly affect our business and our
products. It is impossible to predict whether legislative
changes will be enacted or FDA regulations, guidance, or
interpretations changed, and what the impact of such changes, if
any, may be.
The federal government regulates healthcare through various
agencies, including but not limited to the following:
(i) the FDA, which administers the Food, Drug, and Cosmetic
Act (FD&C Act), as well as other relevant laws;
(ii) CMS, which administers the Medicare and Medicaid
programs; (iii) the Office of Inspector General
(OIG) which enforces various laws aimed at curtailing
fraudulent or abusive practices, including by way of example,
the Anti-Kickback Law, the Anti-Physician Referral Law, commonly
referred to as Stark, the Anti-Inducement Law, the Civil Money
Penalty Law, and the laws that authorize the OIG to exclude
healthcare providers and others from participating in federal
healthcare programs; and (iv) the Office of Civil Rights,
which administers the privacy aspects of the Health Insurance
Portability and Accountability Act of 1996 (HIPAA). All of the
aforementioned are agencies within HHS. Healthcare is also
provided or regulated, as the case may be, by the Department of
Defense through its TriCare program, the Public Health Service
within HHS under the Public Health Service Act, the Department
of Justice through
18
the Federal False Claims Act and various criminal statutes, and
state governments under Medicaid and other state sponsored or
funded programs and their internal laws regulating all
healthcare activities.
In addition to regulation by the FDA as a medical device
manufacturer, we are subject to general healthcare industry
regulations. The healthcare industry is subject to extensive
federal, state and local laws and regulations relating to:
•
billing for services;
•
quality of medical equipment and services;
•
confidentiality, maintenance and security issues associated with
    medical records and individually identifiable health information;
•
false claims; and
•
labeling products.
These laws and regulations are extremely complex and, in some
cases, still evolving. In many instances, the industry does not
have the benefit of significant regulatory or judicial
interpretation of these laws and regulations. If our operations
are found to be in violation of any of the federal, state or
local laws and regulations that govern our activities, we may be
subject to the applicable penalty associated with the violation,
including civil and criminal penalties, damages, fines or
curtailment of our operations. The risk of being found in
violation of these laws and regulations is increased by the fact
that many of them have not been fully interpreted by the
regulatory authorities or the courts, and their provisions are
open to a variety of interpretations. Any action against us for
violation of these laws or regulations, even if we successfully
defend against it, could cause us to incur significant legal
expenses and divert our management's time and attention
from the operation of our business.
We must comply with complex statutes prohibiting fraud and
    abuse, and both we and physicians utilizing
    MelaFind®
could be subject to significant
    penalties for noncompliance.
There are extensive federal and state laws and regulations
prohibiting fraud and abuse in the healthcare industry that can
result in significant criminal and civil penalties. These
federal laws include: the anti-kickback statute which prohibits
certain business practices and relationships, including the
payment or receipt of remuneration for the referral of patients
whose care will be paid by Medicare or other federal healthcare
programs; the physician self-referral prohibition, commonly
referred to as the Stark Law; the anti-inducement law, which
prohibits providers from offering anything to a Medicare or
Medicaid beneficiary to induce that beneficiary to use items or
services covered by either program; the Civil False Claims Act,
which prohibits any person from knowingly presenting or causing
to be presented false or fraudulent claims for payment by the
federal government, including the Medicare and Medicaid programs
and; the Civil Monetary Penalties Law, which authorizes HHS to
impose civil penalties administratively for fraudulent or
abusive acts.
Sanctions for violating these federal laws include criminal and
civil penalties that range from punitive sanctions, damage
assessments, money penalties, imprisonment, denial of Medicare
and Medicaid payments, or exclusion from the Medicare and
Medicaid programs, or both. As federal and state budget
pressures continue, federal and state administrative agencies
may also continue to escalate investigation and enforcement
efforts to root out waste and to control fraud and abuse in
governmental healthcare programs. Private enforcement of
healthcare fraud has also increased, due in large part to
amendments to the Civil False Claims Act in 1986 that were
designed to encourage private persons to sue on behalf of the
government. A violation of any of these federal and state fraud
and abuse laws and regulations could have a material adverse
effect on our liquidity and financial condition. An
investigation into the use of MelaFind® by physicians may
dissuade physicians from either purchasing or using
MelaFind®, and could have a material adverse effect on our
ability to commercialize MelaFind®.
19
The application of the privacy provisions of HIPAA is
    uncertain.
HIPAA, among other things, protects the privacy and security of
individually identifiable health information by limiting its use
and disclosure. HIPAA directly regulates "covered
entities" (insurers, clearinghouses, and most healthcare
providers) and indirectly regulates "business
associates" with respect to the privacy of patients'
medical information. All entities that receive and process
protected health information are required to adopt certain
procedures to safeguard the security of that information. It is
uncertain whether we would be deemed to be a covered entity
under HIPAA, and it is unlikely that based on our current
business model, we would be a business associate. Nevertheless,
we will likely be contractually required to physically safeguard
the integrity and security of the patient information that we or
our physician customers receive, store, create or transmit. If
we fail to adhere to our contractual commitments, then our
physician customers may be subject to civil monetary penalties,
and this could adversely affect our ability to market
MelaFind®. We also may be liable under state laws governing
the privacy of health information.
We may become subject to claims of infringement or
    misappropriation of the intellectual property rights of others,
    which could prohibit us from shipping affected products, require
    us to obtain licenses from third parties or to develop
    non-infringing alternatives, and subject us to substantial
    monetary damages and injunctive relief. Our patents may also be
    subject to challenge on validity grounds, and our patent
    applications may be rejected.
Third parties could, in the future, assert infringement or
misappropriation claims against us with respect to our current
or future products. Whether a product infringes a patent
involves complex legal and factual issues, the determination of
which is often uncertain. Therefore, we cannot be certain that
we have not infringed the intellectual property rights of such
third parties. Our potential competitors may assert that some
aspect of MelaFind® infringes their patents. Because patent
applications may take years to issue, there also may be
applications now pending of which we are unaware that may later
result in issued patents that MelaFind® infringes. There
also may be existing patents of which we are unaware that one or
more components of our MelaFind® system may inadvertently
infringe.
Any infringement or misappropriation claim could cause us to
incur significant costs, could place significant strain on our
financial resources, divert management's attention from our
business and harm our reputation. If the relevant patents were
upheld as valid and enforceable and we were found to infringe,
we could be prohibited from selling our product that is found to
infringe unless we could obtain licenses to use the technology
covered by the patent or are able to design around the patent.
We may be unable to obtain a license on terms acceptable to us,
if at all, and we may not be able to redesign MelaFind® to
avoid infringement. A court could also order us to pay
compensatory damages for such infringement, plus prejudgment
interest and could, in addition, treble the compensatory damages
and award attorney fees. These damages could be substantial and
could harm our reputation, business, financial condition and
operating results. A court also could enter orders that
temporarily, preliminarily or permanently enjoin us and our
customers from making, using, selling, offering to sell or
importing MelaFind®, and/or could enter an order mandating
that we undertake certain remedial activities. Depending on the
nature of the relief ordered by the court, we could become
liable for additional damages to third parties.
We also may rely on our patents, patent applications and other
intellectual property rights to give us a competitive advantage.
Whether a patent is valid, or whether a patent application
should be granted, is a complex matter of science and law, and
therefore we cannot be certain that, if challenged, our patents,
patent applications and/or other intellectual property rights
would be upheld. If one or more of those patents, patent
applications and other intellectual property rights are
invalidated, rejected or found unenforceable, that could reduce
or eliminate any competitive advantage we might otherwise have
had.
20
New product development in the medical device industry is
    both costly and labor intensive with very low success rates for
    successful commercialization; if we cannot successfully develop
    or obtain future products, our growth would be delayed.
Our long-term success is dependent, in large part, on the
design, development and commercialization of MelaFind® and
other new products and services in the medical device industry.
The product development process is time-consuming, unpredictable
and costly. There can be no assurance that we will be able to
develop or acquire new products, successfully complete clinical
trials, obtain the necessary regulatory clearances or approvals
required from the FDA on a timely basis, or at all, manufacture
our potential products in compliance with regulatory
requirements or in commercial volumes, or that MelaFind® or
other potential products will achieve market acceptance. In
addition, changes in regulatory policy for product approval
during the period of product development, and regulatory agency
review of each submitted new application, may cause delays or
rejections. It may be necessary for us to enter into licensing
arrangements, in order to market effectively any new products or
new indications for existing products. There can be no assurance
that we will be successful in entering into such licensing
arrangements on terms favorable to us or at all. Failure to
develop, obtain necessary regulatory clearances or approvals
for, or successfully market potential new products could have a
material adverse effect on our business, financial condition and
results of operations.
We face the risk of product liability claims and may not
    be able to obtain or maintain adequate insurance.
Our business exposes us to the risk of product liability claims
that is inherent in the testing, manufacturing and marketing of
medical devices, including those which may arise from the misuse
or malfunction of, or design flaws in, our products. We may be
subject to product liability claims if MelaFind® causes, or
merely appears to have caused, an injury or if a patient alleges
that MelaFind® failed to provide appropriate diagnostic
information on a lesion where melanoma was subsequently found to
be present. Claims may be made by patients, healthcare providers
or others involved with MelaFind®. MelaFind® will
require PMA approval prior to commercialization in the US. The
clinical studies of MelaFind® are considered by the FDA as
Non-Significant Risk (NSR). Consequently, the trials are
conducted under the auspices of an abbreviated Investigational
Device Exemption (IDE). We therefore do not maintain domestic
clinical trial liability insurance. We have obtained clinical
trial liability insurance in certain European countries where
required by statute or clinical site policy. Although we have
general liability insurance that we believe is appropriate, and
anticipate obtaining adequate product liability insurance before
commercialization of MelaFind®, this insurance is and will
be subject to deductibles and coverage limitations. Our
anticipated product liability insurance may not be available to
us in amounts and on acceptable terms, if at all, and if
available, the coverages may not be adequate to protect us
against any future product liability claims. If we are unable to
obtain insurance at an acceptable cost or on acceptable terms
with adequate coverage, or otherwise protect against potential
product liability claims, we will be exposed to significant
liabilities, which may harm our business. A product liability
claim, recall or other claim with respect to uninsured
liabilities or for amounts in excess of insured liabilities
could result in significant costs and significant harm to our
business.
We may be subject to claims against us even if the apparent
injury is due to the actions of others. For example, we rely on
the expertise of physicians, nurses and other associated medical
personnel to operate MelaFind®. If these medical personnel
are not properly trained or are negligent, we may be subjected
to liability. These liabilities could prevent or interfere with
our product commercialization efforts. Defending a suit,
regardless of merit, could be costly, could divert management
attention and might result in adverse publicity, which could
result in the withdrawal of, or inability to recruit, clinical
trial volunteers, or result in reduced acceptance of
MelaFind® in the market.
Insurance and surety companies have reassessed many aspects of
their business and, as a result, may take actions that could
negatively affect our business. These actions could include
increasing insurance premiums, requiring higher self-insured
retentions and deductibles, reducing limits, restricting
coverages, imposing exclusions, and refusing to underwrite
certain risks and classes of business. Any of these actions may
adversely affect our ability to obtain appropriate insurance
coverage at reasonable costs, which could have a material
adverse effect on our business, financial condition and results
of operations.
21
We may be adversely affected by a data center
    failure.
The success of MelaFind® is dependent upon our ability to
protect our data center against damage from fire, power loss,
telecommunications failure, natural disaster, sabotage or a
similar catastrophic event. Substantially all of our computer
equipment and data operations are located in a single facility.
Our prospective failure to maintain off-site copies of
information contained in our MelaFind® database, or our
inability to use alternative sites in the event we experience a
natural disaster, hardware or software malfunction or other
interruption of our data center, or any interruption in the
ability of physicians to obtain access to our MelaFind®
server and its database could adversely impact our business,
financial condition and results of operations.
We may be adversely affected by breaches of online
    security.
Our MelaFind® database does not contain any information
that allows us to identify specific patients. However, we must
identify certain data as belonging to or as derived from
specific patients for billing purposes. To the extent that our
activities involve the storage and transmission of confidential
information, security breaches could damage our reputation and
expose us to a risk of loss, or to litigation and possible
liability. Our business may be materially adversely affected if
our security measures do not prevent security breaches. In
addition, such information may be subject to HIPAA privacy and
security regulations, the potential violation of which may
trigger concerns by healthcare providers, which may adversely
impact our business, financial condition and results of
operations.
We are dependent upon telecommunications and the
    internet.
The connection between the MelaFind® hand-held imaging
device and the central server in our offices will be dependent
on the internet. Our success will depend in large part on the
continued availability of electronic means for storing and
transmitting encoded compressed diagnostic information, and
storing and transmitting the results of the comparison of such
information with our electronically-maintained database through
the internet. If the domestic and international
telecommunications infrastructure required for these
transmissions fails, our business could be materially adversely
affected.
We plan to use the internet as a medium to provide diagnostic
assistance services to physicians. We also plan to use the
internet to inform the public about the availability of our
products and to market to and communicate with physicians who
are potential or actual customers. Our success will therefore
depend in part on the continued growth and use of the internet.
If our ability to use the internet fails, it may materially
adversely affect our business.
We will be obligated to comply with Federal Communications
    Commission regulations for radio transmissions used by our
    products.
Versions of MelaFind® may rely on radio transmissions from
the hand-held imaging device to a base station that is connected
to the internet. Applicable requirements will restrict us to a
particular band of frequencies allocated to low power radio
service for transmitting data in support of specific diagnostic
or therapeutic functions. Failure to comply with all applicable
restrictions on the use of such frequencies, or unforeseeable
difficulties with the use of such frequencies, could impede our
ability to commercialize MelaFind®.
All of our operations are conducted at a single location.
    Any disruption at our facility could increase our
    expenses.
All of our operations are conducted at two adjacent buildings in
Irvington, New York. We take precautions to safeguard our
facility, including insurance, health and safety protocols,
contracted off-site engineering services, provision for off-site
manufacturing, and storage of computer data. However, a natural
disaster, such as a fire, flood or earthquake, could cause
substantial delays in our operations, damage or destroy our
manufacturing equipment or inventory, and cause us to incur
additional expenses. The insurance
22
we maintain against fires, floods, earthquakes and other natural
disasters may not be adequate to cover our losses in any
particular case.
We may be liable for contamination or other harm caused by
    materials that we handle, and changes in environmental
    regulations could cause us to incur additional expense.
Our manufacturing, research and development and clinical
processes do not generally involve the handling of potentially
harmful biological materials or hazardous materials, but they
may occasionally do so. We are subject to federal, state and
local laws and regulations governing the use, handling, storage
and disposal of hazardous and biological materials. If
violations of environmental, health and safety laws occur, we
could be held liable for damages, penalties and costs of
remedial actions. These expenses or this liability could have a
significant negative impact on our business, financial condition
and results of operations. We may violate environmental, health
and safety laws in the future as a result of human error,
equipment failure or other causes. Environmental laws could
become more stringent over time, imposing greater compliance
costs and increasing risks and penalties associated with
violations. We may be subject to potentially conflicting and
changing regulatory agendas of political, business and
environmental groups. Changes to or restrictions on permitting
requirements or processes, hazardous or biological material
storage or handling might require an unplanned capital
investment or relocation. Failure to comply with new or existing
laws or regulations could harm our business, financial condition
and results of operations.
Failure to obtain and maintain regulatory approval in
    foreign jurisdictions will prevent us from marketing
    abroad.
Following commercialization of MelaFind® in the US, we may
market MelaFind® internationally. Outside the US, we can
market a product only if we receive a marketing authorization
and, in some cases, pricing approval, from the appropriate
regulatory authorities. The approval procedure varies among
countries and can involve additional testing, and the time
required to obtain approval may differ from that required to
obtain FDA approval. The foreign regulatory approval process may
include all of the risks associated with obtaining FDA approval,
in addition to other risks. Foreign regulatory bodies have
established varying regulations governing product standards,
packaging requirements, labeling requirements, import
restrictions, tariff regulations, duties and tax requirements.
We may not obtain foreign regulatory approvals on a timely
basis, if at all. Foreign regulatory agencies, as well as the
FDA, periodically inspect manufacturing facilities both in the
US and abroad. Approval by the FDA does not ensure approval by
regulatory authorities in other countries, and approval by one
foreign regulatory authority does not ensure approval by
regulatory authorities in other foreign countries or by the FDA.
We have not taken any significant actions to obtain foreign
regulatory approvals. We may not be able to file for regulatory
approvals and may not receive necessary approvals to
commercialize MelaFind® in any market on a timely basis, or
at all. Our inability or failure to comply with varying foreign
regulation, or the imposition of new regulations, could restrict
our sale of products internationally.
Our success will depend on our ability to attract and
    retain our personnel.
We are highly dependent on our senior management, especially
Joseph V. Gulfo, M.D., our President and Chief Executive
Officer, and Dina Gutkowicz-Krusin, Ph.D., our Director of
Clinical Studies. Our success will depend on our ability to
retain our current management and to attract and retain
qualified personnel in the future, including scientists,
clinicians, engineers and other highly skilled personnel.
Competition for senior management personnel, as well as
scientists, clinicians, engineers, and experienced sales and
marketing individuals, is intense, and we may not be able to
retain our personnel. The loss of the services of members of our
senior management, scientists, clinicians or engineers could
prevent the implementation and completion of our objectives,
including the development and introduction of MelaFind®.
The loss of a member of our senior management or our
professional staff would require the remaining executive
officers to divert immediate and substantial attention to
seeking a replacement. Each of our officers may terminate their
employment at any time without notice and without cause or good
reason.
23
We expect to expand our operations and grow our research and
development, product development and administrative operations.
This expansion is expected to place a significant strain on our
management, and will require hiring a significant number of
qualified personnel. Accordingly, recruiting and retaining such
personnel in the future will be critical to our success. There
is competition from other companies and research and academic
institutions for qualified personnel in the areas of our
activities. If we fail to identify, attract, retain and motivate
these highly skilled personnel, we may be unable to continue our
development and commercialization activities.
Our financial results for future periods may be adversely
    affected by changes required by financial and accounting
    regulatory agencies.
Our reported financial results may be adversely affected by
changes in accounting principles generally accepted in the US.
Generally accepted accounting principles in the US are subject
to interpretation by the Financial Accounting Standards Board
(FASB), the American Institute of Certified Public Accountants,
the Securities and Exchange Commission (SEC), and various bodies
formed to promulgate and interpret appropriate accounting
principles. A change in these principles or interpretations
could have a significant effect on our reported financial
results, and could affect the reporting of transactions
completed before the announcement of a change.
For example, we currently are not required to record stock-based
compensation charges if the employee's stock option
exercise price is equal to or exceeds the fair value of our
common stock at the date of grant. However, several companies
have recently elected to change their accounting policies, and
have begun to record the fair value of stock options as an
expense. New FASB Statement of Financial Accounting Standards
No. 123 (revised 2004), Share-Based Payment (FASB Statement
No. 123R), requires companies to recognize in the income
statement the grant-date fair value of stock options and other
equity-based compensation issued to employees. Under FASB
Statement No. 123R, SEC registrants would have been
required to implement this standard for interim or annual
periods beginning after June 15, 2005, or after
December 15, 2005 for small business issuers. On
April 14, 2005, the SEC adopted a new rule amending the
compliance dates for FASB Statement No. 123R. The
SEC's new rule permits companies to implement FASB
Statement No. 123R at the beginning of their next fiscal
year, instead of the next reporting period that begins after
June 15, 2005, or December 15, 2005 for small business
issuers. Awards to most non-employee directors will be accounted
for as employee awards. All public companies must use either the
modified prospective or the modified retrospective transition
method. Under the modified prospective method, awards that are
granted, modified, or settled after the date of adoption should
be measured and accounted for in accordance with FASB Statement
No. 123R. Under the modified retrospective method, the
previously-reported amounts are restated to either the beginning
of the year of adoption or for all periods presented. If we
elect to adopt the retroactive provisions and to restate all
prior periods presented our operating expenses and reported
losses will increase. Although we believe that our accounting
practices are consistent with current accounting pronouncements,
changes to or interpretations of accounting methods or policies
in the future may require us to reclassify, restate or otherwise
change or revise our financial statements.
Our financial results for future periods will be affected
    by the attainment of milestones.
We have granted to certain employees stock options that vest
with the attainment of various performance milestones. Assuming
that FASB Statement No. 123R is implemented, then upon the
attainment of these milestones we will be required to recognize
a stock based compensation expense in an amount based on the
then current fair market value of our common stock underlying
the options which vest when the milestone is attained. Assuming
that all shares offered are sold in this public offering at a
price of
$
l
per
share, the mid-point of our filing range, that upon the
attainment of each of the relevant milestones such offering
price remains the fair market value per share of our common
stock, and that the number of shares of our common stock
outstanding after this offering
remains
l
then
we will record a compensation expense: (1) upon completion
of this offering of
$
l
with
respect to 125,000 shares underlying options with an assumed
fair value of $4.00 per share; (2) upon filing our
MelaFind® PMA with the FDA of
$
l
with
respect to 50,000 shares underlying options with an assumed fair
value of $4.00 per share; and (3) upon our
24
receipt of PMA approval for MelaFind® of
$
l
with
respect to 25,000 shares underlying options with an assumed fair
value of $4.00 per share and of
$
l
with
respect
to
l
shares
underlying options with an fair value of $0.46 per share.
If we fail to maintain the adequacy of our internal
    controls, our ability to provide accurate financial statements
    could be impaired and any failure to maintain our internal
    controls and provide accurate financial statements could cause
    our stock price to decrease substantially.
We will face increased legal, accounting, administrative and
other costs and expenses as a public company that we did not
incur as a private company. The Sarbanes-Oxley Act of 2002
(SOX), as well as new rules subsequently implemented by the SEC,
the Public Company Accounting Oversight Board and the NASDAQ
National Market, require changes in the corporate governance
practices of public companies. We expect these new rules and
regulations to increase our legal and financial compliance
costs, to divert management attention from operations and
strategic opportunities, and to make legal, accounting and
administrative activities more time-consuming and costly. We
also expect to incur substantially higher costs to maintain
directors' and officers' insurance. We are in the
process of instituting changes to our internal procedures to
satisfy the requirements of the SOX. We are evaluating our
internal controls systems in order to allow us to report on, and
our independent registered public accounting firm to attest to,
our internal controls, as required by Section 404 of the
SOX. While we anticipate being able to fully implement the
requirements relating to internal controls and all other aspects
of Section 404 of the SOX in a timely fashion, we cannot be
certain as to the timing of completion of our evaluation,
testing and remediation actions or the impact of the same on our
operations, since there is no precedent available by which to
measure compliance adequacy. As a small company with limited
capital and human resources, we will need to divert
management's time and attention away from our business in
order to ensure compliance with these regulatory requirements.
As a public company, we will require greater financial resources
than we have had as a private company. Implementing these
changes may require new information technologies systems, the
auditing of our internal controls, and compliance training for
our directors, officers and personnel. Such efforts would
require a potentially significant expense. If we fail to
maintain the adequacy of our internal controls as such standards
are modified, supplemented or amended from time to time, we may
not be able to provide accurate financial statements and comply
with the SOX. Any failure to maintain the adequacy of our
internal controls and provide accurate financial statements
could cause the trading price of our common stock to decrease
substantially.
Risks Relating to this Offering
An active trading market for our common stock may not
    develop.
Prior to this offering, there has been no public market for our
common stock. Although we are seeking approval for listing of
our common stock on the NASDAQ National Market, an active
trading market for our shares may never develop or be sustained
following this offering. Further, we cannot be certain that the
market price of our common stock will not decline below the
initial public offering price or below the amount required by
Nasdaq to maintain a listing on its National Market. Should we
fail to meet the minimum standards established by Nasdaq for its
National Market, we could be de-listed, meaning shareholders
might be subject to limited liquidity. The initial public
offering price for our common stock will be determined through
negotiations with the underwriters. This initial public offering
price may vary from the market price of our common stock after
the offering and investors may therefore be unable to sell their
common stock at or above the initial public offering price.
Our stock price will be volatile, meaning purchasers of
    our common stock could incur substantial losses.
Our stock price is likely to be volatile. The stock market in
general and the market for medical technology companies in
particular have experienced extreme volatility that has often
been unrelated to the operating performance of particular
companies. As a result of this volatility, investors may not be
able to sell their common stock at or above the initial public
offering price. The following factors, in addition to other risk
25
factors described in this section and general market and
economic conditions, may have a significant impact on the market
price of our common stock:
•
results of our research and development efforts and our clinical
    trials;
•
the timing of regulatory approval for our products;
•
failure of any of our products, if approved, to achieve
    commercial success;
•
the announcement of new products or product enhancements by us
    or our competitors;
•
regulatory developments in the US and foreign countries;
•
ability to manufacture our products to commercial standards;
•
developments concerning our clinical collaborators, suppliers or
    marketing partners;
•
changes in financial estimates or recommendations by securities
    analysts;
•
public concern over our products;
•
developments or disputes concerning patents or other
    intellectual property rights;
•
product liability claims and litigation against us or our
    competitors;
•
the departure of key personnel;
•
the strength of our balance sheet;
•
variations in our financial results or those of companies that
    are perceived to be similar to us;
•
changes in the structure of and third-party reimbursement in the
    US and other countries;
•
changes in accounting principles or practices;
•
general economic, industry and market conditions; and
•
future sales of our common stock.
A decline in the market price of our common stock could cause
you to lose some or all of your investment and may adversely
impact our ability to attract and retain employees and raise
capital. In addition, stockholders may initiate securities class
action lawsuits if the market price of our stock drops
significantly. Whether or not meritorious, litigation brought
against us could result in substantial costs and could divert
the time and attention of our management. Our insurance to cover
claims of this sort may not be adequate.
We have broad discretion in the use of the net proceeds
    from this offering and may not use them effectively.
We cannot specify with certainty the particular uses of the net
proceeds we will receive from this offering. Our management will
have broad discretion in the application of the net proceeds,
including for any of the purposes described in "Use of
Proceeds." Accordingly, you will have to rely upon the
judgment of our management with respect to the use of the
proceeds, with only limited information concerning
management's specific intentions. Our management may spend
a portion or all of the net proceeds from this offering in ways
that our stockholders may not desire or that may not yield a
favorable return. The failure by our management to apply these
funds effectively could harm our business and financial
condition. Pending their use, we may invest the net proceeds
from this offering in a manner that does not produce income or
that loses value.
Concentration of ownership among our directors, executive
    officers, and principal stockholders may prevent new investors
    from influencing significant corporate decisions.
Upon closing of this offering, based upon beneficial ownership
as of May 15, 2005, our directors, executive officers,
holders of more than 5% of our common stock, and their
affiliates will, in the aggregate,
26
beneficially own approximately
l
%
of our outstanding common stock. As a result, these
stockholders, subject to any fiduciary duties owed to our other
stockholders under Delaware law, will be able to exercise a
controlling influence over matters requiring stockholder
approval, including the election of directors and approval of
significant corporate transactions, and will have significant
control over our management and policies. Some of these persons
or entities may have interests that are different from yours.
For example, these stockholders may support proposals and
actions with which you may disagree or which are not in your
interests. The concentration of ownership could delay or prevent
a change in control of our company or otherwise discourage a
potential acquirer from attempting to obtain control of our
company, which in turn could reduce the price of our common
stock. In addition, these stockholders, some of whom have
representatives sitting on our board of directors, could use
their voting influence to maintain our existing management and
directors in office, delay or prevent changes of control of our
company, or support or reject other management and board
proposals that are subject to stockholder approval, such as
amendments to our employee stock plans and approvals of
significant financing transactions.
If there are substantial
sales of our common stock, our stock price could decline.
If our existing stockholders sell a large number of shares of
our common stock or the public market perceives that these sales
may occur, the market price of our common stock could decline.
Based on shares outstanding on May 15, 2005, upon the
closing of this offering, assuming no outstanding options are
exercised prior to the closing of this offering, we will have
approximately
l
shares of common
stock outstanding. All of the shares offered under this
prospectus will be freely tradable without restriction or
further registration under the federal securities laws, unless
purchased by our affiliates. Taking into consideration the
effect of lock-up agreements that will be entered into by our
stockholders, the remaining
l
shares outstanding upon the closing of this initial public
offering will be available for sale pursuant to Rules 144
and 701, and the volume, manner of sale and other limitations
under these rules, as follows:
•
l
shares of common stock will be
    eligible for sale in the public market, beginning 270 days
    after the effective date of this prospectus, unless the lock-up
    period is otherwise extended pursuant to its terms; and
•
the remaining
l
shares of common
    stock will become eligible for sale in the public market
    beginning
l
, 2005.
Existing stockholders holding an aggregate of
l
shares of common stock and
warrant holders holding warrants to purchase
l
shares of our common stock,
based on shares outstanding as of May 15, 2005 have rights
with respect to the registration of these shares of common stock
with the SEC. See "Description of Capital Stock —
Registration Rights." If we register these shares of common
stock, they can immediately sell those shares in the public
market.
Within nine months following this offering, we intend to
register up to 1,899,875 shares of common stock that are
authorized for issuance under our stock option plans. As of
May 15, 2005, 899,875 shares were subject to outstanding
options, of which 446,675 shares were vested. Once we register
these shares, they can be freely sold in the public market upon
issuance, subject to the lock-up agreements referred to above
and restrictions on our affiliates.
You will incur immediate and
substantial dilution as a result of this offering.
The initial public offering price is substantially higher than
the book value per share of our common stock. As a result,
purchasers in this offering will experience immediate and
substantial dilution of $
l
per
share in the tangible book value of our common stock from the
initial public offering price, based on the number of shares
outstanding as of March 31, 2005. This is due in large part
to earlier investors in the company having paid substantially
less than the initial public offering price when they purchased
their shares. Investors who purchase shares of common stock in
this offering will contribute approximately
l
% of the total amount we have
raised to fund our operations but will own only approximately
l
% of our common stock, based on
the number of shares outstanding as of March 31, 2005. In
addition, the exercise of currently outstanding options to
purchase common stock and future equity issuances, including
future public or private
27
securities offerings and any additional shares issued in
connection with acquisitions, will result in further dilution.
Our charter documents and Delaware law may inhibit a
    takeover that stockholders consider favorable and could also
    limit the market price of our stock.
Upon the closing of this offering, provisions of our restated
certificate of incorporation and bylaws and applicable
provisions of Delaware law may make it more difficult for or
prevent a third party from acquiring control of us without the
approval of our board of directors. These provisions:
•
set limitations on the removal of directors;
•
limit who may call a special meeting of stockholders;
•
establish advance notice requirements for nominations for
    election to our board of directors or for proposing matters that
    can be acted upon at stockholder meetings;
•
do not permit cumulative voting in the election of our
    directors, which would otherwise permit less than a majority of
    stockholders to elect directors;
•
prohibit stockholder action by written consent, thereby
    requiring all stockholder actions to be taken at a meeting of
    our stockholders; and
•
provide our board of directors the ability to designate the
    terms of and issue a new series of preferred stock without
    stockholder approval.
In addition, Section 203 of the Delaware General
Corporation Law generally limits our ability to engage in any
business combination with certain persons who own 15% or more of
our outstanding voting stock or any of our associates or
affiliates who at any time in the past three years have owned
15% or more of our outstanding voting stock. These provisions
may have the effect of entrenching our management team and may
deprive you of the opportunity to sell your shares to potential
acquirors at a premium over prevailing prices. This potential
inability to obtain a control premium could reduce the price of
our common stock.
28
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve
substantial risks and uncertainties. All statements, other than
statements of historical facts, included in this prospectus
regarding our strategy, future operations, future financial
position, future revenues, projected costs, prospects, plans and
objectives of management are forward-looking statements. The
words "anticipates," "believes,"
"estimates," "expects," "intends,"
"may," "plans," "projects,"
"will," "would" and similar expressions are
intended to identify forward-looking statements, although not
all forward-looking statements contain these identifying words.
Although we do not make forward-looking statements unless we
believe we have a reasonable basis for doing so, we cannot
guarantee their accuracy. We may not actually achieve the plans,
intentions or expectations disclosed in our forward-looking
statements and you should not place undue reliance on our
forward-looking statements. Actual results or events could
differ materially from the plans, intentions and expectations
stated in the forward-looking statements we make. We have
included important factors in the cautionary statements included
in this prospectus, particularly in the "Risk Factors"
section, that we believe could cause actual results or events to
differ materially from the forward-looking statements that we
make. Additional risks, uncertainties and factors, other than
those discussed under "Risk Factors," could also cause
our actual results to differ materially from those projected in
any forward-looking statements we make. We operate in a very
competitive and rapidly changing environment in which new risks
emerge from time to time and it is not possible for us to
predict all risk factors, nor can we address the impact of all
factors on our business or the extent to which any factor, or
combination of factors, may cause actual results to differ
materially from those contained in any forward-looking
statements. Our forward-looking statements do not reflect the
potential impact of any future acquisitions, mergers,
dispositions, joint ventures or investments we may make. We do
not assume any obligation to update or revise any
forward-looking statements, or to so update the reasons actual
results could differ materially from those anticipated in these
forward-looking statements, even if new information becomes
available in the future.
29
USE OF PROCEEDS
We estimate that we will receive net proceeds of
approximately
l
from
our sale
of
l
shares
of common stock at an assumed initial public offering price of
$
l
per
share, the mid-point of our filing range, after deducting
underwriting discounts and commissions and estimated expenses of
approximately
$
l
,
which includes our underwriter's non-accountable expense
allowance, legal, accounting, printing costs and expenses, and
various fees associated with the registration and listing of our
securities payable by us. If the underwriters exercise their
over-allotment option in full, we will receive an additional
$
l
after
deducting
$
l
for
underwriting discounts and commissions.
We intend to use these net proceeds approximately as follows:
•
l
%
    ($
l
)
    to fund our research and development activities, including our
    clinical studies;
•
l
%
    ($
l
)
    to develop our sales and marketing capabilities; and
•
l
%
    ($
l
)
    for general corporate purposes, including working capital, and
    capital expenditures made in the ordinary course of business.
The amounts that we actually expend for working capital purposes
will vary significantly depending on a number of factors. As a
result, we will retain broad discretion in the allocation of the
net proceeds of this offering. While we have no present
understandings, commitments or agreements to enter into any
potential acquisitions, we may also use a portion of the net
proceeds for the acquisition of, or investment in, technologies
or products that complement our business. Pending the uses
described above, we intend to invest the net proceeds of this
offering in short-term, investment-grade, interest-bearing
securities. We cannot predict whether the proceeds which we
invest will yield a favorable return.
DIVIDEND POLICY
We have never declared or paid cash dividends on our common
stock. We currently intend to retain our cash for the
development of our business. We do not intend to pay cash
dividends to our stockholders in the foreseeable future.
Any future determination relating to our dividend policy will be
made at the discretion of our board of directors and will depend
on then existing conditions, including our earnings, financial
condition, results of operations, level of indebtedness,
contractual restrictions, capital requirements, business
prospects and other factors our board of directors may deem
relevant. Our board of directors' ability to declare a
dividend is also subject to limits imposed by Delaware law.
30
CAPITALIZATION
You should read this capitalization table together with the
sections of this prospectus entitled "Management's
Discussions and Analysis of Financial Condition and Results of
Operations" and with the financial statements and related
notes to those statements included elsewhere in this prospectus.
The following table sets forth our capitalization as of
March 31, 2005:
•
on an actual basis; and
•
on a pro forma as adjusted basis to reflect the conversion of
    all our outstanding shares of convertible preferred stock into
    shares of common stock immediately prior to completion of this
    offering, the assumed conversion of 2,610,643 warrants to
    purchase the company's common stock to be exchanged for a
    total of 1,305,321 shares of the company's common
    stock based on an exchange ratio of one share of our common
    stock for every two shares of our common stock purchasable under
    the warrants to occur prior to the closing of this offering and
    the receipt of the estimated net proceeds from the sale
    of
l
shares
    of our common stock in this offering at the assumed initial
    public offering price of
    $
l
per
    share, the mid-point of our filing range, after deducting the
    underwriting discounts and commissions and estimated offering
    expenses payable by us.
As of March 31, 2005
Pro Forma(1)
As Adjusted
Actual
(unaudited)
(In thousands, except share
and per share data)
Redeemable Convertible Preferred Stock:
Redeemable Preferred Stock Series B convertible;
    992,986 shares designated (liquidation preference
    $2.26 per share); issued and outstanding
    992,986 shares at December 31, 2003 and 2004 and
    March 31, 2005 and 0 shares at March 31, 2005,
    pro forma as adjusted
$
2,224
l
Redeemable Preferred Stock Series C convertible
    5,744,340 shares designated (liquidation preference
    $2.26 per share); issued and outstanding
    907,077 shares at December 31, 2003 and
    5,414,779 shares at December 31, 2004 and
    March 31, 2005 and 0 shares at March 31, 2005,
    pro forma as adjusted
6,762
l
Stockholders' (Deficiency) Equity:
Preferred stock — $.10 par value; authorized
    16,936,704 shares:
Series A Convertible Preferred Stock, 199,380 shares
    designated (liquidation preference $5.00 per share); issued
    and outstanding 198,000 shares at December 31, 2003
    and 2004 and March 31, 2005 and 0 shares at
    March 31, 2005, pro forma as adjusted
972
l
Common stock — $.001 par value; authorized
    30,000,000 shares; issued and outstanding
    1,684,760 shares at December 31, 2003 and
    1,809,758 shares at December 31, 2004 and
    March 31, 2005 and 6,513,164 shares at March 31,
    2005, pro forma as adjusted
2
l
Additional paid-in capital
10,631
l
Notes receivable
(69
)
l
Deferred compensation
(151
)
l
Accumulated deficit
(15,150
)
l
Stockholders' (Deficiency) Equity
(3,765
)
l
Total Capitalization
$
5,241
l
31
None of the columns shown above reflect the following:
•
899,875 shares of common stock issuable as of the date of
    this prospectus upon the exercise of outstanding stock options
    under our 2003 Stock Incentive Plan and our 1996 Stock Option
    Plan, respectively, at a weighted average exercise price of
    approximately $0.63 per share, which amount is 54,391
    shares less than the number of shares issuable under such option
    plans as of March 31, 2005 due to the effect of a
    formula-based option granted to our President and Chief
    Executive Officer — see "Management —
    Employment Agreement";
•
up to 1,000,000 shares of common stock reserved for future
    grants under our 2005 Stock Incentive Plan;
•
75,000 shares of common stock issuable upon exercise of
    outstanding warrants to purchase our common stock at an exercise
    price of $7.00 per share;
•
73,280 shares of common stock issuable upon exercise of
    outstanding warrants to purchase our series C convertible
    preferred stock (assuming conversion of our series C
    convertible preferred stock) at an exercise price of
    $4.52 per share; and
•
l
shares
    of common stock issuable upon exercise of warrants to be issued
    to the underwriters upon completion of this offering at an
    exercise price equal to 125% of the public offering price per
    share.
(1)
Includes the impact of 125,000 options that vest upon
    consummation of the offering, which will have no effect on total
    stockholders' equity but will require an expense of
    $
l
to
    be recorded if such options vested at the assumed initial public
    offering price of
    $
l
per
    share, which is the mid-point of our filing range.
DILUTION
If you invest in our common stock, your interest will be diluted
to the extent of the difference between the public offering
price per share of our common stock and the net tangible book
value per share of our common stock immediately after this
offering. Net tangible book value per share represents the
amount of our common stockholders' equity, less intangible
assets, divided by the number of shares of our common stock
outstanding. As of March 31, 2005, we had a net tangible
book value of approximately $(3,925,630) or $(2.17) per share of
common stock. Pro forma net tangible book value as of
March 31, 2005 is
$
l
or
$
l
per
common share. Assuming the sale by us
of
l
shares
of common stock offered in this offering at an assumed initial
public offering price of
$
l
per
share, the mid-point of our filing range, and after deducting
the underwriting discounts and commissions and estimated
offering expenses, our as adjusted pro forma net tangible book
value as of March 31, 2005, would have been
$
l
,
or
$
l
per
share of common stock. This represents an immediate increase in
pro forma net tangible book value of
$
l
per
share of common stock to our existing stockholders and an
immediate dilution of
$
l
per
share to the new investors purchasing shares in this offering.
The following table illustrates this per share dilution:
Assumed initial public offering price per share
$
l
Net tangible book value per share as of March 31, 2005
$
(2.17
)
Pro forma net tangible book value per share as of March 31,
    2005
$
l
Increase in pro forma net tangible book value per share
    attributable to new investors
$
l
Pro forma net tangible book value per share after the offering
$
l
Dilution per share to new investors
$
l
The following table sets forth on a pro forma as adjusted basis,
as of March 31, 2005, the number of shares of common stock
purchased from us (assuming conversion of all preferred stock
into common stock), the total consideration paid and the average
price per share paid by existing holders of common stock
32
(assuming conversion of all preferred stock into common stock)
and by the new investors in this initial public offering, before
deducting the underwriting discounts and commissions and
estimated offering expenses payable by us.
Average
Shares Purchased
Total Consideration
Consideration
Number
Percent
Amount
Percent
Per Share
Existing Investors
6,513,164
l
%
$
20,033,573
l
%
$
3.08
New Investors
l
l
l
l
l
Total
l
100.0
%
l
100.0
%
Assuming all our outstanding options and the outstanding
warrants are fully exercised, the shares purchased by the new
investors would
constitute
l
%
of all shares purchased from us, and the total consideration
paid by new investors would
constitute
l
%
of the total consideration paid for all shares purchased from
us. In addition, the average price per share paid by new
investors would be
$
l
,
and the average price per share paid by existing stockholders
would be $3.08.
In the preceding tables, the shares of our common stock exclude,
as of March 31, 2005:
•
899,875 shares of common stock issuable as of the date of
    this prospectus upon the exercise of outstanding stock options
    under our 2003 Stock Incentive Plan and our 1996 Stock Option
    Plan, respectively, at a weighted average exercise price of
    approximately $0.63 per share, which amount is 54,391
    shares less than the number of shares issuable under such option
    plans as of March 31, 2005 due to the effect of a
    formula-based option granted to our President and Chief
    Executive Officer — see "Management —
    Employment Agreement";
•
up to 1,000,000 shares of common stock reserved for future
    grants under our 2005 Stock Incentive Plan;
•
75,000 shares of common stock issuable upon exercise of
    outstanding warrants to purchase common stock at an exercise
    price of $7.00 per share;
•
73,280 shares of common stock issuable upon exercise of
    outstanding warrants to purchase our series C convertible
    preferred stock (assuming conversion of our series C
    convertible preferred stock) at an exercise price of
    $4.52 per share; and
•
l
shares
    of common stock issuable upon exercise of warrants to be issued
    to the underwriters upon completion of this offering at an
    exercise price equal to 125% of the public offering price per
    share.
33
SELECTED FINANCIAL DATA
The following summary financial data for the fiscal years ended
December 31, 2000, 2001, 2002, 2003 and 2004 have been
derived from our historical audited financial statements. The
summary financial data for the three months periods ended
March 31, 2004 and 2005 have been derived from our
unaudited financial statements. The unaudited summary financial
data include, in our opinion, all adjustments, consisting only
of normal, recurring adjustments, necessary to present fairly
the financial position and results of operations for the periods
presented. Our historical results for and prior or interim
period are not necessarily indicative of results to be expected
for a full fiscal year or for any future period. The selected
financial data shown below include revenues and related expenses
for our DIFOTI® product, a non-invasive imaging device for
the detection of dental cavities. We decided to discontinue all
operations associated with our DIFOTI® product, effective
as of April 5, 2005, in order to focus our resources and
attention on the development and commercialization of
MelaFind®. See the footnote to the Financial Statements
relating to subsequent events included elsewhere in this
prospectus. You should read the following selected financial
information together with the financial statements and the
related notes appearing at the end of this prospectus and the
"Management's Discussion and Analysis of Financial
Condition and Results of Operations" section of this
prospectus.
Three Months Ended
Year Ended December 31,
March 31,
2000
2001
2002
2003
2004
2004
2005
(unaudited)
(In thousands, except share and per share data)
Statements of Operations Data:
Revenue from DIFOTI® sales, net
$
194
$
80
$
143
$
375
$
364
$
91
$
88
Revenue from grants
210
290
547
—
—
—
—
Total revenues
404
370
690
375
364
91
88
Cost of goods sold
464
217
650
83
166
20
8
Gross profit
(60
)
153
40
292
198
71
80
Operating expenses:
Research and development
726
144
404
828
1,892
307
636
Selling, general and administrative
1,573
2,962
769
1,339
1,858
533
713
Total operating expenses
2,299
3,106
1,173
2,167
3,750
840
1,349
Loss from operations
(2,359
)
(2,953
)
(1,133
)
(1,875
)
(3,552
)
(769
)
(1,269
)
Interest (income)/expense
(79
)
(85
)
8
75
67
1
(26
)
Net loss
(2,280
)
(2,868
)
(1,141
)
(1,950
)
(3,619
)
(770
)
(1,243
)
Preferred stock deemed dividends
85
213
214
322
676
111
362
Preferred stock accretion
143
180
180
25
323
7
421
Stock distribution on series B preferred shares
—
—
—
102
—
—
—
Net loss attributable to common stockholders
$
(2,508
)
$
(3,261
)
$
(1,535
)
$
(2,399
)
$
(4,618
)
$
(888
)
$
(2,026
)
34
Three Months Ended
Year Ended December 31,
March 31,
2000
2001
2002
2003
2004
2004
2005
(unaudited)
(In thousands, except share and per share data)
Basic and diluted net loss per share
$
(1.64
)
$
(2.13
)
$
(1.00
)
$
(1.49
)
$
(2.61
)
$
(0.53
)
$
(1.12
)
Weighted average shares outstanding — basic and diluted
1,529,471
1,534,540
1,534,760
1,614,897
1,766,608
1,684,760
1,809,758
Pro forma basic and diluted net loss per common share
    (unaudited)(1)
$
(0.91
)
$
(0.19
)
Pro forma basic and diluted weighted average number of common
    shares outstanding (unaudited)(1)
3,967,024
6,513,164
(1)
Pro forma basic and diluted net loss per common share reflects
    the effect of the assumed conversion of the company's
    preferred stock, as if this offering had occurred at the date of
    original issuance, into 3,398,105 shares of our common
    stock for the year ended December 31, 2004 and three months
    ended March 31, 2005 which will occur upon closing of this
    offering. Additionally, it is assumed that 2,610,643 warrants to
    purchase the Company's common stock will be exchanged for a
    total of 1,305,321 shares of the company's common
    stock based on an exchange ratio of one share of our common
    stock for every two shares of our common stock purchaseable
    under the warrants and will occur prior to the closing of this
    offering. The net loss attributable to our common stockholders
    used in the computation of basic and diluted net loss per share
    for the unaudited pro forma net loss attributable to common
    stockholders has been adjusted to reverse the accretion on our
    preferred stock and also excludes the preferred stock dividends
    for the respective period.
The following table presents summary balance sheet data, derived
from our historical audited financial statements. The table also
presents summary balance sheet, derived from our historical
unaudited financial statements, as of March 31, 2004 and
March 31, 2005:
Three Months Ended
Year Ended December 31,
March 31,
2000
2001
2002
2003
2004
2004
2005
(unaudited)
(In thousands)
Balance Sheet Data:
Total current assets
$
3,513
$
867
$
111
$
217
$
6,813
$
498
$
5,413
Total assets
3,814
1,131
344
432
7,096
713
5,734
Total liabilities
211
247
529
650
691
600
493
Redeemable convertible preferred stock
2,058
2,155
2,244
4,067
8,585
4,080
9,006
Accumulated deficit
(4,148
)
(7,197
)
(8,518
)
(10,288
)
(13,907
)
(11,191
)
(15,150
)
Total stockholders' (deficiency)/equity
(498
)
(3,408
)
(4,657
)
(4,285
)
(2,180
)
113
(3,765
)
35
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our
financial condition and results of operations together with our
financial statements and the related notes appearing at the end
of this prospectus. Some of the information contained in this
discussion and analysis or set forth elsewhere in this
prospectus, including information with respect to our plans and
strategy for our business and related financing, includes
forward-looking statements that involve risks and uncertainties.
You should review the "Risk Factors" section of this
prospectus for a discussion of important factors that could
cause actual results to differ materially from the results
described in or implied by the forward-looking statements
contained in the following discussion and analysis.
Overview
We are a medical device company focused on the design and
development of a non-invasive, point-of-care instrument to
assist in the early diagnosis of melanoma. Our flagship product,
MelaFind® features a hand-held imaging device that emits
multiple wavelengths of light to capture images of suspicious
pigmented skin lesions and extract data. We currently do not
have any commercialized products or any significant source of
revenue, however, the financial results discussed below include
the revenues and the related expenses associated with our
DIFOTI® product, a non-invasive imaging device for the
detection of dental cavities. We decided to discontinue all
operations associated with our DIFOTI® product effective as
of April 5, 2005, in order to focus our resources and
attention on the development and commercialization of
MelaFind®. We are currently seeking an acquirer for the
DIFOTI® assets, and we do not expect to have any
significant continuing responsibility for the DIFOTI®
business after its disposition.
Our revenue for the foreseeable future will depend on the
commercialization of MelaFind® and may vary substantially
from year to year and quarter to quarter. Our operating expenses
may also vary substantially from year to year and quarter to
quarter based on the timing of the clinical trial and patient
enrollment. We believe that period-to-period comparisons of our
results of operations are not meaningful and should not be
relied on as indicative of our future performance.
We commenced operations in December 1989 as a New York
corporation and re-incorporated as a Delaware corporation in
September 1997. Since our inception, we have generated
significant losses. As of March 31, 2005, we had an
accumulated deficit of $15.1 million. We expect to continue
to spend significant amounts on the development of
MelaFind®. We expect to incur significant commercialization
costs when we begin to introduce MelaFind® into the US
market. Accordingly, we will need to generate significant
revenues to achieve and then maintain profitability.
Most of our expenditures to date have been for research and
development activities and general and administrative expenses.
Research and development expenses represent costs incurred for
product development, clinical trials and activities relating to
regulatory filings and manufacturing development efforts. We
expense all of our research and development costs as they are
incurred.
Our research and development expenses incurred through
March 31, 2005 were expenses related primarily to the
development of MelaFind®. We expect to incur additional
research and development expenses relating to MelaFind®
prior to its commercial launch in the US and selected markets
outside the US. These additional expenses are subject to the
risks and uncertainties associated with clinical trials and the
FDA regulatory review and approval process. As a result, these
additional expenses could exceed our estimated amounts, possibly
materially.
Marketing, general and administrative expenses consist primarily
of salaries and related expenses, general corporate activities
and costs associated with our efforts to obtain PMA approval for
MelaFind®and building a commercial infrastructure to market
and sell MelaFind®. We anticipate that general and
administrative expenses will increase as a result of the
expected expansion of our operations, facilities and other
activities associated with the planned expansion of our
business, together with the additional costs associated with
36
operating as a public company. We expect marketing, general and
administrative expenses to increase as we build our sales force
and marketing capabilities to support placing MelaFind® in
selected markets.
At December 31, 2004, we had available a net operating loss
carryforward for federal income tax reporting purposes of
approximately $12.2 million. The net operating loss
carryforward may be available to offset future taxable income
expiring at various dates through the year 2024. The
Company's ability to utilize its net operating losses may
be significantly limited due to changes in the company's
ownership as defined by federal income tax regulations.
Critical Accounting Policies and Significant Judgments and
Estimates
Our management's discussion and analysis of our financial
condition and results of operations are based on our financial
statements, which have been prepared in accordance with
accounting principles generally accepted in the US. The
preparation of these financial statements requires us to make
estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets
and liabilities at the date of the financial statements as well
as the reported revenues and expenses during the reporting
periods. On an ongoing basis, we evaluate our judgments related
to accounting estimates. We base our estimates on historical
experience and on various other factors that we believe are
reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying value of
assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under
different assumptions or conditions.
While our significant accounting policies are more fully
described in Note 1 to our financial statements appearing
at the end of this prospectus, we believe that the following
accounting policies and significant judgments and estimates
relating to revenue recognition, stock-based compensation
charges, and accrued expenses are most critical to aid you in
fully understanding and evaluating our reported financial
results.
Revenue Recognition
Revenue from the DIFOTI® product sales is recognized at the
time of delivery and acceptance, after consideration of all the
terms and conditions of the customer contract. The DIFOTI®
products which were being sold prior to December 31, 2004
included a 30-day return policy. Revenue on these products is
recognized after the shipment is made and the 30-day return
period has elapsed. DIFOTI® products sold subsequent to
December 31, 2004 were sold without a right of return and
revenue is therefore recognized after the shipment is made.
Deferred revenues at each respective balance sheet date consist
of revenues that were billed or paid in advance of the shipment
of the product. During April 2005 the company discontinued the
sale of the DIFOTI® product line.
Stock-Based Compensation
We account for non-employee stock-based awards in which goods or
services are the consideration received for the equity
instruments issued based on the fair value of the equity
instruments issued in accordance with the Emerging Issues Task
Force Issue No. 96-18, "Accounting for Equity
Instruments That Are Issued to Other Than Employees for
Acquiring, or in Conjunction With Selling, Goods or
Services."
We account for stock-based compensation to employees under the
intrinsic-value-based method of accounting prescribed by
Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees," and
disclose the effect of the differences which would result had we
applied the fair-value-based method of accounting, on a pro
forma basis, as required by FASB Statement No. 123,
"Accounting for Stock-Based Compensation, as amended by
Statement of Financial Accounting Standards
(SFAS) No. 148, Accounting for Stock-Based
Compensation, Transition and Disclosure." In December 2004,
FASB issued FASB Statement No. 123R, which addresses the
accounting for share-based awards to employees and requires
companies to recognize the fair value of stock options and other
stock-based compensation to employees in their statement of
operations. Because we currently account for our stock-based
compensation plans in accordance with APB Opinion No. 25,
the adoption of FASB Statement No. 123R will have a
material effect on our financial statements in future accounting
periods.
37
Our common stock has not been publicly traded and the
determination of the fair value of our common stock involves
considerable judgment. In making this determination, we
evaluated, among other things, our common stock transactions,
the pricing of private equity sales, the rights and preferences
of the security being valued, current market conditions, and
company specific operational milestones.
Accrued Expenses
As part of the process of preparing financial statements, we are
required to estimate accrued expenses. This process involves
identifying services that have been performed on our behalf and
estimating the level of service performed and the associated
cost incurred for such service where we have not been invoiced
or otherwise notified of the actual cost. This is done as of
each balance sheet date in our financial statements. Examples of
estimated accrued expenses include:
•
professional service fees;
•
contract clinical service fees;
•
fees paid to contract manufacturers in conjunction with the
    production of clinical components or materials; and
•
fees paid to third party data collection organizations and
    investigators in conjunction with the clinical trials.
In connection with such service fees, our estimates are most
affected by our projections of the timing of services provided
relative to the actual level of services incurred by such
service providers. The majority of our service providers invoice
us monthly in arrears for services performed. In the event that
we do not identify certain costs that have begun to be incurred
or we under or over estimate the level of services performed or
the costs of such services, our actual expenses could differ
from such estimates. The date on which certain services
commence, the level of services performed on or before a given
date, and the cost of such services are often subjective
determinations. We make these judgments based upon the facts and
circumstances known to us in accordance with accounting
principles generally accepted in the US.
Results of Operations (in thousands)
Three Months Ended March 31, 2005 Compared to Three
    Months Ended March 31, 2004 (Unaudited)
Revenue.
Revenue for the three months ended
March 31, 2005 was $88 compared to $91 for the same period
in 2004. The revenue for both periods represents the sales of
our DIFOTI® product, a non-invasive imaging device for the
detection of dental cavities.
Gross Profit.
Gross profit increased by $9 to $80
for the three months ended March 31, 2005 from $71 for the
three months ended March 31, 2004. Expressed as a
percentage of sales, the gross profit increased to 91% for the
three months ended March 31, 2005 compared to 78% for the
three months ended March 31, 2004.
Research and Development Expense.
Research and
development expense increased by $329 to $636 for the three
months ended March 31, 2005 from $307 for the three months
ended March 31, 2004. Of this increase, $173 was
attributable to higher personnel and personnel related costs as
we increased headcount to support our research and development
programs and $129 relates to increased consulting and outside
research fees for the development of our MelaFind® product,
a non-invasive, point-of-care instrument to assist in the early
diagnosis of melanoma.
Selling, General and Administrative Expense.
Selling, general and administrative expense increased by
$180 to $713 for the three months ended March 31, 2005 from
$533 for the three months ended March 31, 2004. The
increase is primarily due to higher personnel and personnel
related costs of $155 associated with the addition of key
management positions and $20 related to increased consulting
fees.
38
Interest (Income)/ Expense.
Interest
(income)/expense for the three months ended March 31, 2005
was ($26) compared to $1 for the corresponding period in 2004.
The increase was due to higher average cash, cash equivalents
and marketable securities balance during 2005.
Year Ended December 31, 2004 Compared to Year Ended
    December 31, 2003
Revenue.
Revenue for the year ended
December 31, 2004 was $364 compared to $375 for the
corresponding period last year. The revenue for both periods
represents the sales of our DIFOTI® product, a non-invasive
imaging device for the detection of dental cavities.
Gross Profit.
Gross profit decreased by $94 to
$198 for the year ended December 31, 2004 from $292 for the
year ended December 31, 2003. Expressed as a percentage of
sales the gross profit decreased to 54% for the year ended
December 31, 2004 compared to 78% for the year ended
December 31, 2003.
Research and Development Expense.
Research and
development expenses increased by $1,064, from $828 for the year
ended December 31, 2003 to $1,892 for the year ended
December 31, 2004. This increase relates to increased
headcount to support our research and development programs in
the amount of $715, and $332 represents increased consulting and
outside research fees related to the development of
MelaFind®. For the year ended December 31, 2004
research and development costs were approximately 50% of total
operating expenses. Clinical and regulatory expense, a component
of research and development expense, totaled approximately $797
for the year ended December 31, 2004. We expect our
research and development expenses to increase in connection with
our clinical trials and other development activities as we
advance our MelaFind® pivotal study and complete the PMA
regulatory approval process.
Selling, General and Administrative Expense.
Selling, general and administrative expenses increased
by $519, to $1,858 for the year ended December 31, 2004
from $1,339 for the year ended December 31, 2003. The
increase was principally attributable to higher DIFOTI®
marketing and sales expenses of $100, an increase in personnel
and personnel related costs of $63 associated with additions to
the management team, $150 in stock-based compensation to
non-employee board members, and $193 in stock-based payments for
consulting services. For the year ended December 31, 2004
marketing general and administrative expenses were approximately
50% of total operating expenses. We expect that marketing
expenses will increase to support efforts to obtain PMA approval
and commence the commercialization of MelaFind®. In
addition, our general and administrative expenses will increase
to support the additional costs associated with being a public
company.
Interest (Income)/ Expense.
Interest
(income)/expense for the year ended December 31, 2004 was
$67 compared to $75 for the corresponding period in 2003. The
decrease was due to an imputed interest charge of $80 related to
the series C private placement during 2004.
Year Ended December 31, 2003 Compared to Year Ended
    December 31, 2002
Revenue.
Revenue for the year ended
December 31, 2003 was $375 compared to $690 for the
corresponding period in 2002. The sales of our DIFOTI®
product, a non-invasive imaging device for the detection of
dental cavities, were $375 for the year ended December 31,
2003 and $143 for the year ended December 31, 2002. In
addition, grant revenue was recognized for the year ended
December 31, 2002 in the amount of $547.
Gross Profit.
Gross profit increased by $252 to
$292 for the year ended December 31, 2003 from $40 for the
year ended December 31, 2002. For the year ended
December 31, 2002, the cost of goods sold includes all the
expenses attributable to the grant revenue.
Research and Development Expense.
Research and
development expenses increased $424 to $828 for the year ended
December 31, 2003 from $404 for the year ended
December 31, 2002. Of this increase, $280 was principally
attributable to personnel and personnel related costs that
specifically supported the grant program in 2002 and were
classified as cost of goods sold in 2002 and $93 related to an
increase in other consulting and outside research fees for the
development of our MelaFind® product, a non-invasive,
point-of-care instrument to assist physicians in the early
diagnosis of melanoma. For the year ended December 31,
39
2003 research and development costs were approximately 38% of
total operating expenses. Clinical and regulatory expense, a
component of research and development expense totaled
approximately $50 for the year ended December 31, 2003.
Selling, General and Administrative Expense.
Selling, general and administrative expenses increased
by $570 to $1339 for the year ended December 31, 2003 from
$769 for the year ended December 31, 2002. The increase was
principally attributable to personnel and personnel related
costs of $488 that supported the grant program in 2002 and were
classified as cost of goods sold in 2002 and the addition of two
DIFOTI® marketing and sales positions. For the year ended
December 31, 2003 marketing, general and administrative
expenses were approximately 62% of total operating expenses.
Interest (Income)/ Expense.
Interest
(income)/expense for the year ended December 31, 2003 was
$75 compared to $8 for the corresponding period in 2002. The
increase was due to a charge of $45 associated with the value of
the beneficial conversion feature for a promissory note during
2003.
Liquidity and Capital Resources (in thousands)
From inception, we have financed our operations primarily
through the use of working capital from private placements of
equity securities and by applying for and obtaining a series of
National Institute of Health Small Business Innovative Research
grants and similar grants. To date, we have not borrowed (other
than by issuing convertible notes, all of which have been
converted into equity) or financed our operations through
significant equipment leases, financing loans or other debt
instruments. As of March 31, 2005, we had $5,300 in cash,
cash equivalents and marketable securities as compared to $6,703
at December 31, 2004. Our cash, cash equivalents and
marketable securities are liquid investments with a maturity
within one year and consist of investments in money market funds
with a commercial bank and short-term commercial paper and
government obligations.
Cash Flows from Operating Activities.
Net cash
used in operations was $1,382 for the three months ended
March 31, 2005. For the years ended December 31, 2002,
2003 and 2004 the net cash used in operations was $684, $1,699,
and $3,065 respectively. For all periods, cash used in
operations was attributable primarily to net losses after
adjustment for non-cash charges related to depreciation and
other changes in operating assets and liabilities.
Cash from Investing Activities.
Net cash provided
by our investing activities was $1,464 for the three months
ended March 31, 2005 principally relates to the redemption
of investments. For the years ended December 31, 2002, 2003
and 2004 the net cash provided by (used in) investing activities
was $518, $(8) and $(6,677) respectively. The increase in cash
used in investing activities in the years ended
December 31, 2003 and 2004 was principally related to the
net purchase of investments and equipment from the proceeds of
our private placement financings. Cash used in investing
activities for the year ended December 31, 2002 reflected
the redemption of investments.
Cash Flows from Financing Activities.
Net cash
provided by financing activities was zero for the three months
ended March 31, 2005. For the years ended December 31,
2002, 2003 and 2004 the net cash flows provided by financing
activities was zero, $1,816 and $9,733 respectively. For these
periods, financing cash flows reflected the proceeds from the
issuance of common stock, and preferred stock.
Operating Capital and Capital Expenditure Requirements
To date, we have not commercialized our principal product,
MelaFind®. We anticipate that we will continue to incur net
losses for the foreseeable future as we continue to develop the
MelaFind® system, expand our clinical development team and
corporate infrastructure, and prepare for the potential
commercial launch of MelaFind®. We do not expect to
generate significant product revenue until we successfully
obtain PMA approval for and begin selling MelaFind®. We
believe that the net proceeds from this offering, together with
our current cash, cash equivalents and marketable securities and
interest we earn on these balances, will be sufficient to meet
our anticipated cash needs for working capital and capital
expenditures through mid 2008. If existing cash and cash
generated from this offering are insufficient to satisfy our
liquidity requirements, or if
40
we develop additional products, we may seek to sell additional
equity or debt securities or obtain a credit facility. If
additional funds are raised through the issuance of debt
securities, these securities could have rights senior to those
associated with our common stock, and could contain covenants
that would restrict our operations. Any additional financing may
not be available in amounts or on terms acceptable to us, or at
all. If we are unable to obtain this additional financing, we
may be required to reduce the scope of, delay or eliminate some
or all of planned product research development and
commercialization activities, which could harm our business.
Because of the numerous risks and uncertainties associated with
the development of medical devices such as MelaFind®, we
are unable to estimate the exact amounts of capital outlays and
operating expenditures associated with our current and
anticipated clinical trials. Our future funding requirements
will depend on many factors, including, but not limited to:
•
the schedule, costs, and results of our clinical trials;
•
the success of our research and development efforts;
•
the costs and timing of regulatory approval;
•
reimbursement amounts for the use of MelaFind® that we
    are able to obtain from Medicare and third party payors, or the
    amount of direct payments we are able to obtain from patients
    and/or physicians utilizing MelaFind®;
•
the cost of commercialization activities, including product
    marketing and building a domestic direct sales force;
•
the emergence of competing or complementary technological
    developments;
•
the costs of filing, prosecuting, defending and enforcing any
    patent claims and other rights, including litigation costs and
    the results of such litigation;
•
the costs involved in defending any patent infringement actions
    brought against us by third parties; and
•
our ability to establish and maintain any collaborative,
    licensing or other arrangements, and the terms and timing of any
    such arrangements.
Contractual Obligations
The following table summarizes our outstanding contractual
obligations as of December 31, 2004 and the effect those
obligations are expected to have on our liquidity and cash flows
in future periods:
Payments Due by Period
(dollars in thousands)
Less than
More than
Contractual Obligations
Total
1 Year
1-3 Years
4-5 Years
5 years
Operating Leases
$
694
$
155
$
319
$
220
—
Total
$
694
$
155
$
319
$
220
—
Our long-term obligations are two non-cancelable operating
leases for space expiring June 2005 and November 2010. The lease
on 3,700 square feet of office, laboratory and assembly space
expires in June 2005. We have orally agreed with the landlord to
extend this lease through June 2009 and we intend to enter into
a lease agreement which will evidence this extension. The lease
on 2,800 square feet of office space expires November 2010.
Related Party Transactions
For a description of our related party transactions, see the
"Related Party Transactions" section of this
prospectus.
41
Off-Balance Sheet Arrangements
We do not currently have, nor have we ever had, any
relationships with unconsolidated entities or financial
partnerships, such as entities often referred to as structured
finance or special purpose entities, which would have been
established for the purpose of facilitating off-balance sheet
arrangements or other contractually narrow or limited purposes.
In addition, we do not engage in trading activities involving
non-exchange traded contracts. As such, we are not materially
exposed to any financing, liquidity, market or credit risk that
could arise if we had engaged in these relationships.
Quantitative and Qualitative Disclosures about Market Risk
Our exposure to market risk is confined to our cash equivalents
and short-term investments. We invest in high-quality financial
instruments; primarily money market funds, federal agency notes,
and asset-backed securities, with the effective duration of the
portfolio within one year which we believe are subject to
limited credit risk. We currently do not hedge interest rate
exposure. Due to the short-term nature of our investments, we do
not believe that we have any material exposure to interest rate
risk arising from our investments.
Recent Accounting Pronouncements
In May 2003, FASB issued Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity
(SFAS No. 150). This statement establishes how a
company classifies and measures certain financial instruments
with characteristics of both liabilities and equity, including
redeemable convertible preferred stock. This statement is
effective for financial instruments entered into or modified
after May 31, 2003, and is otherwise effective at the
beginning of the interim period commencing July 1, 2003,
except for mandatorily redeemable financial instruments of
nonpublic companies. FASB has indefinitely deferred
implementation of some provisions of SFAS No. 150. The
adoption of SFAS No. 150 did not have a material
effect on our financial position or results of operations.
Quarterly Results of Operations
The following table sets forth unaudited financial and operating
data in each fiscal quarter during 2003 and 2004. The unaudited
quarterly information reflects all adjustments, which include
only normal and recurring adjustments necessary to present
fairly the information shown.
Year Ended December 31, 2003
Year Ended December 31, 2004
Q1
Q2
Q3
Q4
Total
Q1
Q2
Q3
Q4
Total
(In thousands)
Revenue
$
90
$
86
$
112
$
87
$
375
$
91
$
172
$
81
$
20
$
364
Cost of Sales
57
18
33
(25
)
83
20
67
36
43
166
Gross profit
33
68
79
112
292
71
105
45
(23
)
198
Operating expenses:
Research and development
126
198
246
258
828
307
301
482
802
1,892
Marketing, general and administrative
246
322
340
431
1,339
533
439
477
409
1,858
Total Operating expenses
372
520
586
689
2,167
840
740
959
1,211
3,750
Loss from operations
(339
)
(452
)
(507
)
(577
)
(1,875
)
(769
)
(635
)
(914
)
(1,234
)
(3,552
)
Interest (income)/expenses
(11
)
27
5
54
75
1
1
(1
)
66
67
Net loss
$
(328
)
$
(479
)
$
(512
)
$
(631
)
$
(1,950
)
$
(770
)
$
(636
)
$
(913
)
$
(1,300
)
$
(3,619
)
42
OUR BUSINESS
Overview
We are a medical device company focused on the design and
development of a non-invasive, point-of-care instrument to
assist in the early diagnosis of melanoma. Our flagship product,
MelaFind® features a hand-held imaging device that emits
multiple wavelengths of light to capture images of suspicious
pigmented skin lesions and extract data. The data are then
analyzed against our proprietary database of melanomas and
benign lesions using our sophisticated algorithms in order to
provide information to the physician and produce a
recommendation of whether the lesion should be biopsied.
The components of the MelaFind® system include:
•
a
hand-held imaging device,
which employs high precision
    optics and multi-spectral illumination (multiple colors of light
    including near infra-red);
•
our
proprietary database
of pigmented skin lesions, which
    we believe to be the largest in the US;
•
our
lesion classifiers,
which are sophisticated
    mathematical algorithms that extract lesion feature information
    and classify lesions; and
•
a
central server
in our offices that is intended to
    perform quality control functions and provide reports to the
    physician and in commercial use, will be connected to
    physicians' offices via the internet.
We have entered into a binding Protocol Agreement with the FDA
which is an agreement for the conduct of the pivotal trial in
order to establish the safety and effectiveness of
MelaFind®. We believe the presence of the Protocol
Agreement significantly enhances our ability to expedite the FDA
approval process. Management estimates that the study will
commence in early 2006 at over 20 US clinical study sites, and
anticipates PMA approval to commercialize MelaFind® in 2007.
Cancers of the skin have a higher incidence than all other
cancers combined, and the rates are rising dramatically.
Melanoma is responsible for approximately 80% of skin cancer
fatalities and is the deadliest of all skin cancers as there is
currently no cure for advanced stage melanoma. However, early
detection of skin cancers like melanoma can lead to virtually a
100% cure rate. Advanced stage melanoma is costly to treat and
is responsible for approximately 90% of the total spending on
melanoma treatment in the US, costing up to $170,000 per
patient. If diagnosed early, however, melanoma is almost always
cured by simple resection at a cost of approximately $1,800 per
patient.
Because early detection is critical to survival, the American
Cancer Society recommends that individuals age 40 years and
older have complete skin examinations on an annual basis.
According to the 2000 US Census data, over 100 million
Americans in the US are over age 40. Furthermore, there are more
than 20 million individuals in the US who have dysplastic
nevi, a type of pigmented skin lesion that when present is
associated with an increased risk of melanoma. These individuals
warrant more frequent observation.
Melanomas are mainly diagnosed by dermatologists and/or primary
care physicians using visual clinical evaluation. Physicians
assess pigmented skin lesions using the "ABCDE"
criteria,
A
symmetry,
B
order irregularity,
C
olor variation,
D
iameter greater than 6 mm, and
E
volving — change in ABCD over time. This
assessment is subjective and results in missed melanomas, as
well as a ratio of benign lesions biopsied to melanomas
confirmed that is highly variable and as high as 40 to 1 for
dermatologists and as high as 50 to 1 for primary care
physicians.
To date, MelaFind® has been studied on over 5,000 skin
lesions from over 3,500 patients at over 20 clinics. Our
clinical studies have demonstrated that MelaFind® missed
fewer melanomas and produced fewer false positives than
experienced by study dermatologists, who are skin cancer
specialists. The performance of a diagnostic is measured in
terms of
"sensitivity"
(the ability to detect
disease when disease is present) and
"specificit
y" (the ability to exclude disease
when disease is not present). In the largest blinded trial that
we have performed to date on 352 suspicious pigmented skin
lesions, using our most advanced system,
43
MelaFind® did not miss a melanoma (measured sensitivity of
100%) and achieved 48.4% specificity compared to the study
dermatologists' sensitivity of 96.4% and specificity of
28.4%.
We believe that with the assistance provided by MelaFind®,
physicians could diagnose more melanomas at the earliest,
curable stage, which would reduce both treatment costs and the
number of unnecessary biopsies, and improve quality of life.
Our objective is for MelaFind® to become an integral part
of the standard of care in melanoma detection.
The Market Opportunity
Cancer of the skin (nonmelanoma and melanoma skin cancers
combined) is the most common of all cancers, projected to be
over 1.3 million cases in 2005 and estimated to account for
more than 50% of all cancers. There are three significant forms
of skin cancer: basal cell, accounting for approximately 75% of
skin cancer; squamous cell, totaling approximately 20%; and
melanoma, which accounts for an estimated 4% of skin cancer
cases, but is responsible for approximately 80% of all deaths
from skin cancer. The American Cancer Society projects 10,600
deaths from skin cancer in 2005 — 7,800 from melanoma
and 2,800 from other skin cancers. Since 1973, the mortality
rate for melanoma has increased by 50%. Since approximately 62%
of melanomas and 45% of melanoma deaths occur prior to age 65,
melanoma places significant burdens on the healthcare system
well beyond Medicare.
Melanoma, if left untreated, can be fatal. If diagnosed and
removed early in its evolution, when confined to the outermost
skin layer and deemed to be "in situ," it is virtually
100% curable. Invasive melanomas that are thin and extend into
the uppermost regions of the second skin layer still have
excellent cure rates (greater than 90%). However, once the
cancer advances into the deeper layers of skin, the risk of
metastasis (spreading to other parts of the body) increases.
Metastases can occur when the tumor enters into lymphatic
channels and newly formed blood vessels, potentially resulting
in significant morbidity (illness) and mortality (death).
Once the cancer has advanced and metastasized to other parts of
the body, it is difficult to treat. At this advanced stage, the
five year survival rate is reported to be only 10%. Moreover,
survival prospects for those with advanced melanoma have not
improved over the past three decades.
Melanoma is currently the subject of significant attention in
the medical community. In part, this attention is due to the
fact that it is the fastest growing cancer. It is also the most
common cancer in young adults ages 20-30, and currently there
are more new cases of melanoma than HIV/ AIDS. In women ages
20-29, melanoma is the primary cause of cancer death. In women
ages 30-35, melanoma is the second leading cause of death after
breast cancer. Recent published papers identify a strong
correlation between breast cancer and melanoma.
Because early detection is critical to survival, the American
Cancer Society recommends that individuals 40 years and
older have complete skin examinations on an annual basis. The
2000 US Census indicates that there are over 100 million
Americans over the age of 40 in the US. Furthermore, there are
more than 20 million individuals in the US who have
dysplastic nevi, a type of pigmented skin lesion that when
present is associated with an increased risk of melanoma. Such
individuals warrant more frequent observation.
Our Strategy
Our objective is for MelaFind® to become an integral part
of the standard of care in melanoma detection. To achieve this
objective, we are pursuing the following strategy:
•
Pursue the timely FDA approval of MelaFind®
: We have
    entered into a binding Protocol Agreement with the FDA for the
    conduct of the pivotal trial of MelaFind®. Management
    estimates that the study will commence in early 2006 at over 20
    US clinical study sites, and anticipates PMA approval to
    commercialize MelaFind® in 2007.
•
Establish MelaFind®
as the leading technology for
    assisting in the detection of melanoma:
We have invested
    considerable capital and expertise into developing our core
    technology platform, which is
44
protected by six US patents. We will continue to refine and
    optimize this technology to ensure that MelaFind® is the
    leading system for assisting in the detection of melanoma.
•
Obtain third party payor reimbursement to support our
    recurring revenue pricing model:
We intend to offer
    MelaFind® on a per patient basis, creating a recurring
    revenue stream. To do so, we will seek to obtain third party
    reimbursement as well as private pay alternatives. We are
    working with experts to create an evidence-based medicine
    evaluation model consistent with those used to support positive
    coverage decisions by CMS and private payors for similar
    products. The value drivers in the model include the cost
    savings associated with early detection (approximately $168,000
    per patient) and fewer biopsies. We believe that the use of
    MelaFind® could result in substantial savings to the US
    healthcare system.
•
Commercialize MelaFind®
using multiple sales and
    marketing strategies:
Our internal sales and marketing
    effort will focus initially on "high volume/key opinion
    leader" dermatologists with specialties in the diagnosis
    and treatment of melanoma. To enter the larger US markets of
    general dermatologists, plastic surgeons, and primary care
    physicians, and for international markets, we intend to
    establish partnerships with pharmaceutical and/or diagnostic
    device companies with an established presence in these markets.
Limitations of Current Melanoma Diagnosis
The current primary method for detecting melanoma is based on
physicians' ability to recognize patterns using the naked
eye; this is known as clinical examination. Physicians assess
pigmented skin lesions using the "ABCDE" criteria,
A
symmetry,
B
order irregularity,
C
olor
variation,
D
iameter greater than 6 mm, and
E
volving — change in ABCD over time. This
subjective interpretation relies on physician experience and
skill. The ratio of benign lesions biopsied to melanomas
confirmed can be variable, ranging as high as 40 to 1 for
dermatologists and as high as 50 to 1 for primary care
physicians. In contrast, MelaFind® delivers an objective
assessment based on numerical scores assigned to the suspicious
skin lesion under evaluation. Further, clinical examination is
limited to the surface appearance of the suspicious pigmented
skin lesion, whereas MelaFind® utilizes information derived
from up to 2.5 mm deep into the skin.
Dermatologists who specialize in the management of pigmented
skin lesions may also use dermoscopy, a method of viewing
lesions under magnification. Although dermoscopy provides more
information than unaided visual examination, mastery of the
technique necessitates many years of training and experience.
Proper use of dermoscopy can reduce the number of unnecessary
biopsies of benign lesions, but even dermoscopy experts biopsy
3-10 benign lesions for every melanoma detected.
Most dermatologists generally use only visual clinical
evaluation for melanoma detection. Consequently, they biopsy up
to 40 benign lesions for every melanoma detected. While many
primary care physicians immediately refer patients with
suspicious pigmented skin lesions to a specialist, an increasing
number perform biopsies on skin lesions themselves. Their lack
of specialist training in identifying suspect lesions makes
their diagnostic accuracy much lower in terms of both
sensitivity and specificity. This results in 40% misdiagnosed
melanomas and a ratio of benign lesions biopsied to melanomas
confirmed of up to 50 to 1.
MelaFind®
Product Description
MelaFind® is a non-invasive system for assisting in the
early detection of melanoma. The MelaFind® system is
comprised of a point-of-care, hand-held imaging device that, in
commercial use, is intended to be connected via the internet to
a central server in our offices. MelaFind® employs multiple
wavelengths of light to obtain data from images of suspicious
lesions; the data are analyzed against our proprietary database
of melanomas and benign lesions using our sophisticated
algorithms. When marketed, a report will be
45
transmitted to the physician's office containing
MelaFind®'s recommendation of whether the lesion
should be biopsied. The key components of the MelaFind®
system are listed below:
A hand-held imaging device,
which is comprised of
several components:
•
an illuminator that shines 10 different specific wavelengths of
    light, including near infra-red bands;
•
a lens system composed of nine elements that creates images of
    the light reflected from the lesions;
•
a photon (light) sensor; and
•
an image processor employing proprietary algorithms to extract
    many discrete characteristics or features from the images.
Our proprietary database of pigmented skin
    lesions,
which includes
in vivo
MelaFind®
    images and corresponding histopathological results of over 5,000
    biopsied lesions from over 3,500 patients, which we believe to
    be the largest such database in the US and a substantial barrier
    to competition.
Our lesion classifiers, which are sophisticated
    mathematical algorithms
that analyze the MelaFind®
    images and extract lesion feature information from the images;
    the features are used to classify the lesions as either
    suspicious for melanoma or not suspicious for melanoma.
A central server
located in our offices, which is
    intended to perform quality control functions and provide
    diagnostic reports to the physician.
The "brain" of the MelaFind® system, the
Lesion Classifier,
distinguishes melanoma from
non-melanoma using the lesion features extracted and measured by
the hand-held imaging device. The
Lesion Classifiers
are
developed from our proprietary database of pigmented skin
lesions and sophisticated mathematical algorithms. The
mathematical formulas and algorithms used by the
Lesion
Classifiers
are devised and optimized through the process of
"classifier training" using lesions from our
proprietary database.
Lesion Classifier
development and
training is an iterative process involving: (1) selection
of the lesion features that provide for optimal lesion
discrimination; (2) optimization of the mathematical
formulas to differentiate benign lesions from melanoma; and
(3) expansion of the size and diversity of our proprietary
lesion database. The performance of the
Lesion Classifiers
is directly related to the size of the database used in
classifier training, as well as the degree to which the training
database is representative of the lesions that will be evaluated
by MelaFind® in commercial use.
As with many diagnostic systems, the diagnostic performance of
MelaFind® is characterized using two measures: (1)
sensitivity
— the ability to detect
disease when it is present; and (2)
specificity
— the ability to exclude disease when it is
not present. Since sensitivity and specificity are typically
trade-offs, meaning that as one parameter increases the other
decreases, the MelaFind®
Lesion Classifier
is
developed and trained with the intention that MelaFind®
will detect all melanomas in the training data set with the
highest possible specificity.
Reliable functioning of the MelaFind® system is critical to
its utility and success in the marketplace. Automated
self-calibration tests are performed by the hand-held device to
ensure proper functionality. When marketed, the central server
will also perform tests on the hand-held device to determine
whether its functioning is within appropriate limits. The server
will not permit MelaFind® to provide diagnostic information
unless the hand-held device is functioning properly.
MelaFind®
Regulatory Status
In late 2004, we entered into a binding Protocol Agreement with
the FDA for our pivotal clinical study that specified the
inclusion criteria, sample size, endpoints, and performance
criteria necessary to establish the safety and effectiveness of
MelaFind®. The primary endpoints of the study include:
(1) greater than 95% (exact binomial lower confidence
bound) sensitivity for detection of melanoma; and
(2) statistically significant greater specificity in ruling
out melanoma when compared to study dermatologists. We initiated
a trial under the terms of the Protocol Agreement at the end of
2004. However, technical operational issues with the systems
were experienced, requiring further refinement. We are
continuing this study as a supportive
46
pilot trial and are refining the hardware systems. We expect to
have new systems available in order to start the pivotal trial
in early 2006. The pivotal study for PMA approval of
MelaFind® will be conducted under the terms of the Protocol
Agreement, which require at least 1,200 pigmented skin lesions,
and at least 93 eligible melanomas for analysis.
For commercialization outside the US, approvals from appropriate
regulatory bodies within other countries will be required. Once
PMA approval is obtained, we may proceed with applications to
commercialize in various countries pending further assessment of
market opportunities and the possible identification of
strategic partners.
Clinical Studies of MelaFind®
Goals and Objectives
MelaFind® has been studied on over 5,000 skin lesions from
over 3,500 patients during the past five years at over 20
clinical sites in the US, as well as two sites in Europe and one
in Australia. We aim to develop a system with a sensitivity of
at least 95% in detecting melanoma. Our goals are to complete
pre-commercialization design and testing of the hand-held
imaging device and its associated software, as well as to
establish a database of approximately 300 melanomas, including
in vivo
MelaFind® images and biopsy results, for
MelaFind®
Lesion Classifier
algorithm development
and training. Statistically, in order to have a high level of
confidence of success, we set the exact binomial lower
confidence bound (ELCB) at 99%, which requires
approximately 300 melanomas in the classifier training database.
To date, the MelaFind® lesion database includes 225
melanomas.
We are developing in parallel several MelaFind®
Lesion
Classifiers,
which differ in the algorithms, as well as in
the specific lesion features and relative weights used in the
mathematical formulas. Prior to conducting the analysis of the
data from the pivotal trial under the Protocol Agreement, the
optimal
Lesion Classifier
will be selected. The primary
means by which the performance of the MelaFind®
Lesion
Classifiers
is evaluated is through measures of
sensitivity
(the ability to detect disease when
present) and
specificity
(the ability to exclude
disease when not present).
The reference standard used for comparison of the results of
MelaFind® and study dermatologists is histopathological
analysis of the biopsied lesions by a group of expert
dermatohistopathologists. MelaFind® images of pigmented
skin lesions (melanomas and non-melanomas) and the
histopathological results of the corresponding biopsied lesions
comprise our training database of lesions. When the
Lesion
Classifiers
are tested on the database used in training,
this is called a "training study." When the
Lesion
Classifiers
are tested on a set of lesions not used in
training, this is called a "blinded test," which is a
simulation of anticipated real-life prospective classifier
performance.
Our ultimate goal for MelaFind® is to demonstrate
sensitivity of at least 95%, and superior specificity as
compared to study dermatologists in the pivotal blinded test for
PMA approval.
MelaFind®
Development History — Hardware and
Software
In developing the MelaFind® system we have tested both a
first and second generation hand-held imaging device, and are in
the process of developing a pre-commercialization version for
use in our pivotal clinical trial. Our research, development and
clinical testing efforts have been designed to improve our
MelaFind® technology platform, including the imaging device
and lesion classifiers, and to enhance our lesion database.
We began using first generation hand-held imaging devices in
clinical studies in 2001. In 2002, we expanded the clinical
research program to additional study sites equipped with second
generation hand-held imaging devices. The aim of the study,
which is ongoing, is to build the MelaFind® proprietary
lesion database for use in
Lesion Classifier
training.
The study calls for the MelaFind® hand-held imaging device
to acquire images of pigmented skin lesions scheduled for
biopsy. After biopsy, the histopathological slides are collected
and sent for central dermatohistopathological review by a panel
of experts.
47
The results of initial training studies and blinded tests were
not to the expected level of performance. We determined the
cause to be a flaw in the second generation hand-held imaging
devices, which were subsequently shown to exhibit highly
variable levels of stray light, an optical artifact. Therefore,
we ceased producing this generation of hand-held imaging devices
and purged the training database of lesion images acquired with
them. We also incorporated a manufacturing specification for
stray light which, prior to this time, was not included.
Subsequent training studies and blinded tests performed using
only first generation hand-held imaging devices confirmed our
earlier favorable results: MelaFind® missed none or very
few melanomas, and was shown to have higher specificity than
study dermatologists, as shown in the tables below. See
" — Results of Training Studies and Blinded
Tests".
We initiated a clinical study under the terms of the Protocol
Agreement with the FDA in late 2004 using first generation
hand-held imaging devices. However, several technical operating
issues with these older systems were experienced, requiring
further refinement. Third generation hand-held imaging devices
were produced in 2004 and early 2005. These serve as the basis
of the design that is currently being used to generate final,
pre-commercialization hand-held imaging devices, which will be
utilized in the pivotal study for PMA approval under the terms
of the Protocol Agreement.
Along with hardware development efforts, we have also developed,
tested, and continue to refine the software components of the
system, including lesion filters, calibration algorithms, lesion
classification algorithms, and hardware normalization software.
We plan to finalize these key elements of the software prior to
the analysis of the data obtained from the pivotal trial for PMA
approval.
Results of Training Studies
and Blinded Tests
The first iteration of MelaFind®
Lesion Classifiers,
Lesion Classifiers A-1 and B,
employed a single-step
process, that is, an algorithm that differentiates melanoma from
all other pigmented skin lesions. These MelaFind®
classifiers were trained on a total of 1,129
lesions  — 109 melanomas, 70 high grade dysplastic
nevi, and 950 other pigmented skin lesions. For the blinded
test, a different group of 477 pigmented skin lesions, including
26 melanomas, 11 high grade dysplastic nevi, and 440 other
lesions were included. None of these lesions were used in
classifier training. The results of the training study and
blinded tests for MelaFind®
Lesion Classifiers A-1
and
B,
as well as study dermatologists, are
summarized below.
August 2003 — Training Study and Blinded Test
Results
Training Study
Blinded Test
Sensitivity
Specificity
Sensitivity
Specificity
MelaFind®
Lesion Classifier A-1
100
%
45.6
%
80.8
%
44.3
%
MelaFind
®
Lesion Classifier B
96.3
%
21.9
%
80.8
%
25.5
%
Study Dermatologists
NA
NA
96.2
%
17.3
%
The performance of the MelaFind®
Lesion Classifiers
on the blinded data set was significantly below results from
the training study. The first attempt to improve the performance
was by developing a new MelaFind®
Lesion Classifier
A,
employing a three-step process
(A-3)
, which was
accomplished in November 2003. A three-step process employs
algorithms that differentiate melanoma from three other classes
of pigmented skin lesions. The new classifier was re-trained on
the original data set of lesions (109 melanomas, 70 high grade
dysplastic nevi, and 950 other pigmented skin lesions), tested
on the training set and then tested on the same blinded data set
used in August 2003 (26 melanomas, 11 high grade dysplastic
nevi, and 440 other lesions). The following table summarizes the
results of the tests on the training and blinded data sets. Note
that MelaFind®
Lesion Classifier B,
which
accommodates a single-step process only, was not evaluated in
these exercises.
48
November 2003 — Training Study and Blinded Test
Results
Training Study
Blinded Test
Sensitivity
Specificity
Sensitivity
Specificity
MelaFind®
Lesion Classifier A-3
100
%
28.5
%
100
%
25.7
%
Study Dermatologists
N/A
N/A
96.2
%
17.3
%
Review of the data indicated that the three-step MelaFind®
Lesion Classifier A-3
, which was trained with lesions
acquired from first and second generation MelaFind®
hand-held imaging devices, was much less specific on the
training database (28.5%) than the single-step classifier
MelaFind®
Lesion Classifier A-1
, which was trained
on lesions acquired using only first generation hand-held
imaging devices (45.6%). A complete analysis of all
MelaFind® devices from the clinical sites indicated a
systematic difference between the first generation and second
generation MelaFind® hand-held imaging devices. The second
generation hand-held imaging devices exhibited a significantly
greater amount of stray light than the first generation
hand-held imaging devices. Stray light induces variable imaging
artifacts that cannot be predicted or accounted for in the
software algorithms, and introduces higher probability for
error. Therefore, in February 2004, all lesions acquired using
second generation hand-held imaging devices were removed from
the training and testing databases. The three-step
MelaFind®
Lesion Classifier A-3
was then trained on
a set of lesions acquired solely from first generation hand-held
imaging devices including 113 melanomas, 69 high grade
dysplastic nevi, and 987 other pigmented skin lesions. A blinded
test was conducted on 262 lesions (21 melanoma, 8 high grade
dysplastic nevi, and 233 other lesions) not used in classifier
training and acquired using first generation hand-held imaging
devices only. The following table summarizes the results.
February 2004 — Results of Training Study and
Blinded Test after Removing Lesions
Obtained from Second Generation Hand-Held Imaging Devices
Training Study
Blinded Test
Sensitivity
Specificity
Sensitivity
Specificity
MelaFind®
Lesion Classifier A-3
100
%
43.8
%
100
%
44.2
%
Study Dermatologists
N/A
N/A
95.0
%
28.3
%
These results demonstrated the importance of minimizing stray
light and establishing a product specification for stray light.
This specification was instituted in our assembly process
following this analysis. As part of the continued development, a
four-step MelaFind®
Lesion Classifier A-4
was
introduced in March 2004. A four-step process employs algorithms
that differentiate melanoma from four other classes of pigmented
skin lesions. This classifier performed better compared with the
three-step classifier, as summarized in the following table.
March 2004 — MelaFind®
Lesion
Classifiers: Three-step vs. Four-step
Training Study and Blinded Test Results
Training Study
Blinded Test
Sensitivity
Specificity
Sensitivity
Specificity
MelaFind®
Lesion Classifier A-3
100
%
43.8
%
100
%
44.2
%
MelaFind®
Lesion Classifier A-4
100
%
48.9
%
100
%
48.1
%
Study Dermatologists
N/A
N/A
95.0
%
28.3
%
Due to the enhanced specificity of the four-step classifier
A-4
compared to the three-step classifier
A-3
, as
seen in the preceding table, the four-step classifier was
selected for further development and testing. In May 2004, the
largest blinded test was performed on a separate set of 352
lesions (including 28 melanomas, 14 high grade dysplastic nevi,
and 310 other pigmented skin lesions) that were not used in
classifier training. The results of sensitivity and specificity
of MelaFind®
Lesion Classifiers A-4 and B
and study
dermatologists are summarized in the following table.
49
May 2004 — Training Study and Blinded Test
Results
Training Study
Blinded Test
Sensitivity
Specificity
Sensitivity
Specificity
MelaFind®
Lesion Classifier A-4
100
%
53.2
%
100
%
48.4
%
MelaFind®
Lesion Classifier B
100
%
38.0
%
96.4
%
32.9
%
Study Dermatologists
NA
NA
96.4
%
28.4
%
In January 2005, with no additional classifier training and in
an effort to rigorously test the limits of the MelaFind®
Lesion Classifiers,
another blinded test was performed on
228 new lesions (28 melanomas, 4 high grade dysplastic nevi, and
196 other pigmented skin lesions). The lesions in this blinded
test were acquired from the first generation MelaFind®
hand-held imaging devices that had been at the clinical sites
for a longer period of time than in any blinded test to date.
Lesion Classifier
training was not performed using
MelaFind® hand-held imaging devices that had been at the
clinical sites for longer periods of time. A new four-step
MelaFind®
Lesion Classifier C-4
with a revised step
was also evaluated in the blinded test. The results are
summarized in the following table.
January 2005 — Second Blinded Test Results using
March 2004 Classifiers
Sensitivity
Specificity
MelaFind®
Lesion Classifier A-4
82.1
%
37.2
%
MelaFind®
Lesion Classifier B
96.4
%
21.0
%
MelaFind®
Lesion Classifier C-4
92.9
%
35.7
%
Study Dermatologists
92.9
%
23.0
%
In evaluating the MelaFind® hand-held imaging devices used
in the January 2005 blinded test, we found that several
MelaFind® devices were not performing within
specifications. Had these devices performed within
specifications, we believe that the sensitivity of
MelaFind®
Lesion Classifiers A-4 and C-4
would have
been 96.4%, that is, they would have missed a single melanoma,
compared to study dermatologists who missed two melanomas.
We are utilizing the findings of the blinded tests to refine the
design of hardware to further develop the lesion classification
algorithms, to expand the training database, and to develop
improved calibration methods to ensure appropriate functioning
of each hand-held imaging device. As demonstrated in the January
2005 blinded test, melanomas can be missed when MelaFind®
systems that do not meet specifications are used to acquire
images, and when melanoma lesion types (for instance, nodular
melanomas) are not adequately represented in the training
database. In order to address these situations, we have:
(1) incorporated a weekly field calibration test to
evaluate system performance in order to identify and disable
MelaFind® systems that are not functioning within
specifications; (2) intensified our effort to obtain images
of nodular melanomas for inclusion in the targeted 300 melanoma
database for the final
Lesion Classifier;
and
(3) refined our algorithms to result in either a positive
reading of melanoma when MelaFind® images reveal
characteristics well outside the ranges of lesions in the final
training database, or to report that MelaFind® cannot
provide a diagnosis in this circumstance. As mentioned above,
had these devices performed within specifications, we believe
that the sensitivity of MelaFind®
Lesion Classifiers A-4
and C-4
would have been 96.4%, that is, they would have
missed a single melanoma, compared to study dermatologists who
missed two melanomas.
Sales and Marketing
We plan to offer MelaFind® as a point-of-care online
service. This approach is intended to provide us with the
advantage of recurring revenues corresponding to the number of
patients examined and to provide the physician with access to
our technology without having to make a significant capital
investment.
Our sales and marketing strategy is to initially establish
focused sales, marketing, and distribution organization in North
America. We plan to focus our commercialization efforts
initially on "high volume/key opinion leader"
dermatologists who are strongly focused on the diagnosis and
treatment of melanoma. For the expansion to the larger US
markets of general dermatologists, plastic surgeons, and primary
care physicians, and for international markets, we intend to
establish development and commercialization partnerships with
50
pharmaceutical and/or diagnostic device companies with an
established competency in the market to accelerate the product
introduction and to maximize the breadth of the commercial
opportunity. At this time, we have not yet established any
commercialization partnerships.
We believe that the ultimate market for MelaFind® is in the
primary care setting. When used by primary care physicians,
MelaFind® could have a significant public health benefit
and a favorable impact on healthcare costs. Primary care
physicians are at the front line of early detection, but their
lack of specialist training in identifying suspect lesions makes
the achievement of a high level of diagnostic accuracy
challenging. We believe that MelaFind® can significantly
assist primary care physicians in improving their diagnostic
acumen.
The MelaFind®
Value Proposition for the Healthcare System
We are currently working with experts on a quantitative analysis
of the value proposition of the use of MelaFind® by both
dermatologists and primary care physicians using Evidence-Based
Medicine evaluation techniques. This strategy is consistent with
the approach that has been used to support positive coverage
decisions by CMS and private payors for other products. The
value drivers include: (1) the diagnosis of melanoma at the
early curable stages, as opposed to advanced stages, allowing
for both a greater opportunity to cure and a reduction in
treatment costs by approximately 99%; and (2) reduced
number of referrals for evaluation and biopsy of benign
pigmented skin lesions. We believe that the use of
MelaFind® could result in substantial savings to the US
healthcare system.
Our Reimbursement
Strategy
We are aware of no Current Procedural Terminology
(CPT) code that is specifically applicable to the use of
MelaFind®. Therefore, we have engaged the services of
expert consultants with extensive experience in the CPT and
coverage decision processes to assist us in the submission of
appropriate applications to obtain a CPT code(s) and positive
coverage decisions from CMS and private payors.
In advance of obtaining a CPT code, we intend to extend our
efforts to secure coverage by private payors and state Medicaid
agencies. Securing coverage first through private payors and
state Medicaid agencies is a common strategy for facilitating
national Medicare coverage. Our efforts to secure reimbursement
for services using MelaFind® will focus first on private
payors and state Medicaid agencies, particularly in sunbelt
locations and in areas that have been shown to be underserved by
dermatologists.
In the US, healthcare providers that utilize medical systems
such as MelaFind®, generally rely on third-party payors,
including Medicare, Medicaid, private health insurance carriers,
and managed care organizations, to reimburse part, but not
necessarily all, of the costs and fees associated with the
procedures performed using these devices. Public and
professional concern about the cost of medical care and new
technologies has evoked a variety of remedies. Third-party
payors are increasingly challenging the pricing of medical
products and procedures. Guidelines have been established that
recognize the need for clinical strategies to assess the
cost-effectiveness of new diagnostic tools or procedures
(Evidence-Based Medicine), in the hope of reducing the
variations in diagnostic and treatment protocols and reducing
healthcare expenditures. Insurers are also attempting to curb
utilization by applying a rational analysis of the costs versus
benefits of new technologies.
The Evidence-Based Medicine evaluation that we are undertaking
is central to our efforts to obtain positive coverage decisions
from CMS and private insurers. The importance of Evidence-Based
Medicine is underscored by recent actions by CMS, including its
proposed Covered with Evidence Development initiative designed
to provide quicker access to new technologies for beneficiaries
while assuring that appropriate evidence for final coverage
decisions will be obtained.
We recognize that a favorable reimbursement environment will
have a significant impact on MelaFind®'s adoption and
commercial success. Even if a procedure is eligible for
reimbursement, the level of reimbursement may not be adequate.
In addition, third-party payors may deny reimbursement if they
determine that the device used in the treatment was not
cost-effective or was used for a non-approved indication. We have
51
anticipated this need and have employed an active strategy to
obtain medical coverage, identify appropriate coding and
establish adequate payment.
Pending approval of a CPT code and the availability of third
party reimbursement, we plan to offer MelaFind® to
physicians, who would pay for using MelaFind®, and may or
may not charge patients directly for its use. In addition, we
believe that roughly ten percent of all dermatological practices
are focused on cosmetic dermatology. Most procedures performed
in cosmetic dermatological practices and Medi-Spas are provided
on a patient self-pay basis. We believe that healthcare
consumers that seek these services are likely to pay for
MelaFind®, as well.
Competition
We are not aware of any direct competitors to MelaFind®. A
number of systems for visualization and assessment of pigmented
skin lesions are in use or in development. These include
clinical (naked eye) examination, whole body mole mapping
systems, dermoscopes (also known as "dermatoscopes"),
digital dermoscopes, spectrophotometric intercutaneous analysis,
confocal microscopy, and spectrophotometric
(color) analysis. These systems rely on physician
experience and expertise in recognizing patterns that are
associated with melanoma and non-melanoma in order to render an
interpretation and diagnosis.
The current primary method for detecting melanoma relies on
physicians to interpret whether a pigmented skin lesion is
suspicious for melanoma (thereby requiring biopsy) based on
their ability to recognize patterns using clinical examination.
Physicians use the "ABCDE" criteria,
A
symmetry,
B
order irregularity,
C
olor variation,
D
iameter greater than 6 mm, and
E
volving in ABCD,
in their assessment. Whole body mole mapping consists of
periodic photography of patients, typically those at high risk
for developing melanoma. The pictures are reviewed clinically.
This service is provided at some diagnostic imaging centers and
dermatology offices. DigitalDerm, Inc. offers a computerized
system for acquisition, storage, and review of the pictures.
Dermoscopy, or epiluminescence microscopy, allows for
non-invasive visualization of colors and microstructures of the
epidermis, the dermal-epidermal junction, and the papillary
dermis not visible to the naked eye. Manufacturers of
dermoscopes include (but are not limited to) Welch Allyn, Inc.
(US), Heine Optotechnik (Germany), and 3Gen, LLC (US). Digital
dermoscopes allow for dermoscopic images to be visualized on a
computer screen at larger magnification. In addition, images may
be stored and compared to images taken previously. Manufacturers
of digital dermoscopes include (but are not limited to) Derma
Medical Systems, Inc. (Austria), ZN Vision Technologies AG
(Germany), Polartechnics, Ltd. (Australia), Linos Photonics,
Inc. (Germany), and Biomips Engineering (Italy). Dermoscopy is a
tool used by approximately 25% of dermatologists in the US and
is associated with a long learning curve. Physicians experienced
in the use of dermoscopy have been shown to have an increased
diagnostic accuracy of 10 to 20% over clinical examination.
Although some digital dermoscopes provide information regarding
the probability that a lesion may be melanoma compared to a
database of lesions, no system, to our knowledge, is under PMA
development for objective interpretation.
A recent published article describes the results of a study
utilizing the DB-Mips system from Biomips Engineering. The
database of lesions used in this study differs significantly
from our proprietary database. For example, our database
includes seborrheic keratoses and pigmented basal cell
carcinomas, which can be difficult to differentiate from
melanoma. The DB-Mips database included none of these lesions.
Further, our database includes many more melanomas that are
minimally invasive as well as a much higher percentage of
dysplastic nevi compared to the DB-Mips database. Minimally
invasive melanomas are more difficult to diagnose than melanomas
that have significantly invaded the skin, and dysplastic nevi
can be very difficult to differentiate from melanoma. Thus, we
believe that the DB-Mips database does not include as many
pigmented lesions that are difficult to differentiate from
melanoma as our database. The specificity of dermatologists in
other DB-Mips studies was reported to be over 80% while the
specificity of dermatologists in MelaFind® studies is
typically under 30%. The DB-Mips system has a reported
specificity of up to 79%, which is roughly equivalent to the
specificity of the dermatologists in DB-Mips studies.
52
Spectrophotometric intercutaneous analysis is a technique of
visualizing collagen, blood, and pigment. Astron Clinica
(UK) manufactures a device utilizing this technique.
Confocal microscopy is an experimental approach for non-invasive
visualization of skin structures at the cellular level; such a
device utilizing this technique is in development by Lucid (US).
A spectrophotometer (color measuring device) is offered by
Medical High Technologies S.p.A. (Switzerland). In contrast to
MelaFind®, the product does not perform automatic quality
control of images and has an external light source. We believe
that the reported sensitivity of 80.4% would not gain market
approval. Further, we are not aware of comparative data on
physicians' performance in corresponding data sets. The
system does not have PMA approval, nor are we aware of efforts
directed to obtain PMA approval of the product.
The broad market for precision optical imaging devices used for
medical diagnosis is intensely competitive, subject to rapid
change and significantly affected by new product introductions
and other market activities of industry participants. If our
products are approved for marketing, we will potentially be
subject to competition from major optical imaging companies,
such as General Electric Co., Siemens AG, Bayer AG, Eastman
Kodak Company, Olympus Corporation, Carl Zeiss AG Deutschland
and others, each of which manufactures and markets precision
optical imaging products for the medical market and could decide
to develop or acquire a product to compete with MelaFind®.
Manufacturing
We are currently focusing our manufacturing efforts on hardware
engineering in order to make the functioning of the
MelaFind® hand-held imaging devices more consistent and
robust, and to facilitate larger-scale manufacturing methods of
the pre-commercialization devices that will be used in the
pivotal clinical trial. Data from the clinical studies as well
as from engineering tests under stress and different
environmental conditions are being used to refine appropriate
manufacturing and field specifications before the design is
fixed.
For this crucial phase in development, we have contracted with a
third-party vendor, ASKION (Gera, Germany), which specializes in
precision optics. The pre-commercialization hand-held imaging
devices to be assembled by ASKION are expected to be available
for pivotal trial initiation planned for early 2006. The
pre-commercialization hand-held imaging devices are expected to
be more robust while having at least the same or better
performance than the hand-held imaging devices used in the
clinical program to date.
We have recently been inspected by the FDA for the manufacturing
and commercialization of DIFOTI®, our dental cavities
detection product that has been discontinued for business
reasons. The FDA inspectors observed deficiencies that were
documented on FDA Form 483 that was issued to us following
the inspection. We have had a follow-up meeting with the FDA and
are working with the FDA and consultants to address the
inspectional findings, particularly as they relate to current
MelaFind® design development and ultimate MelaFind®
commercial manufacturing. We believe that the issues can be
addressed to the satisfaction of the FDA and will not materially
adversely effect our operations.
Research and Development Efforts
Our research and development efforts are currently focused on
finalization and validation of the pre-commercialization
hand-held imaging device, and completion of the development of
the MelaFind®
Lesion Classifiers
. To date, we have
developed and tested four-step classifiers (see "Results of
Training Studies and Blinded Tests"), and we are currently
working on five-step versions. The classifiers have been trained
on 113 melanomas to date, and our goal is to use 300 melanomas
(and over 4,000 non-melanoma pigmented lesions) for training. To
date we have collected over 225 melanomas, which are available
for classifier training.
Our R&D plan also includes further improvements such as
incorporating wireless technology and an internet connection for
hand-held imaging device quality monitoring, as well as faster
and easier software downloads for future software versions. The
internet based monitoring of the performance of our hand-held
imaging device, known as Intelligent Device Management, is
intended to enable us to continuously monitor
53
our hand-held imaging device, advise the user of errors in
handling, and thus enhance customer satisfaction and loyalty.
We have performed feasibility studies of a MelaFind®
software add-on feature called
MelaMeter
tm
,
an enhancement to MelaFind® that provides information
regarding the depth of penetration of a pigmented skin lesion.
This information may be useful to physicians in determining the
necessary depth and breadth of biopsy of a pigmented skin
lesion. Initial clinical studies of
MelaMeter
tm
demonstrate the ability of
MelaMeter
tm
to non-invasively estimate the Breslow thickness comparably to
histopathological examination of excised lesions. We plan to
continue the development of
MelaMeter
tm
and seek its FDA approval after receiving PMA approval of
MelaFind®.
Following commercialization of MelaFind®, we intend to
evaluate the potential use of our light based computer vision
platform in other applications, including the non-invasive
detection of basal cell carcinoma, the most common skin cancer.
New hardware systems for the imaging of blood and blood vessel
patterns are needed since the majority of basal cell carcinomas
are not pigmented and, accordingly, the MelaFind® system as
currently developed is not appropriate for this use. However, we
believe MelaFind®'s software programs and algorithms
will be applicable.
Intellectual Property
Our policy is to protect our intellectual property by obtaining
US and foreign patents to protect technology, inventions and
improvements important to the development of our business. To
date we have been awarded 14 US patents with numerous foreign
counterparts, of which six US patents and two Australian patents
relate to various aspects of MelaFind®. In addition, we
have applied for two additional US patents and have filed
certain foreign patent applications relating to MelaFind®,
of which two foreign patent applications are currently in the
European regional phase. Also, we have obtained non-exclusive
licenses from several of our suppliers for critical components
of MelaFind®. We have not granted any significant licenses
with respect to our intellectual property.
We cannot be certain that our patents will not be challenged or
circumvented by competitors. Whether a patent is infringed and
is valid, or whether a patent application should be granted, are
all complex matters of science and law, and therefore we cannot
be certain that, if challenged, our patents, patent applications
and/or other intellectual property rights would be upheld. If
one or more of those patents, patent applications and other
intellectual property rights are invalidated, rejected or found
unenforceable, that could reduce or eliminate any competitive
advantage.
We also rely on trade secrets and technical know-how in the
manufacture and marketing of MelaFind®. We require our
employees, consultants and contractors to execute
confidentiality agreements with respect to our proprietary
information.
We have obtained US trademark registrations for the following
marks: "MelaFind®" and "DIFOTI®,"
as well as the corporate logo for "eos-electro-optical
sciences, inc.®" The goods covered by these
registrations are in International Class 010 and US
Classes 26, 39 and 44. For MelaFind®, the description
of goods and services covered by the trademark is: "medical
devices, namely, electro-optical devices incorporating hardware
for obtaining images in different spectral bands and software
for analyzing the images for use in analyzing skin lesions and
determining the existence of melanoma." For DIFOTI®,
the description of goods and services covered by the trademark
is: "electro-optical apparatus to diagnose dental
conditions." For "eos-electro-optical sciences,
inc.®", the description of goods and services covered
by the trademark is: "instrumentation comprising computer
assisted optical imagers and image analyzers for use in the
detection of dental cavities, cutaneous melanoma, and other
pathologies of the teeth, skin and other tissues." We also
have registered the internet domain names: www.eo-sciences.com,
www.eosciences.com, www.melafind.com, www.difoti.com,
www.smartlightsensors.com, and www.skinsurf.com.
54
The following table lists the fundamental US patents that cover
the MelaFind® methodology, apparatus, and systems:
US Patents Relating to MelaFind®
Patent #
Title
Issued
6,081,612
Systems and Methods for the Multispectral Imaging and
06/27/00
Characterization of Skin Tissue
6,208,749
Systems and Methods for the Multispectral Imaging and
03/27/01
Characterization of Skin Tissue
6,307,957
Multispectral Imaging and Characterization of Biological Tissue
10/23/01
6,626,558
Apparatus for Uniform Illumination of an Object
09/30/03
6,657,798
Method for Optimizing the Number of Good Assemblies
12/02/03
Manufacturable From a Number of Parts
6,710,947
Method for Assembling Lens Elements
03/23/04
We also have developed trade secret calibration methods,
classifier programs, and search engines; these programs have
been developed over many years and incorporate decades of
experience in optical computer vision. In addition, our
proprietary MelaFind® database of over 5,000 lesions has
been compiled over a number of years and would be difficult to
replicate.
FDA Regulation
Our product, MelaFind®, is regulated as a medical device
and is subject to extensive regulation by the FDA and other
regulatory authorities in the US. The FD&C Act and other
federal and state statutes and regulations govern the research,
design, development, preclinical and clinical testing,
manufacturing, safety, approval or clearance, labeling,
packaging, storage, record keeping, servicing, promotion, import
and export, and distribution of medical devices.
Unless an exemption applies, each medical device we wish to
commercially distribute in the US will require either prior
premarket notification, or 510(k) clearance, or PMA approval,
from the FDA. The FDA classifies medical devices into one of
three classes. Devices requiring fewer controls because they are
deemed to pose lower risk are placed in Class I or II.
Class I devices are subject to general controls such as
labeling, premarket notification, and adherence to the
FDA's QSR. Class II devices are subject to special
controls such as performance standards, postmarket surveillance,
FDA guidelines, as well as general controls. Some Class I
and Class II devices are exempted by regulation from the
premarket notification, or 510(k), clearance requirement or the
requirement of compliance with certain provisions of the QSR.
Devices are placed in Class III, which requires approval of
a PMA application, if insufficient information exists to
determine that the application of general controls or special
controls are sufficient to provide reasonable assurance of
safety and effectiveness, or they are life-sustaining,
life-supporting or implantable devices, or the FDA deems these
devices to be "not substantially equivalent" either to
a previously 510(k) cleared device or to a
"preamendment" Class III device in commercial
distribution before May 28, 1976, for which PMA
applications have not been required. The FDA classifies
MelaFind® as a Class III device, requiring PMA
approval.
A PMA application must be supported by valid scientific
evidence, which typically requires extensive data, including
technical, pre-clinical, clinical, manufacturing and labeling
data, to demonstrate to the FDA's satisfaction the safety
and effectiveness of the device. A PMA application must include,
among other things, a complete description of the device and its
components, a detailed description of the methods, facilities
and controls used to manufacture the device, and proposed
labeling. A PMA application also must be accompanied by a user
fee, unless exempt. For example, the FDA does not require the
submission of a user fee for a small business's first PMA.
After a PMA application is submitted and found to be
sufficiently complete, the FDA begins an in-depth review of the
submitted information. During this review period, the FDA may
request additional information, or clarification of information
already provided. Also during the review
55
period, an advisory panel of experts from outside the FDA may be
convened to review and evaluate the application and provide
recommendations to the FDA as to the approvability of the
device. In addition, the FDA generally will conduct a
pre-approval inspection of the manufacturing facility to ensure
compliance with the QSR, which requires manufacturers to follow
design, testing, control, documentation and other quality
assurance procedures.
We commenced the PMA application process for MelaFind® by
filing a proposed Shell for a three module PMA on
September 30, 2002. We filed as a Small Business Entity
exempt from the user fee requirement. The Shell was accepted and
two Modules have been filed and reviewed. The third Module will
include the results of the pivotal clinical study, and cannot be
filed until after that study is complete and its results have
been evaluated. The FDA can delay, limit or deny approval of a
PMA application for many reasons, including:
•
MelaFind® may not be safe or effective to the FDA's
    satisfaction;
•
the data from our pre-clinical studies and clinical trials may
    be insufficient to support approval;
•
the manufacturing process or facilities we use may not meet
    applicable requirements; and
•
changes in FDA approval policies or adoption of new regulations
    may require additional data.
If the FDA evaluations of both the PMA application and the
manufacturing facilities are favorable, the FDA will either
issue an approval letter, or approvable letter, which usually
contains a number of conditions which must be met in order to
secure final approval of the PMA. When and if those conditions
have been fulfilled to the satisfaction of the FDA, the agency
will issue a PMA approval letter authorizing commercial
marketing of the device for certain indications. If the
FDA's evaluation of the PMA or manufacturing facilities is
not favorable, the FDA will deny approval of the PMA or issue a
not approvable letter. The FDA may also determine that
additional clinical trials are necessary, in which case the PMA
approval may be delayed while the trials are conducted and the
data acquired is submitted in an amendment to the PMA. Even with
additional trials, the FDA may not approve the PMA application.
The PMA process can be expensive, uncertain and lengthy and a
number of devices for which FDA approval has been sought by
other companies have never been approved for marketing.
New PMA applications or PMA supplements may be required for
modifications to the manufacturing process, labeling and device
specifications, materials or design of a device that is approved
through the PMA process. PMA supplements often require
submission of the same type of information as an initial PMA
application, except that the supplement is limited to
information needed to support any changes from the device
covered by the original PMA application, and may not require as
extensive clinical data or the convening of an advisory panel.
Clinical trials are almost always required to support a PMA
application, and are sometimes required for a 510(k) clearance.
These trials generally require submission of an application for
an IDE to the FDA. We have not been required to file an IDE for
the MelaFind® clinical studies because FDA has considered
the trials "non-significant risk" (NSR) studies
subject to abbreviated IDE regulations, which do not require
formal IDE submission. An IDE application must be supported by
appropriate data, such as animal and laboratory testing results,
showing that it is safe to test the device in humans and that
the testing protocol is scientifically sound. The IDE
application must be approved in advance by the FDA for a
specified number of patients, unless the product is deemed a
non-significant risk device and eligible for more abbreviated
IDE requirements. Generally, clinical trials for a significant
risk device may begin once the IDE application is approved by
the FDA and the study protocol and informed consent form are
approved by appropriate institutional review boards at the
clinical trial sites. The FDA's approval of an IDE allows
clinical testing to go forward, but does not bind the FDA to
accept the results of the trial as sufficient to prove the
product's safety and effectiveness, even if the trial meets
its intended success criteria. All clinical trials must be
conducted in accordance with the FDA's IDE regulations that
govern investigational device labeling, prohibit promotion of
the investigational device, and specify an array of
recordkeeping, reporting and monitoring responsibilities of
study sponsors and study investigators. As stated above, the
clinical studies of MelaFind® are considered by the FDA as
NSR. Consequently, the trials are conducted under the auspices
of an abbreviated IDE. Clinical
56
trials must further comply with the FDA's regulations for
IRB approval and for informed consent. Required records and
reports are subject to inspection by the FDA. The results of
clinical testing may be unfavorable or, even if the intended
safety and effectiveness success criteria are achieved, may not
be considered sufficient for the FDA to grant approval or
clearance of a product. The commencement or completion of any of
our clinical trials may be delayed or halted, or be inadequate
to support approval of a PMA application, or 510(k) clearance,
for numerous reasons, including, but not limited to, the
following:
•
the FDA, other regulatory authorities, or an IRB do not approve
    a clinical trial protocol or a clinical trial, or place a
    clinical trial on hold;
•
patients do not enroll in clinical trials at the rate we expect;
•
physicians do not comply with trial protocols;
•
patient follow-up is not at the rate we expect;
•
patients experience adverse side effects;
•
IRBs and third-party clinical investigators may delay or reject
    our trial protocol;
•
third-party clinical investigators decline to participate in a
    trial or do not perform a trial on our anticipated schedule or
    consistent with the clinical trial protocol, GCPs or other FDA
    requirements;
•
third-party organizations do not perform data collection and
    analysis in a timely or accurate manner;
•
regulatory inspections of our clinical trials or manufacturing
    facilities may, among other things, require us to undertake
    corrective action or suspend or terminate our clinical trials,
    or invalidate our clinical trials;
•
changes in governmental regulations or administrative actions;
    and
•
the interim or final results of the clinical trial are
    inconclusive or unfavorable as to safety or effectiveness.
Our clinical trials may not generate favorable data to support
any PMA applications, and we may not be able to obtain such
approvals on a timely basis, or at all. Delays in receipt of or
failure to receive such approvals, the withdrawal of previously
received approvals, or failure to comply with existing or future
regulatory requirements would have a material adverse effect on
our business, financial condition and results of operations.
Even if granted, the approvals may include significant
limitations on the intended use and indications for use for
which our products may be marketed.
After a device is approved or cleared and placed in commercial
distribution, numerous regulatory requirements apply. These
include:
•
establishment registration and device listing;
•
QSR, which requires manufacturers to follow design, testing,
    control, documentation and other quality assurance procedures;
•
labeling regulations, which prohibit the promotion of products
    for unapproved or "off-label" uses and impose other
    restrictions on labeling;
•
medical device reporting regulations, which require that
    manufacturers report to the FDA if a device may have caused or
    contributed to a death or serious injury or malfunctioned in a
    way that would likely cause or contribute to a death or serious
    injury if it were to recur; and
•
corrections and removal reporting regulations, which require
    that manufacturers report to the FDA field corrections and
    product recalls or removals if undertaken to reduce a risk to
    health posed by the device or to remedy a violation of the
    FD&C Act that may present a risk to health.
Also, the FDA may require us to conduct postmarket surveillance
studies or order us to establish and maintain a system for
tracking our products through the chain of distribution to the
patient level. The FDA
57
enforces regulatory requirements by conducting periodic,
unannounced inspections and market surveillance. Inspections may
include the manufacturing facilities of our subcontractors.
Thus, we must continue to spend time, money, and effort to
maintain compliance.
Failure to comply with applicable regulatory requirements,
including those applicable to the conduct of our clinical
trials, can result in enforcement action by the FDA, which may
lead to any of the following sanctions:
•
warning letters;
•
fines and civil penalties;
•
unanticipated expenditures;
•
delays in approving or refusal to approve our applications,
    including supplements;
•
withdrawal of FDA approval;
•
product recall or seizure;
•
interruption of production;
•
operating restrictions;
•
injunctions; and
•
criminal prosecution.
We and our contract manufacturers, specification developers, and
some suppliers of components, are also required to manufacture
our products in compliance with cGMP requirements set forth in
the QSR. The QSR requires a quality system for the design,
manufacture, packaging, labeling, storage, installation and
servicing of marketed devices, and includes extensive
requirements with respect to quality management and
organization, device design, equipment, purchase and handling of
components, production and process controls, packaging and
labeling controls, device evaluation, distribution,
installation, complaint handling, servicing, and record keeping.
The FDA enforces the QSR through periodic unannounced
inspections that may include the manufacturing facilities of our
subcontractors. We expect that our manufacturing facility and
those of our subcontractors will be subject to domestic and
international regulatory inspection and review. If the FDA
believes we or any of our contract manufacturers or regulated
suppliers are not in compliance with these requirements, it can
shut down our manufacturing operations, require recall of our
products, refuse to approve new marketing applications,
institute legal proceedings to detain or seize products, enjoin
future violations, or assess civil and criminal penalties
against us or our officers or other employees. Any such action
by the FDA would have a material adverse effect on our business.
We cannot assure you that we will be able to comply with all
applicable FDA regulations.
Government Regulation
The advertising of our MelaFind® product will be subject to
both FDA and Federal Trade Commission regulations. In addition,
the sale and marketing of MelaFind® will be subject to a
complex system of federal and state laws and regulations
intended to deter, detect, and respond to fraud and abuse in the
healthcare system. These laws and regulations restrict and may
prohibit pricing, discounting, commissions and other commercial
practices that may be typical outside of the healthcare
business. In particular, anti-kickback and self-referral laws
and regulations will limit our flexibility in crafting
promotional programs and other financial arrangements in
connection with the sale of our products and related services,
especially with respect to physicians seeking reimbursement
through Medicare or Medicaid. These federal laws include, by way
of example, the following:
•
the anti-kickback statute prohibits certain business practices
    and relationships that might affect the provision and cost of
    healthcare services reimbursable under Medicare, Medicaid and
    other federal healthcare programs, including the payment or
    receipt of remuneration for the referral of patients whose care
    will be paid by Medicare or other federal healthcare programs;
58
•
the physician self-referral prohibition, commonly referred to as
    the Stark Law, which prohibits referrals by physicians of
    Medicare or Medicaid patients to providers of a broad range of
    designated healthcare services in which the physicians or their
    immediate family members have ownership interests or with which
    they have certain other financial arrangements;
•
the anti-inducement law, which prohibits providers from offering
    anything to a Medicare or Medicaid beneficiary to induce that
    beneficiary to use items or services covered by either program;
•
the Civil False Claims Act, which prohibits any person from
    knowingly presenting or causing to be presented false or
    fraudulent claims for payment by the federal government,
    including the Medicare and Medicaid programs; and
•
the Civil Monetary Penalties Law, which authorizes HHS to impose
    civil penalties administratively for fraudulent or abusive acts.
Sanctions for violating these federal laws include criminal and
civil penalties that range from punitive sanctions, damage
assessments, money penalties, imprisonment, denial of Medicare
and Medicaid payments, or exclusion from the Medicare and
Medicaid programs, or both. These laws also impose an
affirmative duty on those receiving Medicare or Medicaid funding
to ensure that they do not employ or contract with persons
excluded from the Medicare and other government programs.
Many states have adopted or are considering legislative
proposals similar to the federal fraud and abuse laws, some of
which extend beyond the Medicare and Medicaid programs to
prohibit the payment or receipt of remuneration for the referral
of patients and physician self-referrals regardless of whether
the service was reimbursed by Medicare or Medicaid. Many states
have also adopted or are considering legislative proposals to
increase patient protections, such as limiting the use and
disclosure of patient-specific health information. These state
laws typically impose criminal and civil penalties similar to
the federal laws.
In the ordinary course of their business, medical device
manufacturers and suppliers have been and are subject regularly
to inquiries, investigations and audits by federal and state
agencies that oversee these laws and regulations. Recent federal
and state legislation has greatly increased funding for
investigations and enforcement actions, which have increased
dramatically over the past several years. This trend is expected
to continue. Private enforcement of healthcare fraud also has
increased, due in large part to amendments to the Civil False
Claims Act in 1986 that were designed to encourage private
persons to sue on behalf of the government. These whistleblower
suits by private persons, known as
qui tam
relators, may
be filed by almost anyone, including physicians and their
employees and patients, our employees, and even competitors.
HIPAA, in addition to its privacy provisions, created a series
of new healthcare-related crimes.
Environmental Regulation
Our research and development and clinical processes involve the
handling of potentially harmful biological materials as well as
hazardous materials. We and our investigators and vendors are
subject to federal, state and local laws and regulations
governing the use, handling, storage and disposal of hazardous
and biological materials and we incur expenses relating to
compliance with these laws and regulations. If violations of
environmental, health and safety laws occur, we could be held
liable for damages, penalties and costs of remedial actions.
These expenses or this liability could have a significant
negative impact on our financial condition. We may violate
environmental, health and safety laws in the future as a result
of human error, equipment failure or other causes. Environmental
laws could become more stringent over time, imposing greater
compliance costs and increasing risks and penalties associated
with violations. We are subject to potentially conflicting and
changing regulatory agendas of political, business and
environmental groups. Changes to or restrictions on permitting
requirements or processes, hazardous or biological material
storage or handling might require an unplanned capital
investment or relocation. Failure to comply with new or existing
laws or regulations could harm our business, financial condition
and results of operations.
59
International Regulation
International sales of medical devices are subject to foreign
government regulations, which may vary substantially from
country to country from having no regulations to having a
premarket notice or premarket acceptance. The time required to
obtain approval in a foreign country may be longer or shorter
than that required for FDA approval, and the requirements may
differ. There is a trend towards harmonization of quality system
standards among the European Union, US, Canada and various other
industrialized countries.
The European Union, which includes most of the major countries
in Europe, has adopted numerous directives and standards
regulating the design, manufacture, clinical trials, labeling
and adverse event reporting for medical devices. Devices that
comply with the requirements of a relevant directive will be
entitled to bear the CE conformity marking, indicating that the
device conforms to the essential requirements of the applicable
directives and, accordingly, can be commercially distributed
throughout Europe. The method of assessing conformity varies
depending on the class of the product, but normally involves a
combination of self-assessment by the manufacturer and a third
party assessment by a "Notified Body." This third
party assessment may consist of an audit of the
manufacturer's quality system and specific testing of the
manufacturer's product. An assessment by a Notified Body of
one country within the European Union is required in order for a
manufacturer to commercially distribute the product throughout
the European Union. As part of the CE compliance, manufacturers
are required to comply with the ISO 9000 series of standards for
quality operations. Other countries, such as Switzerland, have
voluntarily adopted laws and regulations that mirror those of
the European Union with respect to medical devices. Outside of
the European Union, regulatory approval needs to be sought on a
country-by-country basis in order for us to market our products.
Product Liability and Insurance
Our business exposes us to the risk of product liability claims
that is inherent in the testing, manufacturing and marketing of
medical devices, including those which may arise from the misuse
or malfunction of, or design flaws in, our products. We may be
subject to product liability claims if MelaFind® causes, or
merely appears to have caused, an injury. Claims may be made by
patients, healthcare providers or others involved with
MelaFind®. MelaFind® will require from the FDA
approval prior to commercialization in the US. The clinical
studies of MelaFind® are considered by the FDA as NSR.
Consequently, the trials are conducted under the auspices of an
abbreviated IDE. We therefore do not maintain domestic clinical
trial liability insurance. We have placed clinical trial
liability insurance in certain European countries where required
by statute or clinical site policy. Although we have general
liability insurance that we believe is appropriate, and
anticipate obtaining adequate product liability insurance before
commercialization of MelaFind®, this insurance is and will
be subject to deductibles and coverage limitations. Our
anticipated product liability insurance may not be available to
us in amounts and on acceptable terms, if at all, and, if
available, the coverages may not be adequate to protect us
against any future product liability claims. If we are unable to
obtain insurance at an acceptable cost or on acceptable terms
with adequate coverage or otherwise protect against potential
product liability claims, we will be exposed to significant
liabilities, which may harm our business.
Employees
As of May 15, 2005, we had 28 full-time and two part-time
employees, of whom 14 were engaged in research and development
(including clinical and regulatory affairs), seven in production
(including document control and quality assurance) and nine in
marketing, sales and administrative activities. We believe that
our relationship with our employees is good.
Facilities
We lease approximately 2,800 square feet of office space at 3
West Main Street, Suite 201, Irvington, New York, and an
additional 3,700 square feet of office, laboratory, and assembly
space in an adjacent building with the street address of 1
Bridge Street, Suite 15, Irvington, New York. The lease on
the 2,800 square feet of space expires in November 2010. The
lease on the 3,700 square feet of space expires in June
60
2005, and we have orally agreed with the landlord to extend this
lease through June 2009 and we intend to enter into a lease
agreement which will evidence this extension. We believe that
these facilities are adequate to meet our current and reasonably
foreseeable requirements. We believe that we will be able to
obtain additional space, if required, on commercially reasonable
terms.
Legal Proceedings
We are not currently a party to any legal proceedings.
Discontinued Business
As of April 5, 2005, we decided to discontinue all
operations associated with our DIFOTI® product, a
non-invasive imaging device for the detection of dental
cavities, in order to focus our resources on the development and
commercialization of Melafind®. We are currently seeking an
acquirer for the DIFOTI® assets. Once a disposition
relating to the DIFOTI® assets is complete, we do not
expect to have any significant continuing responsibility for the
DIFOTI® business.
61
MANAGEMENT
Executive Officers and Directors
The following table sets forth the names, ages as of
May 15, 2005 and a brief account of the business experience
of each person who is a current executive officer or director of
our company and each person who has been elected to serve as a
director effective upon the close of this offering. Each
director of our company will hold office until the next annual
meeting of shareholders of our company or until his successor
has been elected and qualified.
Name
Age
Position
Joseph V. Gulfo, M.D.
42
Director, President and Chief Executive Officer
Karen Krumeich
51
Vice President, Finance, Chief Financial Officer and Treasurer
Jon I. Klippel
50
Vice President, Marketing and Sales
William R. Bronner
59
Vice President, Legal Counsel and Compliance
Breaux Castleman(1)(2)
64
Director, Chairman of the Board of Directors
Sidney Braginsky(1)
67
Director
George C. Chryssis(1)
58
Director
Martin D. Cleary(2)(3)(4)
59
Director Elect
Dan W. Lufkin(2)(3)
73
Director
Gerald Wagner, Ph.D.
61
Director
(1)
Member of Compensation Committee
(2)
Member of Nominating and Governance Committee
(3)
Member of Audit Committee
(4)
Director elected to serve effective as of the completion of this
    offering
Executive Officers
Joseph V. Gulfo, M.D.
,
M.B.A.
has served as
our President and Chief Executive Officer and a member of our
board of directors since January 2004. From May 1999 to November
2004, he served as Chairman, Chief Executive Officer and
President of Antigen Express, Inc., a development-stage company
developing immunodiagnostics and therapeutics for cancer.
Dr. Gulfo serves as a director of ProCertus BioPharm, Inc.,
a privately-held company. Dr. Gulfo received a B.S. in
Biology from Seton Hall University, an M.D. from the University
of Medicine and Dentistry of New Jersey and an M.B.A. in Finance
from Seton Hall University.
Karen Krumeich
has served as our Vice President,
Finance and Chief Financial Officer since January 2005 and
Treasurer since May 2005. From August 2004 to January 2005 she
served as a financial consultant with Horn Murdock Cole, a
financial consulting firm. From September 2002 to July 2004, she
served as divisional Chief Financial Officer of the hospital
group division of Henry Schein, Inc., a publicly-held medical
and dental products distributor. From March 2000 to August 2002,
she served as a financial consultant with Consulting Associates,
a financial consulting firm. Ms. Krumeich received her B.S.
in Pharmacy from the University of Toledo College of Pharmacy
and completed additional coursework in accounting at Cleveland
State University.
Jon I. Klippel
has served as our Vice President,
Marketing and Sales since December 2004. From April 2004 to
November 2004, he was a marketing and sales consultant. From
January 2003 to March 2004, he served as Senior Marketing
Manager of PDI, Inc., a publicly-traded company offering
outsourced marketing, sales and sale support services to
biopharmaceutical and medical device companies. From February
2002 to December 2002, he was a marketing and sales consultant.
From July 2000 to February 2002, he served as Director of
Marketing and Business Development at National Imaging
Associates, Inc., a privately-held diagnostic imaging management
company. Mr. Klippel received a B.A. in Political Science
from Albright College and an M.B.A. from Rutgers University
Graduate School of Business.
62
William R. Bronner
has served as our Vice
President, Legal Counsel and Compliance since July 2000 and as
our Secretary since May 2002. From 1986 to July 2000,
Mr. Bronner served as Vice President, General Counsel and
Secretary of Kronos, Inc. Mr. Bronner received a B.A. in
Government from Dartmouth College and a J.D. from Columbia
University Law School.
Our executive officers are elected by, and serve at the
discretion of our board of directors. There are no family
relationships between our directors and executive officers.
Non-Executive Directors
Breaux Castleman
has served as a member of our
board of directors and Chairman of our board since July 2003.
Since August 2001, he has served as President, Chief Executive
Officer and Chairman of Syntiro Healthcare Services, Inc.
Mr. Castleman also serves as a director of FemPartners,
Inc., Integrated Diagnostic Centers, Inc. and Radiology Practice
Management, Inc., each of which are privately-held companies.
From December 1999 to July 2001, he served as Chief Executive
Officer of Physia Corp. He served as President of Scripps Clinic
from July 1996 to October 1999. He holds a B.A. in economics
from Yale University and attended New York University Graduate
School of Business Administration.
Sidney Braginsky
has served as a member of our
board of directors since 2001. Since 2001, he has also served as
the Chairman and Chief Executive Officer of Digilab, LLC, a
spectroscopy instruments manufacturer. He served as President of
Olympus America, Chairman of Atropos, Inc., and as a director
for Noven Pharmaceuticals, Inc., as well. Mr. Braginsky
received his B.S. in biology from Queens College.
George C. Chryssis
has served as a member of our
board of directors since 2001. Since 2003, he has served as
President, Chief Executive Officer and Chairman of the Board of
MISTsoft Corp., a privately-held software company which he
founded. Since 2000, he has served as the Managing Member of
Arcadian Capital Management, LLC, and General Partner of
Arcadian Venture Partners, LP, a venture capital firm with
investments in early stage technology companies, including EOS.
Since 2003, he has also served as Chairman of the Board of
Directors of DelCom Corp., a privately-held telecommunications
software company. Mr. Chryssis received a B.S. and M.S. in
electrical engineering from Northeastern University.
Martin D. Cleary
will become a member of our board
of directors upon completion of this offering. Since February
2003, he has served as the President and Chief Executive Officer
of Juvaris Biotherapeutics, Inc., a company engaged in the
development of therapeutic vaccines for cancer and infectious
diseases. From September 1999 to May 2002, he served as the
President and Chief Executive Officer of Genteric, Inc., a
company engaged in non-viral gene delivery. Mr. Cleary
received a B.S. in accounting from Rutgers University in 1971,
and a certificate in international studies from Columbia
University in 1973.
Dan W. Lufkin
has served as a member of our board
of directors since July 2003. He is also a co-founder and former
Chairman of the investment banking firm, Donaldson, Lufkin &
Jenrette, Inc. Mr. Lufkin currently serves as a consultant
to and/or board member of a number of private companies and
non-profit endeavors. Mr. Lufkin received a B.A. degree
from Yale University and an M.B.A. from Harvard Business School.
Gerald Wagner, Ph.D.
was appointed as a member of
our board of directors in May 2005. Since 2002, he has owned and
operated Gerald Wagner Consulting LLC, an international
consulting company specializing in: international project
management; technology and application consulting; and company
assessments. From March 1992 to September 2003, he was a Senior
Vice President, Lab Testing Systems, at Bayer, Inc.
Mr. Wagner received a Masters and Ph.D. in
electro-mechanical design from Technical University, Darmstadt,
Germany.
Board of Directors Composition
Our current charter documents and the charter documents we
expect to be in effect upon completion of this offering
authorize up to nine (9) directors. We currently have six
(6) directors and expect to have seven (7) directors
upon completion of the initial public offering. Certain of our
current directors were elected pursuant to voting provisions
contained in a voting agreement that we entered into with
certain holders or our
63
common stock and preferred stock. Upon the closing of this
offering, the voting agreement will be terminated and none of
our stockholders will have any special rights regarding board
representation.
Board Committees
Audit Committee.
The current members of our audit
committee are Messrs. Braginsky and Lufkin, each of whom we
believe satisfies the independence requirements of the NASDAQ
National Market and the SEC. Mr. Cleary will join the audit
committee upon completion of the offering and will chair the
committee. We believe Mr. Cleary satisfies the independence
requirements of the NASDAQ National Market and the SEC. In
addition, we believe Mr. Cleary is qualified as an audit
committee financial expert under the regulations of the SEC, and
has the accounting and related financial management expertise
required by the NASDAQ National Market. Our audit committee
assists our board in its oversight of:
•
the integrity of our financial statements;
•
our independent registered public accounting firm's
    qualifications and independence; and
•
the performance of our independent auditors.
The audit committee has the sole and direct responsibility for
appointing, evaluating and retaining our independent registered
public accounting firm and for overseeing their work. All audit
services to be provided to us and all non-audit services, other
than de minimis non-audit services, to be provided to us by our
independent auditors must be approved in advance by our audit
committee.
Compensation Committee.
The members of our compensation
committee are Messrs. Castleman, Braginsky and Chryssis,
each of whom we believe satisfies the independence requirements
of the NASDAQ National Market and the SEC. Mr. Castleman
chairs this committee. The purpose of our compensation committee
is to discharge the responsibilities of our board of directors
relating to compensation of our executive officers. Specific
responsibilities of our compensation committee include:
•
reviewing and recommending compensation of our executive
    officers;
•
administering our stock incentive plans; and
•
reviewing and recommending incentive compensation and equity
    plans.
Nominating and Governance Committee.
The members of our
nominating and governance committee are Messrs. Lufkin and
Castleman, each of whom we believe satisfies the independence
requirements of the NASDAQ National Market. Mr. Lufkin will
chair this committee. Mr. Cleary will join the nominating
and governance committee upon completion of the offering. Our
nominating and governance committee:
•
identifies and recommends nominees for election to our board of
    directors;
•
develops and recommends our corporate governance principles; and
•
oversees the evaluation of our board of directors and management.
Compensation Committee Interlocks and Insider
Participation
We did not have a compensation committee until May 2005.
Dr. Gulfo, our Chief Executive Officer, previously
participated in the deliberations regarding executive
compensation. None of our executive officers has served as a
member of the compensation committee, or other committee serving
an equivalent function, of any other entity, one of whose
executive officers served as a member of our compensation
committee.
Election of Directors
The number of directors is determined by the stockholders at
their annual meeting, subject to the right of the stockholders
to change such number between annual meetings and to the right
of our board to increase such number between annual meetings.
64
Director Compensation
After completion of this offering, in addition to reimbursement
of expenses incurred in attending meetings of our board of
directors and committees of our board, our non-employee
directors will receive an annual fee of $10,000 for serving as
directors and an additional $500 per meeting for each meeting
attended, whether in person or by telephone. In addition, after
completion of this offering, the chairman of our board of
directors, the chairman of our audit committee and the chairman
of our nominating and governance committee will each receive an
annual fee of $10,000. After completion of this offering, each
member of our board who is not a company employee will receive
an annual stock option grant to purchase up to 5,000 shares of
common stock. Such stock options will vest in full upon the
first anniversary of issuance and have an exercise price equal
to the fair market value of our common stock on the date of the
grant. In addition, we reimburse each member of our Board who is
not a company employee for reasonable travel and other expenses
in connection with attending meetings of the Board.
Scientific and Medical Advisory Committee
We have established a Scientific and Medical Advisory Committee
made up of leading experts in the fields of dermatology and
oncology. Members of our Scientific and Medical Advisory
Committee consult with us regularly on matters relating to:
•
our research and development programs;
•
the design and implementation of our clinical trials;
•
market opportunities from a clinical perspective;
•
new technologies relevant to our research and development
    programs; and
•
scientific and technical issues relevant to our business.
The current members of our Scientific and Medical Advisory
Committee are:
Name
Professional Affiliation
Jeffrey P. Callen, M.D.
Professor and Chief of the Division of Dermatology, University
    of Louisville School of Medicine; Member of the Board of
    Directors of the American Board of Dermatology, Inc.
Armand B. Cognetta, Jr., M.D.
Dermatologist in private practice with Dermatology Associates of
    Tallahasee; Member, American Academy of Dermatology; former
    President of Florida Society of Dermatology; former President of
    Dermatology Photography Society.
Robert Friedman, M.D.
Clinical Assistant Professor, Department of Dermatology, New
    York University School of Medicine; Past Director, American
    Cancer Society, New York City Division, and Member, Professional
    Education Committee; American Academy of Dermatology: Member,
    Skin Cancer/ Melanoma Committee, Past Chairman, Industry Liaison
    Committee.
65
Name
Professional Affiliation
Alfred W. Kopf, M.D.
Clinical Professor of Dermatology at New York University School
    of Medicine; Head of the Oncology Section of the Skin and Cancer
    Unit at New York University Medical Center; member of the Board
    of Directors of the International Foundation for Dermatology;
    Past President, American Academy of Dermatology; Past President,
    American Board of Dermatology; Past President, American
    Dermatological Association; and Past Chairman of the Board of
    Directors, International Foundation for Dermatology.
Martin C. Mihm, Jr., M.D.
Professor and Chief of Dermatopathology at Harvard Medical
    School; Chief of Dermatopathology at Massachusetts General
    Hospital; Co-Director of the Pigmented Skin Lesion Clinic at
    Massachusetts General Hospital; Co-Chairman of the Melanoma
    Pathology Program of the World Health Organization; Co-Director
    of the Rare Tumor Institute of the World Health Organization;
    member of the editorial and advisory board of the American
    Journal of Dermatopathology and the International Journal of
    Surgical Pathology; Member of the American Academy of
    Dermatology; New England Pathology Society; American Society of
    Dermatopathology; American Society of Clinical Oncology; and
    College of American Pathologists.
Harold S. Rabinovitz, M.D.
Dermatologist in private practice with Skin and Cancer
    Associates in Plantation, Florida; Voluntary Professor of
    Dermatology at the University of Miami-School of Medicine;
    Associate Editor of the Journal of Dermatologic Surgery; member
    of the Board of Directors of the South Florida Dermatology
    Foundation.
Darrell S. Rigel, M.D.
Clinical Professor of Dermatology, New York University Medical
    Center; Secretary and Treasurer of the American Dermatological
    Association; Past President, American Academy of Dermatology;
    Member, Board of Directors of the American Cancer Society New
    York City Division and Chairman of its Subcommittee on Skin
    Cancer.
Arthur J. Sober, M.D.
Professor of Dermatology, Harvard Medical School; Member,
    American Joint Commission on Cancer.
Medical Advisor and Liaison to Our Board of Directors
Robert Friedman, M.D., a member of our Scientific and Medical
Advisory Committee, serves as a medical advisor to our board of
directors and a liaison between our Scientific and Medical
Advisory Committee and our board of directors. See
"Consulting Agreements — Consulting Agreement
with Robert Friedman, M.D."
66
Executive Compensation
The following table sets forth summary compensation information
for the years ended December 31, 2002, December 31,
2003 and December 31, 2004 for our chief executive officer
and each of our two other most highly compensated executive
officers whose salary and bonus for 2004 was more than $100,000.
As of December 31, 2004, there were no other persons
serving as executive officers. We have also included summary
compensation information for two executive officers who would
have been among the four other most highly compensated executive
officers whose salary and bonus for 2004 would have been more
than $100,000 had they served as executive officers for the full
year. We refer to these officers collectively as our named
executive officers.
Summary Compensation Table
Long Term
Annual Compensation
Compensation
Securities
Underlying
All Other
Name and Principal Position
Year
Salary ($)
Bonus ($)
Options
Compensation
Joseph V. Gulfo, M.D.
2004
$
173,656
—
81,753
(1)
$
19,880
(1)
President and Chief
2003
—
—
—
—
Executive Officer
2002
—
—
—
—
Marek Elbaum, Ph.D.
2004
173,549
—
10,000
—
Founder and former Chief Science
2003
81,085
—
29,071
—
and Technology Officer
2002
30,204
—
—
—
William Bronner
2004
132,612
—
37,000
—
Vice President, Legal Counsel
2003
106,255
—
32,161
—
and Compliance
2002
26,444
—
1,875
—
Karen Krumeich(2)
2004
—
—
60,000
—
Vice President Finance, Chief
2003
—
—
—
—
Financial Officer
2002
—
—
—
—
Jon I. Klippel(3)
2004
9,346
—
45,000
—
Vice President Marketing
2003
—
—
—
—
and Sales
2002
—
—
—
—
(1)
Dr. Gulfo has been granted another stock option which is
    not reflected in this table because the number of shares
    purchasable under the option can only be calculated at the time
    of PMA approval of MelaFind®. The number of shares granted
    under this option is equal to that number of shares of our
    common stock equal to four percent of our fully-diluted capital
    stock at that time of PMA approval of MelaFind® minus
    81,753 shares of our common stock. The exercise price of this
    option is $0.46 per share.
(2)
Ms. Krumeich's employment with us began in January
    2005 at an annual salary of $165,000.
(3)
Mr. Klippel's employment with us began in December
    2004 at an annual salary of $135,000.
67
Stock Options Granted in 2004
The following table provides information regarding stock options
granted during 2004 to the named executive officers in that
period. We have not granted any stock appreciation rights.
Potential Realizable Value of
Assumed Annual Rates of Stock
Number of
% of Total Options
Price Appreciation for Option
Securities
Granted to
Exercise or Base
Term(2)
Underlying
Employees in
Price Per
Expiration
Name
Options Granted
Fiscal Year
Share(1)
Date
5%
10%
Joseph V. Gulfo, M.D.(3)
75,227
11.07
%
$
0.46
2/02/09
$
l
$
l
6,526
0.09
0.46
2/02/09
l
l
Marek Elbaum, Ph.D.(4)
10,000
1.47
0.46
2/02/09
l
l
Karen Krumeich
60,000
8.82
0.46
12/17/09
l
l
William R. Bronner
17,000
2.50
0.46
2/02/09
l
l
20,000
2.94
0.46
12/17/09
l
l
Jon I. Klippel
45,000
6.62
0.46
12/17/09
l
l
(1)
Exercise price is equal to the fair market value on the date of
    grant as determined by our board of directors.
(2)
The dollar amounts under these columns are the result of
    calculations at rates set by the SEC and, therefore, are not
    intended to forecast possible future appreciation, if any, in
    the price of the underlying common stock. The potential
    realizable values are calculated using an assumed initial public
    offering price of
    $
l
per
    share, the mid-point of our filing range, and assuming that the
    market price appreciates from this price at the indicated rate
    for the entire term of each option and that each option is
    exercised and sold on the last day of its term at the assumed
    appreciated price. Actual gains, if any, on stock option
    exercises depend on the future performance of the common stock
    and overall stock market conditions. The amounts reflected in
    the following table may not necessarily be achieved.
(3)
Dr. Gulfo has been granted another stock option which is
    not reflected in this table because the number of shares
    purchasable under the option can only be calculated at the time
    of PMA approval of MelaFind®. The number of shares granted
    under this option is equal to that number of shares of our
    common stock equal to four percent of our fully-diluted capital
    stock at that time of PMA approval of MelaFind® minus
    81,753 shares of our common stock.
(4)
Formerly our Chief Science and Technology Officer.
Aggregated Option Exercises in 2004 and Year-End Option
    Values
The following table provides information about the number of
shares issued upon option exercises by our named executive
officers as of December 31, 2004 and the value realized by
our named executive officers. The table also provides
information about the number and value of options held by our
named executive officers at December 31, 2004.
Number of Unexercised
Securities Underlying
Value of Unexercised
Options at
In-the-Money Options at
December 31, 2004
December 31, 2004(1)
Name
Exercisable
Unexercisable
Exercisable
Unexercisable
Joseph V. Gulfo, M.D.(2)
71,535
10,218
$
l
$
l
Marek Elbaum, Ph.D.(3)
14,070
25,000
$
l
$
l
Karen Krumeich
0
60,000
$
l
$
l
William R. Bronner
49,160
21,875
$
l
$
l
Jon I. Klippel
0
45,000
$
l
$
l
68
(1)
There was no public trading market for our common stock as of
    December 31, 2004. Accordingly, as permitted by the rules
    of the SEC, we have calculated the value of unexercised
    in-the-money options assuming an initial public offering price
    of
    $
l
per
    share, the mid-point of our filing range, less the aggregate
    exercise price, without taking into account any taxes that might
    be payable in connection with the transaction.
(2)
Dr. Gulfo has been granted another stock option which is
    not reflected in this table because the number of shares
    purchasable under the option can only be calculated at the time
    of PMA approval of MelaFind®. The number of shares granted
    under this option is equal to that number of shares of our
    common stock equal to four percent of our fully-diluted capital
    stock at that time of PMA approval of MelaFind® minus
    81,753 shares of our common stock.
(3)
Formerly our Chief Science and Technology Officer.
Equity Compensation Plans
2005 Stock Incentive Plan
In 2005, we adopted our 2005 Stock Incentive Plan (2005 Plan).
The 2005 Plan permits the granting of awards to key employees,
directors, officers, consultants and scientific collaborators in
the form of incentive or nonqualified stock options and
equity-based awards. Stock options granted under the 2005 Plan
may be "incentive stock options" meeting the
requirements of Section 422 of the Code or nonqualified
stock options, which do not meet the requirements of
Section 422. Stock awards granted under the 2005 Plan to
eligible participants may take the form of the issuance and
transfer to the recipient of shares of common stock or a grant
of stock units representing a future right to such shares of
common stock. As of the date of this offering, there are
1,000,000 shares of our common stock authorized and reserved for
issuance upon exercise of options which may be granted under the
2005 Plan and no options or other equity based awards have been
issued under the 2005 Plan. Pursuant to the 2005 Plan on each of
January 1, 2006 and January 1, 2007, the number of
shares of common stock authorized for issuance will be
automatically increased by an amount equal to 3% of the then
outstanding shares of common stock unless the board decides to
reduce the amount of the increase.
2003 Stock Incentive Plan
In 2003, we adopted our 2003 Stock Incentive Plan, as amended
(2003 Plan). The 2003 Plan permitted the granting of awards to
our employees and other key persons (including directors,
officers, consultants and scientific collaborations) in the form
of restricted stock, and incentive or nonqualified stock
options. Stock options granted under the 2003 Plan may be
"incentive stock options" meeting the requirements of
Section 422 of the Code or nonqualified stock options which
do not meet the requirements of Section 422. As of
May 15, 2005, options to purchase 639,697 shares of our
common stock are outstanding under the 2003 Plan. No options or
other equity-based awards have been granted under the 2003 Plan
since the adoption of the 2005 Plan, and no further options or
other equity-based awards are issuable under the 2003 Plan. As
of May 15, 2005, no options granted under the 2003 Plan
have been exercised.
1996 Stock Option Plan
In 1996, we adopted our 1996 Stock Option Plan (1996 Plan). The
1996 Plan permitted the granting of awards to our officers, key
employees, directors and collaborating scientists in the form of
incentive or nonqualified stock options. Stock options granted
under the 1996 Plan may be "incentive stock options"
meeting the requirements of Section 422 of the Code or
nonqualified stock options which do not meet the requirements of
Section 422. Since the adoption of the 2003 Plan, we have
not granted any stock options under the 1996 Plan. As of
May 15, 2005, options to purchase 260,178 shares of our
common stock are outstanding under the 1996 Plan. No further
options or other equity-based awards are issuable under the 1996
Plan. As of May 15, 2005, no options granted under the 1996
Plan have been exercised.
69
Employment Agreement
Employment Agreement with Joseph V. Gulfo, M.D.
On January 5, 2004, we entered into an employment agreement
with Dr. Joseph V. Gulfo, our President and Chief
Executive Officer. Pursuant to the agreement, Dr. Gulfo is
required to devote substantially all of his business time,
attention and efforts to the performance of his duties under the
agreement. The initial term of the employment agreement extends
until December 31, 2005 and will automatically renew for
successive twelve-month (12) terms unless either party
sends a written notice of termination within 90 days of the
expiration of the initial term or renewal term, as the case may
be.
The employment agreement provides Dr. Gulfo with an annual
base salary of $175,000 subject to periodic review by our board
of directors. Our board of directors has determined that
Dr. Gulfo was entitled to a review and salary increase in
an amount to be agreed by Dr. Gulfo and the Company as a
result of the equity financing consummated in October 2004, but
to date our board of directors has not conducted a review or
granted a salary increase. Dr. Gulfo is also entitled to
receive yearly bonuses at the discretion of our board of
directors. The target for such bonuses is 50% of
Dr. Gulfo's then current base salary.
In addition, Dr. Gulfo is entitled to be reimbursed for
certain travel expenses up to $1,100 per month, $2,000 per month
for lodging expenses and for certain communication expenses,
including cellular phone service and broadband internet service.
If Dr. Gulfo's employment is terminated by us without
cause or Dr. Gulfo resigns for good reason, then
Dr. Gulfo would be entitled to receive severance pay equal
to 15 months of his then current base salary and, if
Dr. Gulfo is then covered by health insurance provided by
us, the cost to Dr. Gulfo of COBRA coverage for
15 months. If we elect not to renew Dr. Gulfo's
employment agreement, Dr. Gulfo is entitled to an amount
equal to his then current base salary for nine months and, if
Dr. Gulfo is covered by our health insurance policy at such
time, the cost of COBRA for nine months (subject to reduction to
the extent Dr. Gulfo received comparable benefits from a
subsequent employer during such nine month period).
Dr. Gulfo is subject to a non-compete covenant upon
termination of his employment by us or him. The term of
Dr. Gulfo's non-compete covenant is one (1) year,
which can be extended to two (2) years in the event we
elect to pay him additional severance equal to twelve
(12) months of his base salary at the time of termination
and his most recent bonus (if any).
The employment agreement provides for three separate grants of
stock options. As of May 15, 2005, the first two stock
option grants for the purchase of a total of 81,753 shares of
our common stock at an exercise price of $0.46 per share have
fully vested. The number of shares of our common stock subject
to the third stock option can only be calculated at the time of
PMA approval of MelaFind®. The number of shares purchasable
under this option at an exercise price of $0.46 per share is
equal to that number of shares of our common stock equal to four
percent of our fully-diluted capital stock at the time of PMA
approval of MelaFind® minus the number of shares of common
stock underlying options granted to Dr. Gulfo under the
employment agreement, which is 81,753. Assuming
that
l
shares
are outstanding as of the completion of this offering and remain
the total number of shares outstanding on the date we receive
PMA approval of MelaFind®(assuming in both cases the
exercise of all outstanding options and warrants and the
conversion of all convertible securities), the number of shares
subject to this option would
be
l
.
This third stock option grant vests 50% at the time of PMA
approval of MelaFind®, and the remaining 50% vests in four
equal installments over the one year period following such PMA
approval of MelaFind®.
Consulting Agreements
Consulting Agreement with Breaux Castleman
In June 2003, we entered into a consulting agreement with Breaux
Castleman for consulting services related to FDA approval of
MelaFind®, administrative matters, financial reporting, and
our business and financial strategy. Under this agreement,
Mr. Castleman receives compensation for each month of
services rendered. During 2003 Mr. Castleman was paid at
the rate of $8,000 for each month of services rendered and
thereafter from 2004 onward he has been paid at the rate of
$2,000 for each month of services rendered. We
70
made payments pursuant to this consulting agreement of $48,000
in 2003, $22,000 in 2004, and $12,000 in 2005. These payments
did not exceed $60,000 in any twelve-month period since June
2003. In connection with our consulting agreement with
Mr. Castleman, we granted Mr. Castleman a restricted
stock award of 75,000 shares of our common stock under our 2003
Plan for an aggregate purchase price of $34,500.
Mr. Castleman issued an interest-bearing promissory note in
the principal amount of $34,500 as payment for these shares. To
date, no payments have been made under this note. Our consulting
agreement with Mr. Castleman is terminable by either party
on 30 days' written notice.
Consulting Agreement with Marek Elbaum, Ph.D.
Pursuant to a consulting agreement effective as of May 31,
2005, we retained Marek Elbaum, Ph.D., our founder and former
Chief Science and Technology Officer, as our Chief Scientist to
provide services relating to the integration of our product
development, mentoring and advising our staff scientists,
providing new product vision, supporting of our research and
development and providing such other services as assigned to him
by our Chief Executive Officer. Pursuant to the consulting
agreement, Dr. Elbaum will provide us with a majority of
his business time in consideration of a monthly fee of
approximately $14,500. The term of such agreement extends for a
period of two years and is automatically renewable for an
additional one year period unless either Dr. Elbaum or we
decide to not so renew. In the event of a non-renewal, and in
the event that Dr. Elbaum's services terminate as a
result of his death or disability, we will pay to
Dr. Elbaum a termination fee of $100,000. In addition, upon
termination of the consulting agreement for any reason other
than a termination by us for cause, we will pay to
Dr. Elbaum for 18 months an amount equal to what
Dr. Elbaum would have had to pay to extend his insurance
coverage under COBRA. Dr. Elbaum is subject to a
non-compete covenant during the term of the consulting agreement
and for a period of two years after the term of the consulting
agreement. We have also agreed that all stock options previously
granted to Dr. Elbaum will continue to vest in accordance
with their original terms.
Consulting Agreement with Robert Friedman, M.D.
Pursuant to a consulting agreement effective as of June 1,
2005, we have retained the services of Robert Friedman, M.D. for
an initial term of one year as a consultant, medical advisor to
our board of directors, and as a liaison between our board of
directors and our Scientific and Medical Advisory Committee, and
in connection with the clinical testing of MelaFind®. In
consideration of rendering of these services, Dr. Friedman
will be paid at a rate of $5,000 per day (assuming an eight-hour
day) for up to 30 days of service. The consulting agreement
is automatically renewed for successive one-year terms unless
either party terminates the agreement at least 30 days
prior to the expiration of the agreement.
Consulting Agreement with Gerald Wagner, Ph.D.
Pursuant to a consulting agreement dated as of June 1, 2005
with Gerald Wagner Consulting LLC (GWC), a company owned and
operated by Dr. Gerald Wagner, GWC has agreed to direct our
MelaFind® product development efforts and oversee the
manufacturing process for a period that began June 1, 2005
and ends three months following the initiation of our pivotal
clinical trial of MelaFind®. The consulting agreement
provides for a flat fee of $150,000, payable ratably over the
course of the term, and the grant to Dr. Wagner immediately
after completion of this offering of a non-qualified stock
option to purchase up to 50,000 shares of our common stock at
the public offering price per share.
Limitation of Liability and Indemnification of Directors and
Officers
Our fourth amended and restated certificate of incorporation and
third amended and restated bylaws provide that we will indemnify
our directors and executive officers and may indemnify our other
officers and employees and other agents to the fullest extent
permitted by law. Our fourth amended and restated certificate of
incorporation and third amended and restated bylaws also permit
us to secure insurance on behalf of any officer, director,
employee or other agent for any liability arising out of his or
her actions in such capacity, regardless of whether the bylaws
would permit indemnification. We maintain directors' and
officers'
71
liability insurance. We believe that these provisions and
agreements are necessary to attract and retain qualified persons
as directors and executive officers.
RELATED PARTY TRANSACTIONS
We also describe below certain other transactions with our
directors, executive officers and stockholders.
Common Stock
In June 2003, we sold 75,000 shares of our common stock at a
price of $0.46 per share to Dr. Robert Friedman, a former
member of our board of directors, and 75,000 shares of our
common stock at a price of $0.46 per share to Breaux Castleman,
a member of our board of directors, and the chairman of our
board. In May 2004, we issued 125,000 shares of our common stock
at a per share purchase price of $0.46 to investors who loaned
an aggregate of $1,000,000 to EOS, which loans were evidenced by
convertible promissory notes, all of which converted into shares
of our series C preferred stock on October 26, 2004.
Preferred Stock
All share numbers and share prices presented below for our
preferred stock do not reflect the 1-for-2 reverse stock split
approved by our board of directors on May 13, 2005 with
respect to our common stock. The reverse split will be effective
after the conversion of our preferred stock and thus the shares
of our common stock into which our preferred stock will convert
will be subject to the reverse stock split.
In 1998, we issued 198,000 shares of our series A preferred
stock at a per share purchase price of $5.00 to 22 accredited
investors for an aggregate consideration of $990,000. All shares
of series A preferred stock will convert into an aggregate
of 115,201 shares of our common stock upon completion of this
offering.
In 2000 and 2001, we issued an aggregate of 947,986 shares of
our series B preferred stock in three transactions at per
share purchase prices of $5.1282 and $6.50 to 149 accredited
investors for an aggregate consideration of $5,894,409. The
rights of the holders of series B preferred stock were
identical except for the purchase prices paid for such stock.
The purchasers of our series B preferred stock included
Arcadian Venture Partners L.P., a venture fund with which George
C. Chryssis, a member of our board of directors, is affiliated,
and Double D Venture Fund, LLC, a venture fund with which Sidney
Braginsky, a member of our board of directors, is affiliated.
On June 20, 2003, we issued an aggregate of 45,000 shares
of our series B preferred stock to the original
series B preferred stock investors in consideration of
certain amendments to their investment agreements, bringing the
total number of shares of our series B preferred stock
outstanding to 992,986. All shares of our series B
preferred stock will convert into an aggregate of 575,532 shares
of our common stock upon completion of this offering.
From June 2003 to October 2004, we sold an aggregate of
5,414,779 shares of our series C preferred stock (together
with warrants to purchase an aggregate of 2,610,643 shares of
our common stock, all of which warrants will be converted into
an aggregate of 1,305,313 shares of our common stock pursuant to
the warrant exchange described below under "Warrants to
Purchase Common Stock") to 73 accredited investors for an
aggregate consideration of $12,191,480. These investors
included: Breaux Castleman, a member of our board of directors
and chairman of our board; Dr. Robert Friedman, a member of
our scientific and medical advisory committee and former member
of our board of directors; Double D Venture Fund, LLC, a venture
fund with which Sidney Braginsky, a member of our board of
directors, is affiliated; and Dan W. Lufkin, a member of our
board of directors. All shares of our series C preferred
stock will convert into an aggregate of 2,707,372 shares of our
common stock upon completion of this offering.
Warrants to Purchase
Preferred Stock
In June 2003, we issued a warrant to purchase up to 24,890
shares of our series C preferred stock at an exercise price
of $2.26 per share to Koji Miyazaki, one of our series C
preferred stock investors.
72
In February 2004, we issued a warrant to purchase up to 121,681
shares of our series C preferred stock with an exercise
price $2.26 per share to Health Partners I, LLC (HP I). In
November 2004, HP I was dissolved and this warrant, together
with all shares of our series C preferred stock and
warrants to purchase our common stock previously issued to HP I,
were distributed to HP I's members, which included:
Dr. Robert Friedman, a member of our scientific and medical
advisory committee and a former member of our board of
directors; Breaux Castleman, a member of our board of directors
and chairman of our board; and Dan W. Lufkin, a member of our
board of directors. Assuming conversion of our preferred stock
immediately prior to completion of this offering, these warrants
and the warrant issued to Mr. Miyazaki will be exercisable
for an aggregate of 73,280 shares of our common stock at an
exercise price of $4.52 per share.
Warrants to Purchase
Common Stock
Prior to the closing of this offering, we will consummate an
exchange of warrants to purchase our common stock for shares of
our common stock under a plan of recapitalization to be adopted
by our board of directors. During the period from June 2003
through October 2004, we issued warrants to purchase an
aggregate of up to 2,610,643 shares of our common stock to
certain holders of our series C preferred stock. All of
these warrants have an exercise price of $13.00 per share. In
June 2003, we also issued a warrant to Dr. Marek Elbaum,
our former Chief Science and Technology Officer, to purchase up
to 25,000 shares of our common stock at per share exercise price
of $13.00. In December 2004, we issued a warrant to Allen &
Company LLC to purchase up to 75,000 shares of our common stock
at an exercise price of $7.00 per share (Allen & Company
Warrant) in consideration of Allen & Company's
agreement to provide certain advisory services to us. Warrants
to purchase a total of 2,610,643 shares of our common stock will
be exchanged for a total of 1,305,321 shares of our common stock
based on an exchange ratio of one share of our common stock for
every two shares of our common stock purchasable under the
warrants (Warrant Exchange).
After completion of the Warrant Exchange, the only warrants that
will remain outstanding as of the date of this offering are the
Allen & Company Warrant, the underwriters' warrant (see
"Underwriting") and warrants to purchase an aggregate
of 146,571 shares of our series C preferred stock, which
assuming conversion of our preferred stock will be exercisable
for an aggregate of 73,280 shares of our common stock.
Options
From inception to May 15, 2005, we have granted on
aggregate of 523,489 options to our current directors and named
executive officers, with exercise prices ranging from $0.46 to
$10.00 per share.
PRINCIPAL STOCKHOLDERS
The following tables set forth as of May 15, 2005, and as
adjusted to reflect the sale of the shares offered hereby,
certain information regarding beneficial ownership of our common
stock by:
•
each person or group of affiliated persons known to us to
    beneficially own more than 5% of our common stock;
•
each named executive officer;
•
each of our directors; and
•
all of our executive officers and directors as a group.
The percentage of ownership indicated in the following table is
based on 6,513,164 shares of common stock outstanding on
May 15, 2005 and
l
shares of
common stock outstanding immediately following the completion of
this offering, each of which assumes the conversion of all
outstanding shares of our preferred
73
stock and consummation of the Warrant Exchange. The table
assumes no exercise of the underwriters' over-allotment
option.
Information with respect to beneficial ownership has been
furnished by each director, officer, beneficial owner of more
than 5% of our common stock or selling stockholder and is
determined in accordance with the rules of the SEC. Except as
indicated by footnote and subject to community property laws
where applicable, to our knowledge, the persons named in the
table below have sole voting and investment power with respect
to all shares of common stock shown as beneficially owned by
them. In computing the number of shares beneficially owned by a
person and the percentage of ownership of that person, shares of
common stock subject to options or warrants held by that person
that are currently exercisable or will become exercisable within
60 days after May 15, 2005 are deemed outstanding,
while such shares are not deemed outstanding for purposes of
computing percentage ownership of any other person.
Number of
Shares of Common
Stock Beneficially
Percentage of Shares
Owned
Beneficially Owned
Options and
Warrants
Exercisable
Within 60
Before the
After the
Name of Beneficial Owner
Shares
Days
Offering
Offering
Named Executive Officers
Joseph V. Gulfo, M.D.
—
81,753
1.2
%
l
Marek Elbaum, Ph.D.(1)
462,500
14,070
7.3
l
Karen Krumeich
—
60,000
*
l
William R. Bronner
4,850
70,285
1.1
l
Jon I. Klippel
—
45,000
*
l
Directors
Breaux Castleman
91,570
6,168
1.5
l
Sidney Braginsky(2)
51,500
5,000
*
l
George C. Chryssis(3)
94,717
12,500
1.6
l
Dan W. Lufkin(4)
356,231
29,187
5.9
l
All directors and named executive
officers as a group (all 9 persons)
1,061,368
323,963
20.3
%
l
Holders of more than 5%
Patricia and Stanley Brilliant(5)
349,532
2,342
5.4
l
Caremi Partners Ltd.(6)
917,767
11,693
14.2
l
Eric Dobkin(7)
351,523
7,015
5.5
l
*
Less than one percent.
(1)
Marek Elbaum, Ph.D. resigned as a director and our Chief Science
    and Technology Officer effective as of May 31, 2005.
(2)
Includes 51,500 shares of common stock held by Double D Venture
    Fund, LLC, an investment fund with which Mr. Braginsky is
    affiliated. Mr. Braginsky expressly disclaims ownership of these
    shares.
(3)
Includes 94,717 shares of common stock held by Arcadian Venture
    Partners, L.P., an investment fund with which Mr. Chryssis
    is affiliated. Mr. Chryssis expressly disclaims ownership of
    these shares.
(4)
Includes 140,570 shares of common stock held by trusts the
    beneficiaries of which are family members of Mr. Lufkin and
    5,840 shares of common stock issuable upon exercise of
    Series C preferred stock warrants. Mr. Lufkin
    expressly disclaims ownership of the shares held by these trusts.
(5)
Patricia and Stanley Brilliant are husband and wife. Their
    business address is: 180 East End Avenue, Apt. 4A, New
    York, NY 10128.
74
(6)
The business address of Caremi Partners, Ltd. is: c/o Steven B.
    Ruchefsky, 2 American Lane, Greenwich, CT 06836.
(7)
The business address of Eric Dobkin is: 160 Old Church Lane,
    Pound Ridge, NY 10576.
DESCRIPTION OF CAPITAL STOCK
The following information describes our common stock and
preferred stock and provisions of our fourth amended and
restated certificate of incorporation and our third amended and
restated bylaws as in effect upon the closing of this offering.
This description is only a summary. You should also refer to the
fourth restated certificate of incorporation and third amended
and restated bylaws which will be filed with the SEC as exhibits
to our registration statement of which this prospectus forms a
part. The descriptions of the common stock and preferred stock
reflect changes to our capital structure that will occur upon
the receipt of the requisite board and stockholder approvals and
upon the closing of this offering in accordance with the terms
of the fourth amended and restated certificate of incorporation.
Upon completion of this offering, and after giving effect to the
conversion of all outstanding convertible preferred stock into
common stock and the amendment of our fourth amended and
restated certificate of incorporation, our authorized capital
stock will consist of 30,000,000 shares of common stock, $0.001
par value per share, and 10,000,000 shares of preferred stock,
$0.10 par value per share. As of May 15, 2005, there were
6,513,164 shares of our common stock outstanding held of record
by 242 stockholders.
Common Stock
Subject to preferences that may be applicable to any shares of
preferred stock outstanding at the time, the holders of common
stock are entitled to the following:
Dividends.
The holders of outstanding shares of our
common stock are entitled to receive dividends out of assets
legally available for the payment of dividends at the times and
in the amounts as our board of directors from time to time may
determine, subject to any preferential dividend rights of any
holder of outstanding shares of our preferred stock.
Voting.
Each holder of common stock is entitled to one
vote for each share of common stock held on all matters
submitted to a vote of stockholders, including the election of
directors. We have not provided for cumulative voting for the
election of directors in our fourth restated certificate of
incorporation. This means that the holders of a majority of the
shares voted can elect all of the directors then standing for
election.
Preemptive rights, conversion and redemption.
Our common
stock is not entitled to preemptive rights and is not subject to
conversion or redemption.
Liquidation, dissolution and winding-up.
Upon our
liquidation, dissolution or winding-up, the holders of common
stock are entitled to share ratably in all assets remaining
after payment of liabilities and the liquidation preferences of
any preferred stock.
Each outstanding share of common stock is, and all shares of
common stock to be issued in this offering when they are paid
for, will be duly and validly issued, fully paid and
non-assessable.
Options
As of May 15, 2005, options to purchase a total of 899,875
shares of common stock were outstanding, which amount is 54,391
shares less than the number of shares issuable under such option
plans as of March 31, 2005 due to the effect of a
formula-based option granted to our President and Chief
Executive Officer — see "Management —
Employment Agreement". All options issued under the 2003
Plan or issuable under the 2005 Plan are subject to 180-day
lock-up provisions under the terms of the 2003 Plan and the 2005
Plan, respectively. Options to purchase a total of 1,000,000
shares of common stock remain available for grant under the 2005
Plan. Following this offering, no options to purchase, or other
equity-based awards with respect to shares of our common stock,
will be available under the 2003 Plan or the 1996 Plan.
75
Preferred Stock
Upon the closing of this offering, all outstanding shares of our
preferred stock will convert into an aggregate of 3,398,105
shares of common stock.
Following the offering, our board of directors will be
authorized, subject to the limits imposed by the Delaware
General Corporation Law, to issue 10,000,000 shares of preferred
stock in one or more series, to establish from time to time the
number of shares to be included in each series, to fix the
rights, preferences and privileges of the shares of each wholly
unissued series and any of its qualifications, limitations and
restrictions. Our board of directors can also increase or
decrease the number of shares of any series, but not below the
number of shares of that series then outstanding, without any
further vote or action by our stockholders.
Our board of directors may authorize the issuance of preferred
stock with voting or conversion rights that adversely affect the
voting power or other rights of our common stockholders. The
issuance of preferred stock, while providing flexibility in
connection with possible acquisitions, financings and other
corporate purposes, could have the effect of delaying, deferring
or preventing a change in control and may cause the market price
of our common stock to decline or impair the voting and other
rights of the holders of our common stock. We have no current
plans to issue shares of preferred stock.
Warrants
See "Related Party Transactions — Warrants
to Purchase Preferred Stock" and "Related Party
Transactions — Warrants to Purchase Common
Stock."
Registration Rights
Under a second amended and restated investors' rights
agreement, following this offering, the holders of
l
shares of common stock have the
right to require us to register their shares with the SEC so
that those shares may be publicly resold or to include their
shares in any registration statement we file with the SEC.
Demand Rights
At any time after the earlier of October 26, 2009 or the
date which is one year after the effective date of this
offering, if the holders of more than 20% of the outstanding
shares of common stock issued or issuable upon conversion of our
existing series B preferred stock or series C
preferred stock or upon exercise of warrants to purchase our
common stock held by holders of our existing series B
preferred stock or series C preferred stock, request that
we file a registration statement with the SEC having an
aggregate offering price to the public (after deduction of
underwriter's discounts and expenses) of not less than
$2,000,000, we are obligated to use our commercially reasonable
efforts to cause such shares to be registered and to include in
such registration, if requested, additional shares of our common
stock requested to be included by holders of registration rights
who deliver a written notice to us within 20 days of our
receipt of notice from the initiating holders. We are only
required to effect two such registrations, and we are not
required to effect any such registration during period
commencing 90 days before a company initiated registration
and ending 90 days after a company initiated registration.
Our board of directors has the right to defer for not more than
90 days and not more than twice in any 12-month period any
such registration if in its good faith judgment such
registration would be detrimental to us and not in our best
interest.
If we are eligible to file a registration statement on
Form S-3, holders of shares having registration rights have
the right to demand on or prior to the fifth anniversary of the
effective date of this offering that we file a registration
statement on Form S-3. We are only required to effect two
such registrations in any 12-month period, and we are not
required to effect any such registration during period
commencing 90 days before a company-initiated registration
and ending 90 days after a company-initiated registration.
76
Piggy Back Registration
Rights
The holders of shares having registration rights are entitled to
unlimited "piggy-back" registration rights on all
registrations of our stock other than a registration relating
solely to employee benefit plans, a registration on
Form S-4 or any other form that does not permit secondary
sales or a registration pursuant to the demand rights described
above. Pursuant to the lock-up agreements we expect to enter
into with our directors, officers and certain stockholders, any
such person holding "piggy-back" registration rights
will waive such rights with respect to this offering.
Limitations on
Registration Rights
We and the underwriters of any underwritten offering will have
the right to limit the number of shares having registration
rights to be included in the registration statement. The
underwriters have excluded any sales by existing investors in
this offering.
Expenses of
Registration
We shall bear all registration expenses, exclusive of
underwriting discounts, selling commissions, stock transfer
taxes and fees and disbursements of counsel for the holders of
registration rights (other than customary fees of one counsel in
the case of a demand registration), of all demand and piggy-back
registrations.
Delaware Anti-Takeover Law
We are subject to the provisions of Section 203 of the
Delaware General Corporation Law, or Delaware law, regulating
corporate takeovers. In general, these provisions prohibit a
Delaware corporation from engaging in any business combination
with any interested stockholder for a period of three years
following the date that the stockholder became an interested
stockholder, unless:
•
the transaction is approved by the board of directors before the
    date the interested stockholder attained that status;
•
upon consummation of the transaction that resulted in the
    stockholder becoming an interested stockholder, the interested
    stockholder owned at least 85% of the voting stock of the
    corporation outstanding at the time the transaction commenced; or
•
on or after the date the business combination is approved by the
    board of directors and authorized at a meeting of stockholders,
    by at least two-thirds of the outstanding voting stock that is
    not owned by the interested stockholder.
Section 203 defines "business combination" to
include the following:
•
any merger or consolidation involving the corporation and the
    interested stockholder;
•
any sale, transfer, pledge or other disposition of 10% or more
    of the assets of the corporation involving the interested
    stockholder;
•
subject to certain exceptions, any transaction that results in
    the issuance or transfer by the corporation of any stock of the
    corporation to the interested stockholder;
•
any transaction involving the corporation that has the effect of
    increasing the proportionate share of the stock of any class or
    series of the corporation beneficially owned by the interested
    stockholder; or
•
the receipt by the interested stockholder of the benefit of any
    loans, advances, guarantees, pledges or other financial benefits
    provided by or through the corporation.
In general, Section 203 defines an interested stockholder
as any entity or person beneficially owning 15% or more of the
outstanding voting stock of the corporation and any entity or
person affiliated with or controlling or controlled by any of
these entities or persons.
77
A Delaware corporation may opt out of this provision either with
an express provision in its original certificate of
incorporation or in an amendment to its certificate of
incorporation or bylaws approved by its stockholders. However,
we have not opted out of this provision. The statute could
prohibit or delay mergers or other takeover or change in control
attempts and, accordingly, may discourage attempts to acquire us.
Provisions of our Certificate of Incorporation and Bylaws and
Certain Regulatory Requirements That May Have an Anti-Takeover
Effect or Entrench Current Management
Our fourth amended and restated certificate of incorporation and
third amended and restated bylaws will contain certain
provisions that are intended to enhance the likelihood of
continuity and stability in the composition of our board of
directors and the policies formulated by our board of directors.
These provisions are also expected to discourage certain types
of coercive takeover practices and inadequate takeover bids and
to encourage persons seeking to acquire control of us to first
negotiate with us. These provisions, as well as certain
provisions of contracts to which we are a party, may discourage
or hinder attempts to acquire us or remove incumbent directors
or management even if some, or a majority, of our stockholders
believe that such action is in their best interest.
Certificate of Incorporation
and Bylaws.
The provisions in our fourth amended and restated certificate of
incorporation and third amended and restated bylaws with the
intent described above include:
•
Vacancies Filled by the Board.
Vacancies on our board of
    directors may be filled by a majority of the remaining directors
    (even if they constitute less than a quorum), or by a sole
    remaining director.
•
Removal of Directors.
None of our directors may be
    removed other than for cause.
•
Stockholder Meetings.
Only our board of directors, the
    chairman of our board of directors or our chief executive
    officer may call special meetings of stockholders. Stockholders
    cannot call special meetings of stockholders.
•
No Action by Written Consent.
Stockholders may take
    action only at an annual or special meeting of stockholders.
    Stockholders may not act by written consent.
•
Requirements for Advance Notification of Stockholder
    Proposals and Director Nominations
. Stockholders must comply
    with advance notice procedures with respect to stockholder
    proposals and the nomination of candidates for election as
    directors. In general, these provisions will provide that notice
    of intent to nominate a director or raise matters at such
    meetings must be received in writing by us not less than 90 nor
    more than 120 days prior to the anniversary of the date of
    the proxy statement for the previous year's annual meeting
    of stockholders, and must contain certain information concerning
    the person to be nominated or the matters to be brought before
    the meeting and concerning the stockholder submitting the
    proposal.
•
No Cumulative Voting.
There is no cumulative voting in
    the election of directors.
•
"Blank Check" Preferred Stock
. We will be
    authorized to issue, without any further vote or action by the
    stockholders, up to 10,000,000 shares of preferred stock in one
    or more classes or series and, with respect to each such class
    or series, to fix the number of shares constituting the class or
    series and the designation of the class or series, the voting
    powers (if any) of the shares of the class or series, and the
    preferences and relative, participating, optional and other
    special rights, if any, and any qualifications, limitations or
    restrictions, of the shares of such class or series.
•
Regulatory Approval.
We are also required to obtain the
    approval of certain regulatory agencies, such as the NASD, for
    certain transactions that could result in a change of control.
    See "Our Business — Regulation."
78
Transfer Agent and Register
The transfer agent and registrar for the common stock is the
American Stock Transfer and Trust Company.
Listing
We have applied to have our common stock approved for listing,
subject to official notice of issuance, on the NASDAQ National
Market under the symbol "MELA". We have not applied to
list our common stock on any other exchange or quotation system.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for our common
stock, and a liquid trading market for our common stock may not
develop or be sustained after this offering. Future sales of
substantial amounts of our common stock, including shares issued
upon exercise of outstanding options and warrants or in the
public market after this offering, or the anticipation of those
sales, could adversely affect the price of our common stock from
time to time and could impair our ability to raise capital
through sales of our equity securities. Upon completion of this
offering, we will have outstanding an aggregate of
l
shares of common stock, after
giving effect to the issuance of
l
shares of common stock in this offering and the conversion of
all outstanding shares of our convertible preferred stock into
an aggregate of 3,398,105 shares of our common stock.
Sales of Restricted Shares
Of the shares to be outstanding after the completion of this
offering, the
l
shares sold in
this offering will be freely tradable without restriction under
the Securities Act of 1933, as amended (Securities Act) unless
purchased by our "affiliates," as that term is defined
in Rule 144 under the Securities Act. Of the remaining
l
shares of common stock,
l
are held by
"affiliates" and therefore are "restricted
securities" within the meaning of Rule 144. All of
these restricted securities and all other shares of common stock
other than those sold in this offering will be subject to the
270-day lock-up period described below. After the 270-day
lock-up period, these restricted securities may be sold in the
public market only if registered or if they qualify for an
exemption from registration under Rules 144, 144(k) or 701
promulgated under the Securities Act, which are summarized
below. Sales of the restricted securities in the public market,
or the availability of such shares for sale, could adversely
affect the market price of our common stock.
Our directors, officers and certain significant stockholders
intend to enter into lock-up agreements in connection with the
offering generally providing that they will not offer, sell,
contract to sell or grant any option to purchase or otherwise
dispose of our common stock or any securities exercisable for or
convertible into our common stock owned by them for a period of
270 days after the date of this prospectus without the
prior written consent of the underwriters, which consent may be
withheld in their sole discretion. Such shareholders may make
gifts of our common stock within the restricted period provided
the recipient agrees in advance to be bound by the lock-up
restrictions. Taking into account the lock-up agreements, and
assuming the underwriters do not release any stockholders from
these agreements, the number of restricted shares that will be
available for sale in the public market under the provisions of
Rule 144, 144(k) and 701 will be as follows:
•
beginning on the effective date of this prospectus, only the
    shares sold in the offering will be immediately available for
    sale in the public market; and
•
beginning 180 days after the effective date, approximately
l
shares of our restricted shares
    will be eligible for sale subject to the volume, manner of sale
    and other limitations under Rule 144.
•
beginning 365 days after the effective date, approximately
l
shares of our restricted shares
    will be eligible for sale subject to the volume, manner of sale
    and other limitations under Rule 144.
•
beginning 180 days after the effective date, approximately
l
shares of our restricted shares
    will be eligible for sale as unrestricted shares under
    Rule 144(k).
79
In general, under Rule 144 as currently in effect, after
the expiration of the lock-up agreements, a person who has
beneficially owned restricted securities for at least one year
would be entitled to sell within any three-month period a number
of shares that does not exceed the greater of:
•
one percent of the number of shares of common stock then
    outstanding, which will equal approximately
l
shares immediately after the
    offering; or
•
the average weekly trading volume of our common stock during the
    four calendar weeks preceding the filing of a notice on
    Form 144 with respect to that sale.
Sales under Rule 144 are also subject to requirements with
respect to manner of sale, notice and the availability of
current public information about us. Under Rule 144(k),
generally, a person who is not deemed to have been our affiliate
at any time during the three months preceding a sale and who has
beneficially owned the shares proposed to be sold for at least
two years, is entitled to sell such shares without complying
with the manner of sale, public information, volume limitation
or notice provisions of Rule 144.
Rule 701
In general, under Rule 701 of the Securities Act as
currently in effect, any of our employees, directors or
consultants who purchased shares of our common stock from us in
connection with our stock option plans before the effective date
of the registration statement of which this prospectus is a
part, or who hold stock options as of that date, may rely on the
resale provisions of Rule 701. Under Rule 701, these
persons who are not our affiliates may generally sell their
eligible securities, commencing 90 days after the effective
date of the registration statement in reliance on Rule 144,
but without compliance with some of the restrictions, including
the holding period and volume limitations contained in
Rule 144. Rule 152 under the Securities Act provides a
safe harbor for transactions not involving any public offering
even if the issuer subsequently files a registration statement.
Also, Rule 701 states that offers and sales exempt under
Rule 701 are deemed to be part of a single, discrete
offering and are not subject to integration with other offers or
sales (whether registered or not). We therefore believe that the
issuance of common stock upon the exercise of options by our
employees, directors or consultants should not be integrated
with the issuance of common stock in this offering.
Subject to the 180-day lock-up period described above, as of
l
, holders of vested options
exercisable for approximately
l
shares of our common stock will be eligible to exercise their
options and to sell their shares in accordance with
Rule 701.
Stock Options
We intend to file a registration statement under the Securities
Act covering the shares of common stock reserved for issuance
upon exercise of outstanding options under our 2005 Plan, our
2003 Plan and our 1996 Plan. The registration statement is
expected to be filed 270 days after the closing of this
offering and become effective as soon as practicable after
filing. Accordingly, shares registered under the registration
statement will be available for sale in the open market after
the effective date of the registration statement subject to
manner of sale, public information, volume limitation and notice
provisions of Rule 144 applicable to our affiliates, and
any limitations on sale under the applicable option plan and the
lock-up agreements described above. See "Risk
Factors — If there are substantial sales of our common
stock, our stock price could decline."
80
MATERIAL US FEDERAL INCOME AND
ESTATE TAX CONSIDERATIONS FOR NON-US HOLDERS
The following is a general discussion of the material US federal
income and estate tax consequences of the ownership and
disposition of our common stock by a non-US holder that
purchases shares pursuant to this offer. As used in this
discussion, the term non-US holder means a beneficial owner of
our common stock that is not, for US federal income tax purposes:
•
an individual who is a citizen or resident of the US;
•
a corporation or partnership (including any entity treated as a
    corporation or partnership for US federal income tax purposes)
    created or organized in or under the laws of the US or any State
    thereof or the District of Columbia, other than a partnership
    treated as foreign under US Treasury regulations;
•
an estate whose income is includible in gross income for US
    federal income tax purposes regardless of its source; or
•
a trust (1) if a US court is able to exercise primary
    supervision over the administration of the trust and one or more
    US persons have authority to control all substantial decisions
    of the trust, or (2) that has a valid election in effect
    under applicable Treasury regulations to be treated as a US
    person.
This discussion does not consider:
•
US federal gift tax consequences, US state or local or non-US
    tax consequences;
•
specific facts and circumstances that may be relevant to a
    particular non-US holder's tax position, including, if the
    non-US holder is a partnership or trust that the US tax
    consequences of holding and disposing of our common stock may be
    affected by certain determinations made at the partner or
    beneficiary level;
•
the tax consequences for the stockholders, partners or
    beneficiaries of a non-US holder;
•
special tax rules that may apply to particular non-US holders,
    such as financial institutions, insurance companies, tax-exempt
    organizations, hybrid entities, US expatriates, broker-dealers,
    and traders in securities; or
•
special tax rules that may apply to a non-US holder that holds
    our common stock as part of a straddle, hedge, conversion
    transaction, synthetic security or other integrated investment.
The following discussion is based on provisions of the Code,
applicable US Treasury regulations and administrative and
judicial interpretations, all as in effect on the date of this
prospectus, and all of which are subject to change,
retroactively or prospectively. The following summary assumes
that a non-US holder holds our common stock as a "capital
asset" within the meaning of section 1221 of the Code
(generally, property held for investment). Each non-US holder
should consult a tax advisor regarding the US federal, state,
local and non-US income and other tax consequences of acquiring,
holding and disposing of shares of our common stock.
Dividends
We do not plan to pay any dividends on our common stock for the
foreseeable future. However, in the event that we pay dividends
on our common stock, we will have to withhold a US federal
withholding tax at a rate of 30%, or a lower rate under an
applicable income tax treaty, from the gross amount of dividends
paid to a non-US holder.
Dividends that are effectively connected with a non-US
holder's conduct of a trade or business in the US or, if an
income tax treaty applies, attributable to a permanent
establishment in the US (effectively connected income or ECI),
are taxed on a net income basis at the regular graduated rates
and in the manner applicable to US persons. In that case, we
will not have to withhold US federal withholding tax if the
non-US holder complies with applicable certification and
disclosure requirements. In addition to the US tax on ECI, in the
81
case of a holder that is a foreign corporation and has ECI, a
branch profits tax may be imposed at a 30% rate, or a lower rate
under an applicable income tax treaty, on the dividend
equivalent amount.
In order to claim the benefit of an income tax treaty or claim
exemption from withholding because the income is effectively
connected with the conduct of a trade or business in the US, the
non-US holder must provide a properly executed Form W-8BEN,
for treaty benefits, or W-8ECI, for effectively connected
income, prior to the payment of dividends. These forms must be
periodically updated. Non-US holders should consult their tax
advisors regarding their entitlement to benefits under a
relevant income tax treaty and their ability to claim exemption
from withholding because the income is effectively connected
with the conduct of a trade or business in the US, and related
certification requirements.
A non-US holder that is eligible for a reduced rate of US
federal withholding tax under an income tax treaty may obtain a
refund or credit of any excess amounts withheld by filing an
appropriate claim for a refund with the US Internal Revenue
Service (IRS) in a timely manner.
Gain on Disposition of Common Stock
A non-US holder generally will not be taxed on gain recognized
on a disposition of our common stock unless:
•
the gain is effectively connected with a non-US holder's
    conduct of a trade or business in the US or, alternatively, if
    an income tax treaty applies, is attributable to a permanent
    establishment maintained by the non-US holder in the US; in
    these cases, the gain will be taxed on a net income basis at the
    regular graduated rates and in the manner applicable to US
    persons, unless an applicable treaty provides otherwise, and, if
    the non-US holder is a foreign corporation, the branch profits
    tax described above may also apply;
•
the non-US holder is an individual who holds our common stock as
    a capital asset, is present in the US for 183 days or more
    in the taxable year of the disposition and meets other
    requirements; in this case, the non-US holder will be subject to
    a 30% tax on the gain derived from the disposition; or
•
we are or have been a US real property holding corporation
    (USRPHC) for US federal income tax purposes at any time during
    the shorter of the five-year period ending on the date of
    disposition or the period that the non-US holder held our common
    stock; in this case, the non-US holder may be subject to US
    federal income tax on its net gain derived from the disposition
    of our common stock at regular graduated rates. Generally, a
    corporation is a USRPHC if the fair market value of its US real
    property interests equals or exceeds 50% of the sum of the fair
    market value of its worldwide real property interests plus its
    other assets used or held for use in a trade or business. If we
    are, or were to become, a USRPHC, gain realized upon disposition
    of our common stock by a non-US holder that did not directly or
    indirectly own more than 5% of our common stock during the
    shorter of the five-year period ending on the date of
    disposition or the period that the non-US holder held our common
    stock generally would not be subject to US federal income tax,
    provided that our common stock is "regularly traded on an
    established securities market" within the meaning of
    Section 897(c)(3) of the Code. We believe that we are not
    currently, and we do not anticipate becoming in the future, a
    USRPHC.
Federal Estate Tax
Common stock owned or treated as owned by an individual who is a
non-US holder at the time of death, unless an applicable estate
tax or other treaty provides otherwise, will be included in the
individual's gross estate for US federal estate tax
purposes, and therefore may be subject to US federal estate tax.
Information Reporting and Backup Withholding Tax
We must report annually to the IRS and to each non-US holder the
amount of dividends paid to that holder and the tax withheld
from those dividends. These reporting requirements apply
regardless of whether withholding was reduced or eliminated by
an applicable income tax treaty. Copies of the information
returns
82
reporting those dividends and withholding may also be made
available to the tax authorities in the country in which the
non-US holder is a resident under the provisions of an
applicable income tax treaty or agreement.
Under some circumstances, US Treasury regulations require
additional information reporting and backup withholding
(currently at a rate of 28%) on some payments on our common
stock. The gross amount of dividends paid to a non-US holder
that fails to certify its non-US holder status in accordance
with applicable US Treasury regulations generally will be
reduced by backup withholding at the applicable rate.
The payment of the proceeds of the disposition of our common
stock by a non-US holder to or through the US office of any
broker generally will be reported to the IRS and reduced by
backup withholding unless the non-US holder either certifies its
status as a non-US holder under penalties of perjury or
otherwise establishes an exemption. The payment of the proceeds
of the disposition of our common stock by a non-US holder to or
through a non-US office of a non-US broker generally will not be
reduced by backup withholding or reported to the IRS unless the
non-US broker has certain enumerated connections with the US. In
general, the payment of proceeds from the disposition of our
common stock by or through a non-US office of a broker that is a
US person or that has certain enumerated connections with the US
will be reported to the IRS and may, in limited circumstances,
be reduced by backup withholding, unless the broker receives a
statement from the non-US holder, signed under penalty of
perjury, certifying its non-US status or the broker has
documentary evidence in its files that the holder is a non-US
holder.
Non-US holders should consult their own tax advisors regarding
the application of the information reporting and backup
withholding rules to them.
Backup withholding is not an additional tax. Any amounts
withheld under the backup withholding rules from a payment to a
non-US holder will be refunded, or credited against the
holder's US federal income tax liability, if any, provided
that the required information or appropriate claim for refund is
furnished to the IRS in a timely manner.
83
UNDERWRITING
Under the terms and subject to the conditions in an underwriting
agreement
dated
l
,
2005, we have agreed to sell to the underwriters named below,
for whom Ladenburg Thalmann & Co. Inc. and Stanford
Group Company are acting as the representatives, the following
respective numbers of shares of common stock:
Underwriters
Number of Shares
l
Total
l
Subject to the terms and conditions of the underwriting
agreement, the underwriters have agreed to purchase from
us
l
shares
of our common stock at the public offering price, less the
underwriting discounts and commissions set forth on the cover
page of this prospectus. The underwriting agreement provides
that the underwriters' obligations to purchase our shares
are subject to approval of legal matters by counsel and to the
satisfaction of other conditions. The underwriters are obligated
to purchase all of the shares (other than those covered by the
over-allotment option described below) if they purchase any
shares. The underwriting agreement also provides that, if an
underwriter defaults, the purchase commitments of non-defaulting
underwriters may be increased or this offering may be terminated.
Commissions and Expenses
The underwriters propose to offer the shares to the public at
the public offering price set forth on the cover of this
prospectus. The underwriters may offer the shares to securities
dealers at the price to the public less a concession not in
excess of
$
l
per
share. Securities dealers may reallow a concession not in excess
of
$
l
per
share to other dealers. After the shares are released for sale
to the public, the underwriters may vary the offering price and
other selling terms from time to time. The underwriters will
also receive a nonaccountable expense allowance equal to 1% of
the public offering price set forth on the cover of this
prospectus for the sale of all the shares sold (excluding shares
sold pursuant to the overallotment option, if any).
The following table shows the underwriting discounts and
commissions that we are to pay to the underwriters in connection
with this offering. These amounts are shown assuming no exercise
and full exercise of the underwriters' over-allotment
option to purchase additional shares.
No Exercise
Full Exercise
Per Share
$
l
$
l
Total
$
l
$
l
We estimate that the total expenses of this offering, excluding
underwriting discounts and commissions, will be approximately
$
l
.
Warrant
We have agreed to sell to the representatives, for nominal
consideration, a warrant (Underwriters' Warrant) to
purchase up to a total
of
l
shares
of our common stock. The Underwriters' Warrant is not
exercisable during the first year after the date of this
prospectus and thereafter is exercisable at an exercise price
equal to 125% of the public offering price per share set forth
on the cover of this prospectus for a period commencing on the
first anniversary of the date of this prospectus and ending on
the fifth anniversary of the date of this prospectus. The
Underwriters' Warrant contains customary antidilution
provisions and certain demand and participatory registration
rights. The Underwriters' Warrant also includes a
"cashless" exercise provision entitling the holder to
convert the Underwriters' Warrant into shares of our common
stock. The Underwriters' Warrant may not be sold,
transferred, assigned or hypothecated for a period of one year
from the date of this prospectus, except to officers or partners
of the underwriters and members of the selling group and/or
their officers or partners.
84
Over-Allotment Option
We have granted to the underwriters an option, exercisable not
later than 45 days after the date of this prospectus, to
purchase up to an aggregate
of
l
additional
shares of common stock at the public offering price set forth on
the cover page of this prospectus less the underwriting
discounts and commissions. The underwriters may exercise this
option in whole or in part only to cover over-allotments, if
any, made in connection with the sale of shares offered hereby.
Lock-Up and Related Agreements
Except as noted below, our directors, executive officers and
principal stockholders will agree with the representatives that
for a period of 270 days following the date of this
prospectus, they will not offer, sell, assign, transfer, pledge,
contract to sell or otherwise dispose of or hedge any of our
shares of common stock or any securities convertible into or
exchangeable for shares of common stock. Such shareholders may
make gifts of our common stock within the restricted period
provided the recipient agrees in advance to be bound by the
lock-up restrictions. The representatives may, in their sole
discretion, at any time without prior notice, release all or any
portion of the shares from the restrictions in any such
agreement. We have entered into an agreement with the
representatives, stating that we will not issue additional
shares (with the exception of shares issued pursuant to the
over-allotment option) of our common stock prior to the end of
the 270 day period following the date of this prospectus,
other than with respect to our issuing shares pursuant to
employee benefit plans, qualified option plans or other employee
compensation plans already in existence, or pursuant to
currently outstanding options, warrants or other rights to
acquire shares of our common stock. There are no agreements
between the representatives and any of our directors, executive
officers or principal stockholder releasing them from these
lock-up agreements, or with us pertaining to our issuance of
additional shares, prior to the expiration of the 270 day
period.
Indemnification
We have agreed to indemnify the underwriters against certain
civil liabilities, including liabilities under the Securities
Act and liabilities arising from breaches of representations and
warranties contained in the underwriting agreement, and to
contribute to payments the underwriters may be required to make
in respect of any such liabilities.
Stabilization, Short Positions and Penalty Bids
The representatives may engage in over-allotment, stabilizing
transactions, syndicate covering transactions, and penalty bids
or purchases for the purpose of pegging, fixing or maintaining
the price of the common stock, in accordance with
Regulation M under the Securities Exchange Act of 1934:
•
Over-allotment transactions involve sales by the underwriters of
    shares in excess of the number of shares the underwriters are
    obligated to purchase, which creates a syndicate short position.
    The short position may be either a covered short position or a
    naked short position. In a covered short position, the number of
    shares over-allotted by the underwriters is not greater than the
    number of shares that they may purchase in the over-allotment
    option. In a naked short position, the number of shares involved
    is greater than the number of shares in the over-allotment
    option. The underwriters may close out any short position by
    either exercising their over-allotment option and/or purchasing
    shares in the open market.
•
Stabilizing transactions permit bids to purchase the underlying
    security so long as the stabilizing bids do not exceed a
    specific maximum.
•
Syndicate covering transactions involve purchases of the common
    stock in the open market after the distribution has been
    completed in order to cover syndicate short positions. In
    determining the source of shares to close out the short
    position, the underwriters will consider, among other things,
    the price of shares available for purchase in the open market as
    compared to the price at which they may purchase shares through
    the over-allotment option. If the underwriters sell more shares
    than could be
85
covered by the over-allotment option, a naked short position,
    the position can only be closed out by buying shares in the open
    market. A naked short position is more likely to be created if
    the underwriters are concerned that there could be downward
    pressure on the price of the shares in the open market after
    pricing that could adversely affect investors who purchase in
    the offering.
•
Penalty bids permit the representatives to reclaim a selling
    concession from a syndicate member when the common stock
    originally sold by the syndicate member is purchased in a
    stabilizing or syndicate covering transaction to cover syndicate
    short positions.
These stabilizing transactions, syndicate covering transactions
and penalty bids may have the effect of raising or maintaining
the market price of our common stock or preventing or retarding
a decline in the market price of our common stock. As a result,
the price of our common stock may be higher than the price that
might otherwise exist in the open market. These transactions may
be effected on the NASDAQ National Market or otherwise and, if
commenced, may be discontinued at any time. Neither we nor any
of the underwriters make any representation or prediction as to
the direction or magnitude of any effect that the transactions
described above may have on the price of our common stock. In
addition, neither we nor any of the underwriters make any
representation that the representatives will engage in these
stabilizing transactions or that any transaction, once
commenced, will not be discontinued without notice.
Offering Price Determination
Prior to this offering, there has been no market for our common
stock. The public offering price has been, due to our lack of
operating history, arbitrarily determined by negotiations
between us and the representatives, bears no relationship to our
earnings, book value, net worth or other financial criteria of
value and may not be indicative of the market price for the
common stock after this offering. After completion of this
offering, the market price of the common stock will be subject
to change as a result of market conditions and other factors.
Discretionary Accounts
The representatives of the underwriters have advised us that
they do not intend to confirm sales of the shares to
discretionary accounts.
LEGAL MATTERS
The validity of the common stock being offered hereby is being
passed upon for us by Dreier LLP. We have received certain
advice from our legal counsel in connection with the matters
described herein. Such legal advice is solely for our benefit
and not for any stockholder or prospective investor. Purchasers
of common stock offered hereby are not entitled to rely on any
such advice and should not consider any such counsel to
represent them or their interests. Certain legal matters
relating to the offering will be passed upon for the
underwriters by Greenberg Traurig, LLP, New York, New York.
Prospective investors should consult with their own legal and
other counsel.
EXPERTS
The financial statements of Electro-Optical Sciences, Inc. as of
December 31, 2003 and 2004, and for each of the three years
in the period ended December 31, 2004, as set forth in
their report, have been included herein and in the Registration
Statement in reliance upon the report of Eisner LLP, independent
registered public accounting firm, appearing elsewhere herein,
and upon the authority of said firm as experts in accounting and
auditing.
86
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on
Form S-1 under the Securities Act with respect to the
shares of common stock we are offering to sell. This prospectus,
which constitutes part of the registration statement, does not
include all of the information contained in the registration
statement. You should refer to the registration statement and
its exhibits for additional information. Whenever we make
reference in this prospectus to any of our contracts, agreements
or other documents, the references are not necessarily complete
and you should refer to the exhibits attached to the
registration statement for copies of the actual contract,
agreement or other document. When we complete this offering, we
will also be required to file annual, quarterly and special
reports, proxy statements and other information with the SEC. We
anticipate making these documents publicly available, free of
charge, on our website at www.eo-sciences.com as soon as
reasonably practicable after filing such documents with the
Securities and Exchange Commission.
You can read the registration statement and our future filings
with the SEC, over the internet at the SEC's website at
http://www.sec.gov. You may also read and copy any document that
we file with the Securities and Exchange Commission at its
public reference room at 450 Fifth Street, N.W.,
Washington, DC 20549.
You may also obtain copies of the documents at prescribed rates
by writing to the Public Reference Section of the SEC at 450
Fifth Street, NW, Washington, DC 20549. Please call the SEC
at 1-800-SEC-0330 for further information on the operation of
the public reference room.
87
ELECTRO-OPTICAL SCIENCES, INC.
CONTENTS
Financial Statements:
Report of Independent Registered Public Accounting Firm
F-2
Balance sheets as of December 31, 2004 and 2003 and
    March 31, 2005 (unaudited)
F-3
Statements of operations for the years ended December 31,
    2004, 2003 and 2002 and three months ended March 31, 2005
    and 2004 (unaudited)
F-4
Statements of changes in stockholders' (deficiency) equity
    for the years ended December 31, 2004, 2003 and 2002 and
    three months ended March 31, 2005 (unaudited)
F-5
Statements of cash flows for the years ended December 31,
    2004, 2003 and 2002 and three months ended March 31, 2005
    and 2004 (unaudited)
F-6
Notes to financial statements
F-7
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Electro-Optical Sciences, Inc.
The following report is in the form that will be signed upon the
effectiveness of the one-for-two reverse common stock split
described in Note 1 to the financial statements.
/s/ Eisner LLP
New York, New York
June 3, 2005
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Electro-Optical Sciences, Inc.
We have audited the accompanying balance sheets of
Electro-Optical Sciences, Inc. (the "Company") as of
December 31, 2004 and 2003, and the related statements of
operations, stockholders' (deficiency) equity and cash
flows for each of the years in the three year period ended
December 31, 2004. These financial statements are the
responsibility of the Company's management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of Electro-Optical Sciences, Inc. as of December 31, 2004
and 2003, and the results of its operations and its cash flows
for each of the years in the three year period ended
December 31, 2004, in conformity with accounting principles
generally accepted in the United States of America.
Eisner LLP
New York, New York
May 31, 2005
F-2
ELECTRO-OPTICAL SCIENCES, INC.
BALANCE SHEETS
Pro-Forma
March 31,
December
December
March 31,
2005
31,
31,
2005
2003
2004
(audited)
(audited)
(unaudited)
(unaudited)
(Note 1)
ASSETS
Current Assets:
Cash and cash equivalents
$
116,691
$
108,705
$
190,818
$
190,818
Marketable securities
—
6,594,751
5,108,796
5,108,796
Accounts receivable, net
16,679
7,128
7,075
7,075
Inventories
72,865
69,755
82,756
82,756
Prepaid expenses and other current assets
10,697
32,844
23,263
23,263
Total Current Assets
216,932
6,813,183
5,412,708
5,412,708
Property and equipment, net
18,418
89,306
130,671
130,671
Patents and trademarks, net
178,157
163,459
160,817
160,817
Other assets
18,248
30,201
30,201
30,201
Total Assets
$
431,755
$
7,096,149
$
5,734,397
$
5,734,397
LIABILITIES AND STOCKHOLDERS' (DEFICIENCY) EQUITY
Current Liabilities:
Accounts payable
$
211,810
$
338,821
$
150,385
$
150,385
Accrued expenses
363,270
228,583
324,984
324,984
Deferred revenues
—
106,335
—
Notes payable — stockholders
48,000
—
Notes payable — other
15,000
—
Other current liabilities
11,976
17,284
17,898
17,898
Total Current Liabilities
650,056
691,023
493,267
493,267
REDEEMABLE CONVERTIBLE PREFERRED STOCK
Redeemable Preferred Stock Series B Convertible 992,986
    shares designated (liquidation preference $2.26 per share);
    issued and outstanding 992,986 shares at December 31, 2003
    and 2004 and March 31, 2005 and 0 shares at
    March 31,2005, pro forma
2,244,147
2,244,147
2,244,147
—
Redeemable Preferred Stock Series C Convertible 5,744,340
    shares designated (liquidation preference $2.26 per share);
    issued and outstanding 907,077 shares at December 31, 2003
    and 5,414,779 shares at December 31, 2004 and
    March 31, 2005 and 0 shares at March 31, 2005, pro
    forma
1,822,950
6,340,666
6,761,796
—
COMMITMENTS AND CONTINGENCIES
Stockholders' (Deficiency) Equity:
Preferred stock — $.10 par value; authorized
    16,936,704 shares:
Series A Convertible Preferred Stock, 199,380 shares
    designated - (liquidation preference $5.00 per share); issued
    and outstanding 198,000 shares at December 31, 2003 and
    2004 and March 31, 2005 and 0 shares at March 31,
    2005, pro forma
972,311
972,311
972,311
—
Common stock — $.001 par value; authorized 30,000,000
    shares; issued and outstanding 1,684,760 shares at
    December 31, 2003 and 1,809,758 shares at December 31,
    2004 and March 31, 2005 and 6,513,164 shares at
    March 31, 2005, pro forma
1,685
1,810
1,810
6,513
Additional paid-in capital
5,119,923
10,981,455
10,631,125
20,604,676
Notes receivable
(69,000
)
(69,000
)
(69,000
)
(69,000
)
Deferred compensation
(22,500
)
(159,300
)
(151,335
)
(151,335
)
Accumulated deficit
(10,287,817
)
(13,906,963
)
(15,149,724
)
(15,149,724
)
Stockholders' (Deficiency) Equity
(4,285,398
)
(2,179,687
)
(3,764,813
)
5,241,130
Total Liabilities and Stockholders' (Deficiency)
    Equity
$
431,755
$
7,096,149
$
5,734,397
$
5,734,397
See accompanying notes to the financial statements
F-3
ELECTRO-OPTICAL SCIENCES, INC.
STATEMENTS OF OPERATIONS
Year Ended
Three Months Ended
December 31,
December 31,
December 31,
March 31,
March 31,
2002
2003
2004
2004
2005
(audited)
(audited)
(audited)
(unaudited)
(unaudited)
Revenue from Difoti® sales, net (Note 10)
$
142,559
$
375,490
$
364,066
$
91,549
$
87,589
Revenue from grants
547,290
—
—
—
—
Total revenue
689,849
375,490
364,066
91,549
87,589
Cost of sales
649,620
83,044
166,468
20,159
8,255
Gross profit
40,229
292,446
197,598
71,390
79,334
Selling, general and administrative expenses
769,021
1,338,760
1,858,152
532,732
712,088
Research and development
404,331
828,239
1,891,551
307,690
636,267
Loss from operations
(1,133,123
)
(1,874,553
)
(3,552,105
)
(769,032
)
(1,269,021
)
Interest income
(2,189
)
(1,373
)
(27,935
)
(178
)
(26,260
)
Interest expense
10,117
76,923
94,976
1,170
—
7,928
75,550
67,041
992
(26,260
)
Net loss
(1,141,051
)
(1,950,103
)
(3,619,146
)
(770,024
)
(1,242,761
)
Less:
Preferred stock deemed dividends
214,245
321,830
676,218
110,704
362,039
Preferred stock accretion
180,009
25,228
322,800
6,934
421,130
Stock distribution of Preferred Series B shares
101,700
Net Loss Attributable to Common Stockholders
$
(1,535,305
)
$
(2,398,861
)
$
(4,618,164
)
$
(887,662
)
$
(2,025,930
)
Basic and diluted net loss per common share
$
(1.00
)
$
(1.49
)
$
(2.61
)
$
(0.53
)
$
(1.12
)
Basic and diluted weighted average number of shares outstanding
1,534,760
1,614,897
1,766,608
1,684,760
1,809,758
Pro forma basic and diluted net loss per common share (unaudited)
(0.91
)
(0.19
)
Pro forma basic and diluted weighted average number of common
    shares outstanding (unaudited)
3,967,024
6,513,164
See accompanying notes to financial statements
F-4
ELECTRO-OPTICAL SCIENCES, INC.
STATEMENT OF STOCKHOLDERS' (DEFICIENCY) EQUITY
Years ended December 31, 2002, 2003 and 2004, and the
three months ended March 31, 2005
Convertible
Preferred Stock
Series A
Common Stock
Additional
Total
Paid-in
Notes
Deferred
Accumulated
Stockholders'
Shares
Amount
Shares
Amount
Capital
Receivable
Compensation
Deficit
(Deficiency)
Balance at January 1, 2002
198,000
$
972,311
1,534,760
$
1,535
$
2,932,174
$
(117,000
)
$
(7,196,663
)
$
(3,407,643
)
Amortization of deferred compensation
72,000
72,000
Net loss
(1,141,051
)
(1,141,051
)
Preferred stock accretion
(180,009
)
(180,009
)
Balance at December 31, 2002
198,000
$
972,311
1,534,760
$
1,535
$
2,752,165
$
(45,000
)
$
(8,337,714
)
$
(4,656,703
Preferred stock accretion
(25,228
)
(25,228
)
Amortization of deferred compensation
22,500
22,500
Issuance of common stock in exchange for notes receivable
150,000
150
68,850
(69,000
)
—
Adjustment for reduction to liquidation value of Series B
    preferred stock
2,125,600
2,125,600
Stock distribution of preferred Series B shares
101,700
101,700
Common stock options issued for consulting fees
96,836
96,836
Net loss
(1,950,103
)
(1,950,103
)
Balance at December 31, 2003
198,000
$
972,311
1,684,760
$
1,685
$
5,119,923
$
(69,000
)
$
(22,500
)
$
(10,287,817
)
$
(4,285,398
)
Sale of common stock
124,998
125
137,375
137,500
Deferred compensation-stock option awards to employees
159,300
(159,300
)
—
Issuance of option to non-employee directors
150,450
150,450
Preferred stock accretion
(322,800
)
(322,800
)
Warrants issued in connection with preferred Series C stock
3,158,948
3,158,948
Beneficial conversion in connection with preferred Series C
    stock
2,385,063
2,385,063
Issuance of options to consultants
72,800
72,800
Issuance of warrants to consultant
120,396
120,396
Amortization of deferred compensation
22,500
22,500
Net loss
(3,619,146
)
(3,619,146
)
Balance at December 31, 2004
198,000
$
972,311
1,809,758
$
1,810
$
10,981,455
$
(69,000
)
$
(159,300
)
$
(13,906,963
)
$
(2,179,687
)
Preferred stock accretion
(421,130
)
(421,130
)
Issuance of options for employee compensation
70,800
70,800
Amortization of deferred compensation
7,965
7,965
Net loss
(1,242,761
)
(1,242,761
)
Balance at March 31, 2005 (unaudited)
198,000
$
972,311
1,809,758
$
1,810
$
10,631,125
$
(69,000
)
$
(151,335
)
$
(15,149,724
)
$
(3,764,813
)
See accompanying notes to the financial statements
F-5
ELECTRO-OPTICAL SCIENCES, INC.
STATEMENTS OF CASH FLOWS
Year Ended
Three Months Ended
December 31,
December 31,
December 31,
March 31,
March 31,
2002
2003
2004
2004
2005
(audited)
(audited)
(audited)
(unaudited)
(unaudited)
Cash flows from operating activities:
Net loss
$
(1,141,051
)
$
(1,950,103
)
$
(3,619,146
)
$
(770,024
)
$
(1,242,761
)
Adjustments to reconcile net loss to net cash used in operating
    activities:
Allowance for doubtful accounts
—
(13,288
)
(9,000
)
—
Depreciation and amortization
33,329
30,987
35,860
7,286
13,212
Noncash compensation and amortization of deferred compensation
72,000
22,500
172,950
—
78,765
Common stock options and warrant issued for consulting fees
—
96,836
193,196
—
—
Amortization of discount on marketable securities
—
—
(10,001
)
—
(30,072
)
Accrued interest receivable
—
(1,056
)
(15,293
)
(6,189
)
Accrued interest payable
—
8,985
—
1,170
—
Interest expense attributable to preferred Series C
45,000
Interest expense from bridge loan
80,000
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable
(3,326
)
53,585
20,662
(31,249
)
53
Decrease (increase) in inventories
67,279
(39,296
)
3,110
(31,287
)
(13,001
)
Decrease (increase) in prepaid expenses and other current
    assets
6,060
(2,408
)
(20,918
)
2,399
15,770
Increase (decrease) in accounts payable and accrued expenses
237,660
128,429
(7,676
)
(38,336
)
(92,035
)
(Decrease) increase in deferred revenues
—
(57,300
)
106,335
10,000
(106,335
)
Increase (decrease) in other current liabilities
44,373
(21,879
)
5,308
(11,976
)
614
Net cash used in operating activities
(683,676
)
(1,699,008
)
(3,064,613
)
(862,017
)
(1,381,979
)
Cash flows from investing activities:
Patent costs
—
(5,986
)
(3,166
)
(2,165
)
(1,831
)
Purchases of property and equipment
—
(2,432
)
(88,884
)
(5,244
)
(50,104
)
Redemption (purchase) of marketable securities
518,050
—
(6,584,750
)
—
1,516,027
Net cash provided by (used in) investing activities
518,050
(8,418
)
(6,676,800
)
(7,409
)
1,464,092
Cash flows from financing activities:
Proceeds from issuance of Series C preferred stock
—
1,500,000
9,171,480
1,100,000
—
Expenses related to Series C preferred stock offering
—
(252,278
)
(447,553
)
—
—
Proceeds from (repayment of) notes payable to stockholders
—
48,000
(48,000
)
—
—
Proceeds from issuance of notes payable
—
520,000
920,000
—
—
Proceeds from sale of common stock
—
—
137,500
—
—
Net cash provided by financing activities
-
1,815,722
9,733,427
1,100,000
—
Net (decrease) increase in cash and cash equivalents
(165,626
)
108,296
(7,986
)
230,574
82,113
Cash and cash equivalents at beginning of period
174,021
8,395
116,691
116,691
108,705
Cash and cash equivalents at end of period
$
8,395
$
116,691
$
108,705
$
347,265
$
190,818
Supplemental Cash Flow Information:
Cash paid for interest
$
—
$
24,378
$
14,976
$
—
$
—
Supplemental Schedule of Noncash Financing Activities:
Notes payable exchanged for Series C preferred stock
$
—
$
505,000
$
1,015,000
$
—
$
—
Notes receivable in exchange for common stock
$
—
$
69,000
$
—
$
—
$
—
Preferred stock accretion
$
180,009
$
25,228
$
322,800
$
6,934
$
421,130
Reduction to liquidation value Series B
$
2,125,600
Beneficial conversion issued in connection with Series C
$
2,385,063
Fair value of warrants issued in connection with Series C
    preferred stock
$
3,158,948
See accompanying notes to financial statements
F-6
ELECTRO-OPTICAL SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS
(In thousands, except for share and per share date)
(Information for the three months ended March 31, 2005
and 2004 is unaudited)
1.
PRINCIPAL BUSINESS ACTIVITIES AND SUMMARY OF SIGNIFICANT
    ACCOUNTING POLICIES:
Organization and Business
Electro-Optical Sciences, Inc., a Delaware corporation (the
"Company") is focused on the design and development of
a non-invasive, point-of-care instrument for assisting in the
early diagnosis of melanoma. The Company has entered into a
Protocol Agreement with the Food and Drug Administration
(FDA) which is an agreement for the conduct of the pivotal
trial and to establish the safety and effectiveness of the
MelaFind® device. Upon obtaining premarket approval, or
PMA, from the FDA, the Company plans to launch MelaFind® in
the United States.
The Company discontinued all operations associated with its
DIFOTI® product effective as of April 5, 2005, in
order to focus its resources on the development and
commercialization of MelaFind®. The Company is currently
seeking a buyer for the DIFOTI® assets, and does not expect
to have any significant continuing responsibility for the
DIFOTI® business after the sale of the DIFOTI® assets.
Pro Forma Balance Sheet
The accompanying balance sheet as of March 31, 2005, and
the statements of operations, stockholders' equity
(deficiency) and cash flows for the three months ended
March 31, 2005 and 2004 are unaudited. The unaudited
interim financial statements have been prepared on the same
basis as the annual financial statements and, in the opinion of
management, reflect all adjustments, which include only normal
recurring adjustments necessary to present fairly the
Company's financial position and results of operations and
cash flows for the three months ended March 31, 2005 and
2004. The financial data and other information disclosed in
these notes to financial statements related to the three month
periods are unaudited. The results for the three months ended
March 31, 2005 are not necessarily indicative of the
results to be expected for the year ending December 31,
2005.
The Pro Forma Balance Sheet gives effect as of March 31,
2005 to the conversion of all of the Company's outstanding
preferred stock into 3,398,105 shares of common stock which will
occur upon the closing of the proposed initial public offering.
Upon such conversion, the deemed dividends on the convertible
preferred stock will be forfeited. Additionally, it is assumed
for pro forma purposes that 2,610,643 of the Company's
warrants to purchase the Company's common stock will be
exchanged for a total of 1,305,321 shares of the Company's
common stock based on an exchange ratio of one share of the
Company's common stock for every two shares of the
Company's common stock purchaseable under the warrants and
will occur prior to the closing of the proposed initial public
offering.
Reverse Stock Split
The Board of Directors approved on May 13, 2005, a
one-for-two reverse common stock split, which will become
effective upon the earlier of the conversion of the preferred
stock or September 30, 2005. All references to common
stock, common shares outstanding, average number of common
shares outstanding, per share amounts, common stock options and
warrants in these financial statements and notes to financial
statements have been restated to reflect the one-for- two common
stock reverse split on a retroactive basis.
Cash and Cash Equivalents
The Company maintains cash in bank deposit accounts which, at
times, may exceed federally insured limits. The Company has not
experienced any losses on these accounts. Cash equivalents
include all highly-liquid debt instruments with an original
maturity of three months or less at the date of acquisition.
F-7
ELECTRO-OPTICAL SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
Accounts Receivable
Accounts receivable are reported at their outstanding unpaid
principal balances reduced by an allowance for doubtful
accounts. The Company estimates doubtful accounts based on
historical bad debts, factors related to specific
customers' ability to pay and current economic trends. The
Company writes off accounts receivable against the allowance
when a balance is determined to be uncollectible.
Inventories
Inventories, which consist primarily of DIFOTI® supplies,
are stated at the lower of cost, determined by the first-in,
first-out method, or market.
Property and Equipment
Depreciation of property and equipment is provided for by the
straight-line method over the estimated useful lives of the
related assets. Leasehold improvements are amortized over the
lesser of the assets' useful lives or the remaining term of
the lease.
Patents
Patents are carried at cost less accumulated amortization which
is calculated on a straight-line basis over a period of
15 years.
Revenue Recognition
Revenue from DIFOTI® product sales is recognized at the
time of delivery and acceptance, and after consideration of all
the terms and conditions of the customer contract. Certain of
the Company's products which were being sold prior to
December 31, 2004 included a 30-day return policy. Revenue
on these products is recognized after the shipment is made and
the 30-day return period has elapsed. Effective January 1, 2005
all products are sold without a right of return and revenue is
therefore recognized after the shipment is made. Deferred
revenues at December 31, 2004 consist of revenues that were
billed and paid in advance of the shipment of the product.
During April 2005, the Company discontinued the sale of the
DIFOTI® product line.
The Company has not received FDA approval for the sale of
MelaFind® or any other product line, and has had no
revenues from products other than DIFOTI®.
Grant revenue generated in 2002 represents federal grants
received by the Company in conjunction with an undertaking to
perform certain research. Cost of sales for the year ended
December 31, 2002 includes expenses attributable to the
grant revenue, principally payroll and related costs amounting
to $564.
Warranty Costs
The Company generally warrants its products for one year after
sale. Warranty costs have been de minimus to the Company and are
recorded when incurred.
Shipping Costs
Shipping costs are included in selling, general and
administrative expenses and amounted to approximately $18, $24
and $28 for the years ended December 31, 2002, 2003 and
2004, respectively, and $7 and $9 for the three months ended
March 31, 2004 and 2005, respectively.
F-8
ELECTRO-OPTICAL SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
Income Taxes
Deferred tax assets and liabilities are recognized for the
estimated future tax consequences attributable to differences
between the amounts of existing assets and liabilities carried
on the financial statements and their respective tax bases and
the benefits arising from the realization of operating loss and
tax credit carryforwards. Deferred tax assets and liabilities
are measured using tax rates in effect for the year in which
those temporary differences are expected to be recovered or
settled. A valuation allowance is established when necessary to
reduce deferred tax assets to the amount expected to be realized.
Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires the use of estimates and assumptions by
management that affect reported amounts of assets and
liabilities and disclosures 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.
Long-lived Assets
The Company reviews long-lived assets for impairment annually
whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. An asset is
considered to be impaired when the sum of the undiscounted
future net cash flows expected to result from the use of the
asset and its eventual disposition exceeds its carrying amount.
The amount of impairment loss, if any, is measured as the
difference between the net book value of the asset and its
estimated fair value.
Advertising Costs
Costs incurred for producing and communicating advertising are
expensed as incurred and are included in selling, general and
administrative expenses in the accompanying statements of
operations. Advertising expenses were approximately $0, $3 and
$57 for the years ended December 31, 2002, 2003 and 2004,
respectively, and $0 and $15 for the three months ended
March 31, 2004 and 2005, respectively.
Research and Development
Research and development costs are expensed as incurred.
Stock-Based Compensation
The Company applies the intrinsic-value method of accounting
prescribed by the Accounting Principles Board (APB) Opinion
No. 25 and related interpretations to account for the
Company's fixed-plan employee stock options. Under this
method, compensation expense is recorded on the date of grant
only if the then current market price of the underlying stock
exceeded the exercise price. Statement of Financial Accounting
Standards (SFAS) No. 123, Accounting for Stock-Based
Compensation, as amended by SFAS No. 148,
Accounting for Stock-Based Compensation, Transition and
Disclosure,
established accounting and disclosure
requirements using a fair-value based method of accounting for
stock-based employee compensation plans. As allowed by
SFAS No. 123 and No. 148, the Company has elected
to continue to apply the intrinsic-value based method of
accounting for employee stock options described above, and has
adopted only the disclosure requirements of
SFAS No. 123. Had the Company elected to recognize
compensation cost based on the fair
F-9
ELECTRO-OPTICAL SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
value of the options granted at the grant date, as prescribed by
SFAS No. 123, the Company's net loss and net loss
per share would have been adjusted to the pro forma amounts
indicated below:
December 31,
March 31,
2002
2003
2004
2004
2005
Net loss attributable to common stockholders, as reported
$
(1,535
)
$
(2,399
)
$
(4,618
)
$
(888
)
$
(2,026
)
Add: stock-based employee compensation included in reported net
    loss, net of income tax effect
72
23
173
6
79
Deduct: stock-based employee compensation expense determined
    under fair-value-based method, net of related tax effect
(75
)
(65
)
(186
)
(8
)
(82
)
Pro Forma Net Loss
$
(1,538
)
$
(2,441
)
$
(4,631
)
$
(890
)
$
(2,029
)
Basic and Diluted Loss per Share, as reported
$
(1.00
)
$
(1.49
)
$
(2.61
)
$
(0.53
)
$
(1.12
)
Basic and Diluted Loss per Share, pro forma
$
(1.00
)
$
(1.51
)
$
(2.62
)
$
(0.53
)
$
(1.12
)
The per share weighted-average fair value of stock options
granted during 2002, 2003 and 2004 was $.26, $.34, and $3.00,
respectively, on the dates of grant using the Black-Scholes
option-pricing model.
During the three months ended March 31, 2005, the Company
did not grant any stock options. The per share weighted average
fair value of stock options granted during the three months
ended March 31, 2004 was determined using the Black-Scholes
option pricing model resulting in a weighted average fair value
of $0.23 per share. The following weighted-average assumptions
were used:
December 31,
March 31,
2002
2003
2004
2004
2005
Expected volatility
1
%
1%
60%
60%
—
Risk-free interest rate
4.52
%
4.52%
3.17%
3.39%
to
to
to
5.43
%
5.43%
3.94%
Expected option life (in years)
10
10
5
5
Expected dividend yield
0
%
0%
0%
0%
Options or warrants issued to non-employees for services are
recorded at fair value and accounted for in accordance with
Emerging Issues Task Force (EITF) Issue No. 96-18,
Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services.
For equity instruments that are not
immediately vested, compensation cost is measured on the date
such instruments vest or a performance commitment, as defined in
EITF Issue 96-18, is reached. The costs are classified in
the accompanying statements of operations based on the nature of
the services performed.
Deferred Compensation
Deferred compensation attributable to unvested common stock
options is measured at the measurement date for the respective
grants, and reflected as a deduction from stockholders'
equity. Compensation expense is recognized ratably over the
vesting period.
F-10
ELECTRO-OPTICAL SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
Financial Instruments
The Company's financial instruments consist principally of
cash and cash equivalents, marketable securities, accounts
receivable and accounts payable. The Company believes the
financial instruments' recorded values approximate current
values because of their nature and respective durations. The
Company maintains cash in bank deposit accounts, which, at
times, may exceed federally insured limits. The Company has not
experienced any losses on these accounts.
Net Loss per Common Share
Net loss per share is presented in accordance with the
provisions of SFAS No. 128, "Earnings Per
Share" ("EPS"). Basic EPS excludes dilution for
potentially dilutive securities and is computed by dividing net
loss attributable to common stockholders by the weighted average
number of common shares outstanding during the period. Diluted
EPS gives effect to dilutive options, warrants and other
potential common shares outstanding during the period. Diluted
net loss per common share is equal to basic net loss per common
share since all potentially dilutive securities are
anti-dilutive for each of the periods presented. Diluted net
loss per common share for the years ended December 31,
2002, 2003 and 2004 does not include the effects of options to
purchase 142,581, 290,678 and 965,203 shares of common stock,
respectively, and 412,182 and 954,266 shares for the three
months ended March 31, 2004 and 2005 respectively; 690,
369,993 and 2,758,923 common stock warrants for the years ended
December 31, 2002, 2003 and 2004, respectively, and 613,356
and 2,758,923 common stock warrants for the three months ended
March 31, 2004 and 2005, respectively.
The pro forma basic and diluted net loss per common share for
the year ended December 31, 2004 and for the three months
ended March 31, 2005 gives effect to the conversion of the
existing shares of preferred stock into 3,398,105 shares of
common stock at the conversion ratios which would apply upon
consummation of the proposed initial public offering and the
exchange of 2,610,643 warrants for 1,305,321 shares of common
stock as described in Note 9. In addition, the net loss
attributable to the Company's common stockholders used in
the computation of basic and diluted net loss per share for the
unaudited pro forma net loss attributable to the Company's
common stockholders has been adjusted to reverse the accretion
on the Company's preferred stock and also excludes the
preferred stock dividends for the respective periods.
Recently Issued Pronouncements
In December 2004, the Financial Accounting Standards Board
(FASB) issued the revised SFAS No. 123,
Share-Based Payment ("SFAS 123R"), which
addresses the accounting for share-based payment transactions in
which the Company obtains employee services in exchange for
(a) equity instruments of the Company or
(b) liabilities that are based on the fair value of the
Company's equity instruments or that may be settled by the
issuance of such equity instruments. SFAS 123R eliminates
the ability to account for employee share-based payment
transactions using APB No. 25 and requires instead that such
transactions be accounted for using the grant-date fair value
based method. SFAS 123R will be effective as of the
beginning of the first interim or annual reporting period that
begins after December 15, 2005 (January 1, 2006 for
the Company) and applies to all awards granted or modified after
the effective date. In addition, compensation cost for the
unvested portion of previously granted awards that remain
outstanding on the effective date shall be recognized on or
after the effective date, as the related services are rendered,
based on the awards' grant-date fair value as previously
calculated for the pro-forma disclosure under SFAS 123. The
Company expects that upon the adoption of SFAS 123R it will
apply the modified prospective application transition method, as
permitted by the statement. Under such transition method, upon
the adoption of SFAS 123R, the Company's financial
statements for periods prior to the effective date of the
statement will not be restated. The impact of this statement on
the Company's financial statements or its results of
operations in 2005 and beyond will depend upon various factors,
among them, its future compensation strategy. The Company
F-11
ELECTRO-OPTICAL SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
expects that the effect of applying this statement on its
results of operations in 2005 as it relates to existing option
plans would not be materially different from the SFAS 123
pro forma effect previously reported.
In March 2004, the FASB issued EITF Issue No. 03-1,
"The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments," which provides new
guidance for assessing impairment losses on debt and equity
investments. Additionally, EITF Issue No. 03-1 includes new
disclosure requirements for investments that are deemed to be
temporarily impaired. In September 2004, the FASB delayed the
accounting provisions of EITF Issue No. 03-1; however, the
disclosure requirements remain effective and have been adopted
by the Company in the financial statements. The Company will
evaluate the effect, if any, of EITF Issue No. 03-1 when
final guidance is released.
2.     MARKETABLE SECURITIES:
Marketable securities consist of debt securities that the
Company has the intent and ability to hold to maturity. The
Company classifies the marketable securities as held-to maturity
in accordance with SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities".
Held-to-maturity securities are recorded at amortized cost. The
Company's investments mature within one year. Investments
in securities are summarized as follows at December 31,
2004 and March 31, 2005:
December 31, 2004
March 31, 2005
Gross
Gross
Unrealized
Fair
Amortized
Unrealized
Fair
Amortized
Loss
Value
Cost
Loss
Value
Cost
Corporate commercial paper
$
(—
)
$
2,500
$
2,500
$
(—
)
$
1,000
$
1,000
Corporate debt
(10
)
2,497
2,507
(8
)
2,511
2,519
United States Treasury note
(8
)
1,580
1,588
(10
)
1,580
1,590
$
(18
)
$
6,577
$
6,595
$
(18
)
$
5,091
$
5,109
3.     PROPERTY AND EQUIPMENT:
Property and equipment, at cost, consists of the following:
December 31,
March 31,
Estimated
2003
2004
2005
Useful Life
Leasehold improvements
$
23
$
32
$
35
5-10 years
Laboratory and research equipment
61
119
119
5 years
Office furniture and equipment
112
134
158
5 years
197
286
312
Less accumulated depreciation and amortization
179
197
182
$
18
89
$
130
Depreciation expense amounted to approximately $16, $15 and $18,
for the years ended December 31, 2002, 2003 and 2004,
respectively and $3 and $9 for the three months ended
March 31, 2004 and 2005 respectively.
4.     PATENTS:
Patents are shown in the accompanying balance sheets net of
accumulated amortization of $83 and $101 at December 31,
2003 and 2004, respectively, and $105 at March 31, 2005.
Amortization expense related to
F-12
ELECTRO-OPTICAL SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
the patents was approximately $17, $17 and $18 for the years
ended December 31, 2002, 2003 and 2004, respectively, and
$4 and $4 for the three months ended March 31, 2004 and
2005, respectively.
The estimated future amortization expense related to the patents
is as follows:
Year ended December 31,
2005
$
18
2006
18
2007
18
2008
18
2009
18
Thereafter
73
$
163
5.     NOTES
PAYABLE-STOCKHOLDERS:
During 2003, the Company had notes payable to two of its
stockholders totaling $48. These notes were payable in October
2004, bore interest at 6%, and were repaid during 2004. Interest
expense amounted to approximately $1 and $2 for the years ended
December 31, 2003 and 2004, respectively.
In addition, the Company had a demand note payable to one of its
stockholders in the amount of $15 with interest accruing at 12%
per annum. During October 2004, the note and accrued interest of
$1 were converted into 6,999 shares of Series C preferred
stock.
6.     COMMITMENTS AND
CONTINGENCIES:
The Company is obligated under two non cancelable operating
    leases for office space expiring June 2005 and November 2010.
    The leases are subject to escalations for increases in operating
    expenses. The approximate aggregate minimum future payments
    under these leases are due as follows:
Year ended December 31,
2005
$
155
2006
102
2007
108
2008
109
2009
115
Thereafter
105
$
694
Rent expense charged to operations amounted to approximately
$88, $113 and $110 for the years ended December 31, 2002,
2003 and 2004, respectively, and $27 and $25 for the three
months ended March 31, 2004 and 2005, respectively.
During January 2004, the Company entered into an employment
agreement with its President and CEO through December 31,
2005, which provides for a base salary of $175, stock options
and performance bonuses. The agreement provides for automatic
one year renewal terms.
During January 2004 the Company amended its employment agreement
with its former president, who now holds the title of Chief
Science and Technology Officer. The agreement was originally
entered into in May 2003 with a three-year term. The agreement
now includes a salary of $175 and provides for stock
F-13
ELECTRO-OPTICAL SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
options and performance bonuses. As of May 31, 2005 this
former employee is now a consultant to the Company.
The Company had been involved in various claims and legal
actions arising in the ordinary course of business. The ultimate
outcome of these matters did not have a material adverse impact
on the financial position of the Company or the results of its
operations.
7.     EMPLOYEE BENEFIT PLAN:
The Company has a defined contribution plan under
Section 401(k) of the Internal Revenue Code covering all
qualified employees. An officer of the Company serves as trustee
of the plan. The Company provides a matching contribution of up
to 3% of each employee's salary. Contributions to this plan
amounted to approximately $29, $12 and $25 for the years ended
December 31, 2002, 2003 and 2004, respectively, and $5 and
$10 for the three months ended March 31, 2004 and 2005,
respectively.
8
STOCKHOLDERS' (DEFICIENCY) EQUITY AND REDEEMABLE
    PREFERRED STOCK:
During January 2003, the Company received $180 in exchange for
issuing a convertible promissory note bearing interest at 10%
per annum, The note was convertible at a discount of 20% on the
next round of financing. In June 2003, the note was converted
into Series C preferred stock. (See discussion below.) Upon
conversion of the note the Company recorded a charge of $45 to
reflect the value of the beneficial conversion of the shares
since the shares were converted at $1.81 per share, a 20%
discount. In addition, the Company granted the note holder
five-year warrants to purchase 25% of the total number of
securities issued upon conversion of the note, which amounted to
99,558 shares (or 24,890 warrants), at an exercise price equal
to the per share price of the next financing as defined in the
loan agreement. The value of these warrants was de minimus for
the year ended December 31, 2003, interest on these notes
amounted to approximately $8.
During February 2003, certain stockholders loaned the Company
$325 bearing interest at 12% per annum. In June 2003, these
loans were converted into 143,802 shares of Series C
preferred stock at $2.26 per share. For the year ended
December 31, 2003, interest on these notes amounted to
approximately $21.
During June 2003, the Company completed a private placement
whereby investors agreed to acquire up to 1,400,000 Preferred
Series C units. Each unit consists of one share of
Series C preferred stock and one warrant to purchase
one half share of common stock at an exercise price of
$6.50 per share. Of the 1,400,000 units, the first tranche of
663,717 units was sold for an aggregate of $1,500. Costs
associated with this issuance amounted to $252. This amount will
be accreted to the Series C over the redemption period. For
the year ended December 31, 2003, $25 was accreted. The
value of the warrants was de minimus.
In order to complete the private placement, the Series A
and B stockholders consented to modifications to certain of
their rights, preferences, and privileges. The Series A
preferred shares were split 1,000 for 1 and due to the
anti-dilution provision, the conversion ratio of Series A
was changed to 0.5818 to 1 (totaling 16,202 shares of common
stock). Additionally, the Company granted a stock distribution
of 45,000 shares to the Series B stockholders, valued at
$102 or $2.26 per share. As a result of these modifications, the
Company adjusted the carrying amount of the Series B
preferred stock. Due to the anti-dilution provision, the
conversion ratio of Series B was changed to 0.5796 to
1(totaling 79,043 shares of common stock). The Series C
preferred stock converts to common stock at a ratio of
0.50 to 1.
In connection with the private placement, 150,000 shares of
common stock were sold to the promoters at $.46 per share. A
note of $69 was exchanged for this purchase and is shown as a
reduction in stockholders' equity (deficiency). The note
bears interest at 3.06% and is due June 20, 2008. Interest
income amounted to approximately $2 and $1 for the years ended
December 31, 2004 and 2003, respectively.
F-14
ELECTRO-OPTICAL SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
During 2004, the second tranche of the Series C private
placement was completed and an additional 486,725 of
Series C units were issued for total proceeds of $1,100. An
additional 427 units were distributed in order to comply with
minimum ownership provisions. The value of the distribution was
de minimus. In order to induce the investment in this second
tranche, the Company issued additional warrants to purchase
121,681 shares of Series C preferred stock at a price of
$2.26 per share, for waiving a development milestone. These
warrants were valued at $179.
During May 2004, the Company obtained bridge loans in the amount
of $1,000 from related parties. The loans bears interest at
1.57% and were payable on December 31, 2004. During October
2004 these loans were converted into 442,469 Preferred
Series C units at a price of $2.26 per unit. The warrants
were valued at $327. The Company also sold approximately 125,000
shares of common stock to the lenders at $.46 per share for $57.
The Company ascribed a value to the common stock and recorded an
imputed interest charge of $80.
During October 2004, the Company completed a second private
placement and sold 3,578,081 Preferred Series C units for
total proceeds of approximately $8,100 at a price of $2.26 per
unit. The warrants were valued at $2,653. Costs of the
Series C private placement amounted to approximately $448.
This amount will be accreted to the Series C over the
redemption period. For the year ended December 31, 2004,
$71 was accreted.
As a result of the October 2004 Preferred Series C
transactions, the Company recorded a beneficial conversion
feature of $2,385.
The total accretion to redemption value for the Series C
amounted to $25, $323, and $421 for the years ended
December 31, 2003, 2004 and the three months ended
March 31, 2005, respectively.
The rights, preferences, and privileges of the Series B and
C redeemable preferred stock are as follows:
Voting Rights
All holders of redeemable convertible preferred stock have
voting rights equal to the number of shares of common stock into
which the respective preferred stock is convertible.
Liquidation Preference
In the event of liquidation, dissolution, or winding-up of the
Company, and before any distribution to common stockholders, the
holders of Series B and C redeemable convertible preferred
stock are entitled to receive $2.26 per share plus all accrued
but unpaid dividends.
Deemed Dividends
Dividends on the Series B and Series C preferred stock
may be declared at the discretion of the board of directors at
an annual rate equal to 10%, as adjusted, of the accreted value
per share and shall be payable in preference and priority to any
declaration or payment of any distribution on Series A
preferred stock or common stock and will be cumulative. At
December 31, 2004 and March 31, 2005 there are
approximately $1,506 and $1,674 of deemed but unpaid dividends.
In the event the preferred stock is converted into common stock,
any related deemed dividends would be forfeited.
Redemption Provisions
Pursuant to the modification of the Series B preferred
stock terms adopted at the closing of the Series C private
placement, the requirement to redeem the preferred shares, at
the option of the holder, has been extended to June 2008. The
redemption of Series B requires approval of the
Series C shareholders. The preferred Series C stock is
redeemable at the option of the holder, on the fifth and sixth
anniversary of the first
F-15
ELECTRO-OPTICAL SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
issuance of Series C preferred stock (June 2003). Both the
Series B and C have been classified as mezzanine capital at
their redemption values.
9.     STOCK OPTIONS AND
WARRANTS:
Warrants
Warrants outstanding consist principally of warrants issued in
connection with the Company's Series C financing and
generally expire seven years from the date of grant.
During 2003 and 2004, in connection with the sale of preferred
Series C stock, 2,683,923 warrants at exercise prices
ranging from $4.52 to $13.00 per share were issued and have been
valued at $3,159.
During 2004, the Company issued a 5 year warrant to
purchase 75,000 shares of common stock at an exercise price of
$7.00 per share to one of its consultants. These warrants have
been valued at $120.
Warrant activity during the periods indicated is as follows:
Weighted-
Average
Exercise
Warrants
Price
Outstanding at January 1, 2002
10,505
$
10.00
Expired
(9,815
)
10.00
Outstanding at December 31, 2002
690
$
10.00
Granted
369,303
12.72
Outstanding at December 31, 2003
369,993
12.70
Granted
2,389,620
12.60
Expired
(690
)
10.00
Outstanding at December 31, 2004
2,758,923
$
12.61
There was no warrant activity during the quarter ended
March 31, 2005.
On April 5, 2005, the Board of Directors approved, subject
to stockholder approval, the issuance of 1,305,321 shares of the
Company's common stock in exchange for 2,610,643
outstanding warrants (a conversion ratio of one share of common
stock for two warrants.) The Company considers this transaction
to be an exchange of equity instruments at fair value which will
have no net effect on stockholders' equity.
The value of the warrants was determined using the Black-Scholes
option pricing model.
Stock Options
The Company has two stock option plans (the "Plans")
which allow the board of directors to grant incentives to
employees, directors and collaborating scientists in the form of
incentive stock options, nonqualified stock options and
restricted stock. At December 31, 2004 and March 31, 2005,
options to purchase 965,203 and 954,266 shares of common stock
respectively at exercise prices ranging from $.40 to $10.00 per
share are outstanding and are exercisable at various dates
through 2013. The total number of shares reserved under the
Company's stock option plans is 1,000,000.
In January 2003, the Company issued an option to acquire 24,209
shares of common at an exercise price of $1.00 valued at
approximately $97 to outside consultants. During 2004, the
Company issued options to acquire 22,750 shares of common stock
at an exercise price of $.46 to outside consultants. These
options had a nominal value.
F-16
ELECTRO-OPTICAL SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
During 2004 the Company issued 262,500 options to certain
employees and Board members. The value of the options resulted
in a charge to operations in the amount of $150 and $71 during
the year ended December 31, 2004 and for the three months
ended March 31, 2005, respectively. In addition, during
2003 and 2004 the Company issued options to consultants that
resulted in a charge to operations of $97 and $73 during the
years ended December 31, 2003 and 2004, respectively.
Stock option activity during the periods indicated is as follows:
Weighted-
average
Number
Exercise
of Shares
Price
Outstanding at January 1, 2002
128,050
$
2.28
Granted
14,531
1.00
Outstanding at December 31, 2002
142,581
2.16
Granted
158,565
.94
Expired/ Forfeited
(10,468
)
.96
Outstanding at December 31, 2003
290,678
1.12
Granted
679,525
.46
Expired/ Forfeited
(5,000
)
1.00
Outstanding at December 31, 2004
965,203
.66
Expired/ Forfeited
(10,937
)
3.49
Outstanding at March 31, 2005
954,266
$
.63
Options exercisable at December 31, 2004
428,729
$
.89
Options exercisable at March 31, 2005
446,675
.82
The following table summarizes information about fixed stock
options outstanding at December 31, 2004:
Options Outstanding
Options Exercisable
Weighted-
average
Weighted-
Weighted-
Remaining
average
average
Range of
Number
Contractual
Exercise
Number
Exercise
Exercise Prices
Outstanding
Life
Price
Exercisable
Price
$.01-$.46
694,525
4.7 years
$
.46
173,989
$
.46
$.47-$1.00
265,678
6.5 years
1.00
249,740
1.00
$1.01-$10.00
5,000
.4 years
10.00
5,000
10.00
$.01-$10.00
965,203
5.7 years
$
.66
428,729
$
.89
In May 2005, the Company amended option agreements for 125,000
shares in the aggregate, of three key employees to immediately
vest upon the completion of a successful initial public
offering. The Company will record a charge to operations based
upon the initial public offering price.
10.     INCOME TAXES:
At December 31, 2004, the Company had net operating loss
carryforwards of approximately $12,208 available to offset
future taxable income expiring at various dates through the year
2024. The Company's ability to utilize its net operating
losses may be significantly limited due to changes in the
Company's ownership as defined by federal income tax
regulations. Without regard to any such limitations, the Company
had a deferred tax asset of approximately $3,443 and $4,883 at
December 31, 2003 and 2004, respectively. Because the
Company anticipates continued losses for the foreseeable future,
the Company has recorded a
F-17
ELECTRO-OPTICAL SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
100% valuation allowance against its deferred income tax assets
for all years. The increase in the valuation allowance for the
years ended December 31, 2002, 2003, and 2004 amounted to
$428, $753, and $1,440, respectively.
11.     SUBSEQUENT EVENTS:
On March 9 through March 21, 2005, the Company was
inspected by the FDA in connection with its DIFOTI®
product, a non-invasive imaging device for the detection of
dental cavities. On March 21, 2005, the Company was cited
for failures to comply fully with FDA quality system regulation,
or QSR, mandated procedures. These inspectional findings were
discussed in a subsequent meeting with the FDA on April 28,
2005. The Company is in the process of addressing the
deficiencies noted.
The Company decided to discontinue all operations associated
with its DIFOTI® product effective as of April 5,
2005, in order to focus its resources and attention on the
development and commercialization of MelaFind. The Company is
currently seeking an acquirer for the DIFOTI® assets, and
does not expect to have any significant continuing
responsibility for the DIFOTI® business after its
disposition.
Losses attributable to DIFOTI® operations discontinued in
April 2005 amounted to $201, $12, $426, $81, and $129 for the
years ended December 31, 2002, 2003, 2004, and the three
months ended March 31, 2004 and 2005, respectively.
F-18
l
Shares
Electro-Optical Sciences, Inc.
Common Stock
PROSPECTUS
Until                     ,
2005, all dealers that effect transactions in these securities,
whether or not participating in this offering, may be required
to deliver a prospectus. This is in addition to the
dealers' obligation to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or
subscriptions.
Ladenburg Thalmann & Co. Inc.
Stanford Group Company
,
2005
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13.
Other Expenses of Issuance and Distribution.
The following table sets forth the costs and expenses to be paid
by the Registrant in connection with the sale of the shares of
common stock being registered hereby. All amounts are estimates
except for the SEC registration fee, the NASD filing fee and the
NASDAQ National Market filing fee.
Securities and Exchange Commission registration fee
$
3,884.10
NASD filing fee
4,640.00
NASDAQ National Market filing fee
5,000.00
Accounting fees and expenses
*
Legal fees and expenses
*
Road show expenses
*
Printing and engraving expenses
*
Blue sky fees and expenses
*
Transfer agent and registrar fees and expenses
*
Miscellaneous
*
Total
*
*
To be completed by amendment.
ITEM 14.
Indemnification of Directors and Officers.
Section 145 of the Delaware General Corporation Law permits
a corporation to include in its charter documents, and in
agreements between the corporation and its directors and
officers, provisions expanding the scope of indemnification
beyond that specifically provided by the current law.
Article VIII of our third amended and restated certificate
of incorporation provides for the indemnification of directors
to the fullest extent permissible under Delaware law. Our fourth
amended and restated certification of incorporation to be filed
upon completion of this offering will contain similar
indemnification provisions.
Article IX of our second amended and restated bylaws
provides for the indemnification of officers, directors or other
agents acting on our behalf if such person acted in good faith
and in a manner reasonably believed to be in and not opposed to
our best interest and, with respect to any criminal action or
proceeding, the indemnified party had no reason to believe his
or her conduct was unlawful. Our third amended and restated
bylaws to be filed upon completion of this offering will contain
similar indemnification provisions.
Prior to the completion of the offering, the Registrant intends
to enter into Indemnification Agreements with each of its
current directors and officers to provide such directors and
officers additional contractual assurances regarding the scope
of the indemnification set forth in the Registrant's
restated certificate of incorporation and amended and restated
bylaws and to provide additional procedural protections. At
present, there is no pending litigation or proceeding involving
a director, officer or employee of the Registrant regarding
which indemnification is sought. Reference is also made to
Section
l
of
the Underwriting Agreement, which provides for the
indemnification of officers, directors and controlling persons
of the Registrant against certain liabilities. The
indemnification provision in the Registrant's restated and
amended certificate of incorporation, amended and restated
bylaws and the indemnification agreements to be entered into
between the Registrant and each of its directors and officers
may be sufficiently broad to permit indemnification of the
Registrant's directors and officers for liabilities arising
under the Securities Act.
II-1
The Registrant has directors' and officers' liability
insurance for securities matters prior to the closing of this
offering.
See also the undertakings set out in response to Item 17.
Reference is made to the following documents filed as exhibits
to this Registration Statement regarding relevant
indemnification provisions described above and elsewhere herein:
Exhibit Document
Number
Underwriting Agreement
1.1
*
Registrant's Third Amended and Restated Certificate of
    Incorporation
3.1
Registrant's Second Amended and Restated Bylaws
3.3
Second Amended and Restated Investors' Rights Agreement
    dated October 26, 2004
4.2
Form of Indemnification Agreement
10.1
*
*
To be filed by amendment.
ITEM 15.
Recent Sales of Unregistered Securities.
•
On June 20, 2003, we sold 75,000 shares of our common
    stock at a price of $0.46 per share to Dr. Robert
    Friedman, a former member of our board of directors, and
    75,000 shares of our common stock at a price of
    $0.46 per share to Breaux Castleman, a member of our board
    of directors, and the chairman of our board.
•
On June 20, 2003, we issued an aggregate of
    45,000 shares of our series B preferred stock to the
    149 Series B preferred stock investors who originally
    purchased our Series B preferred stock in 2000 in
    consideration of certain amendments to their investment
    agreements.
•
On June 20, 2003, we issued a warrant to purchase up to
    24,890 shares of our series C preferred stock at an
    exercise price of $2.26 per share to Koji Miyazaki, one of
    our series C preferred stock investors.
•
On June 20, 2003, we also issued a warrant to
    Dr. Marek Elbaum, a former member of our board of directors
    and former Chief Science and Technology Officer, to purchase up
    to 25,000 shares of our common stock at per share exercise
    price of $13.00.
•
From June 20, 2003 through October 26, 2004, we issued
    an aggregate of 5,414,779 shares of our series C
    preferred stock to 73 accredited investors for an aggregate
    consideration of $12,191,480.
•
From June 20, 2003 through October 26, 2004, we issued
    warrants to purchase up to an aggregate of 2,610,643 shares
    of our common stock with an exercise price of $13.00 per
    share to certain purchasers of our series C preferred stock.
•
On February 2, 2004, we issued a warrant to purchase up to
    121,681 shares of our series C preferred stock with an
    exercise price $2.26 per share to Health Partners I,
    LLC.
•
In May 2004, we issued 125,000 shares of our common stock
    at a per share purchase price of $0.46 to accredited investors
    who loaned an aggregate of $1,000,000 to the company, which
    loans were evidenced by convertible promissory notes, all of
    which converted into shares of our series C preferred stock
    on October 26, 2004.
•
On December 10, 2004, we issued a warrant to
    Allen & Company LLC to purchase up to
    75,000 shares of our common stock at an exercise price of
    $7.00 per share in consideration of Allen &
    Company's agreement to provide certain advisory services to
    us.
•
From January 1, 2002 to May 15, 2005 we granted
    options to purchase 852,621 shares of our common stock
    to employees, directors and consultants under our 1996 Plan and
    2003 Plan.
The sales of the above securities were deemed to be exempt from
registration under the Securities Act in reliance on
Section 4(2) of the Securities Act, or Regulation D
promulgated thereunder, or Rule 701
II-2
promulgated under Section 3(b) of the Securities Act, as
transactions by an issuer not involving a public offering or
transactions pursuant to compensatory benefit plans and
contracts relating to compensation as provided under
Rule 701. The recipients of securities in each of these
transactions represented their intention to acquire the
securities for investment only and not with view to or for sale
in connection with any distribution thereof and appropriate
legends were affixed to the share certificates and instruments
issued in such transactions. The sales of these securities were
made without general solicitation or advertising. All recipients
had adequate access, through their relationship with the
Registrant, to information about the Registrant.
ITEM 16.
Exhibits and Financial Statement Schedules.
(a) The following exhibits are filed herewith:
Number
Exhibit Title
1
.1*
Form of Underwriting Agreement.
3
.1
Third Amended and Restated Certificate of Incorporation.
3
.2*
Form of Amended and Restated Certificate of Incorporation of
    Registrant to be effective upon closing of the offering.
3
.3
Second Amended and Restated Bylaws of the Registrant as
    currently in effect.
3
.4*
Form of Amended and Restated Bylaws of the Registrant to be
    effective upon closing of the offering.
4
.1*
Specimen Stock Certificate.
4
.2
Second Amended and Restated Investor's Rights Agreement
    dated as of October 26, 2004 by and among the Registrant
    and the parties listed therein.
5
.1*
Opinion of Dreier LLP.
10
.1*
Form of Indemnification Agreement for directors and executive
    officers.
10
.2
1996 Stock Option Plan.
10
.3
2003 Stock Incentive Plan, as amended.
10
.4*
2005 Stock Incentive Plan.
10
.5
Employment Agreement dated as of January 5, 2004 between
    the Registrant and Joseph V. Gulfo.
10
.6
Consulting Agreement dated as of May 31, 2005 between the
    Registrant and Marek Elbaum.
10
.7
Lease Agreement dated as of December 16, 1998, by and
    between the Registrant and Bridge Street Properties LLC, for
    office space located at One Bridge Street, Irvington, New York.
10
.8
First Amendment to the Lease Agreement dated as of May 17,
    2001 by and between the Registrant and Bridge Street Properties
    LLC.
10
.9
Second Amendment to the Lease Agreement dated as of
    June 19, 2003 by and between the Registrant and Bridge
    Street Properties LLC.
10
.10
Lease Agreement dated as of November 23, 2004, by and
    between the Registrant and Bridge Street Properties LLC, for
    office space located at 3 West Main Street, Irvington, New York.
10
.11*
Consulting Agreement dated as of June 1, 2005 between the
    Registrant and Gerald Wagner Consulting, LLC.
10
.12*
Consulting Agreement dated as of June 20, 2003 between the
    Registrant and Breaux Castleman, as amended.
23
.1
Consent of Eisner LLP, Independent Registered Public Accounting
    Firm.
23
.2*
Consent of Counsel (included in Exhibit 5.1).
24
.1
Power of Attorney (included on signature page).
*
To be filed by amendment.
(b)
Financial statement schedules are omitted because the
    information called for is not required or is shown either in the
    financial statements or the notes thereto.
II-3
ITEM 17.
Undertakings.
The undersigned Registrant hereby undertakes to provide to the
underwriters at the closing specified in the Underwriting
Agreement certificates in such denominations and registered in
such names as required by the Underwriters to permit prompt
delivery to each purchaser.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the provisions
described under Item 14 above, or otherwise, the Registrant
has been advised that in the opinion of the SEC such
indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid
by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant
will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the
    Securities Act, the information omitted from the form of
    prospectus filed as part of this Registration Statement in
    reliance upon Rule 430A and contained in a form of
    prospectus filed by the Registrant pursuant to
    Rule 424(b)(1) or (4) or 497(h) under the
    Securities Act shall be deemed to be part of this Registration
    Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the
    Securities Act, each post-effective amendment that contains a
    form of prospectus shall be deemed to be a new registration
    statement relating to the securities offered therein, and the
    offering of such securities at that time shall be deemed to be
    the initial bona fide offering thereof.
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act, the
Registrant has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly
authorized, in the City of New York, New York, on this 3rd day
of June, 2005.
ELECTRO-OPTICAL SCIENCES, INC.
By:
/s/
Joseph V. Gulfo
Joseph V. Gulfo
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS that each individual whose
signature appears below constitutes and appoints Joseph V. Gulfo
and Karen Krumeich and each of them, his or her true and lawful
attorneys-in-fact and agents with full power of substitution,
for him or her and in his or her name, place and stead, in any
and all capacities, to sign any and all amendments (including
post-effective amendments) to this Registration Statement, and
to sign any registration statement for the same offering covered
by the Registration Statement that is to be effective upon
filing pursuant to Rule 462(b) promulgated under the
Securities Act, and all post-effective amendments thereto, and
to file the same, with all exhibits thereto and all documents in
connection therewith, with the SEC, granting unto said
attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as
fully to all intents and purposes as he or she might or could do
in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or his, her or
their substitute or substitutes, may lawfully do or cause to be
done or by virtue hereof.
Pursuant to the requirements of the Securities Act, this
Registration Statement has been signed by the following persons
in the capacities and on the date indicated.
Name
Title
Date
Principal Executive Officer:
/s/
Joseph V. Gulfo
Joseph
    V. Gulfo
President , Chief Executive Officer and Director
June 3, 2005
Principal Financial Officer and Principal Accounting
    Officer:
/s/
Karen Krumeich
Karen
    Krumeich
Vice President, Finance and Chief Financial Officer
June 3, 2005
Additional Directors:
/s/
Breaux Castleman
Breaux
    Castleman
Director, Chairman of the Board of Directors
June 3, 2005
/s/
Sidney Braginsky
Sidney
    Braginsky
Director
June 3, 2005
II-5
Name
Title
Date
/s/
George C. Chryssis
George
    C. Chryssis
Director
June 3, 2005
/s/
Dan W. Lufkin
Dan
    W. Lufkin
Director
June 3, 2005
/s/
Gerald Wagner
Gerald
    Wagner
Director
June 3, 2005
II-6
EXHIBIT INDEX
Number
Exhibit Title
1
.1*
Form of Underwriting Agreement.
3
.1
Third Amended and Restated Certificate of Incorporation.
3
.2*
Form of Amended and Restated Certificate of Incorporation of
    Registrant to be effective upon closing of the offering.
3
.3
Second Amended and Restated Bylaws of the Registrant as
    currently in effect.
3
.4*
Form of Amended and Restated Bylaws of the Registrant to be
    effective upon closing of the offering.
4
.1*
Specimen Stock Certificate.
4
.2
Second Amended and Restated Investor's Rights Agreement
    dated as of October 26, 2004 by and among the Registrant
    and the parties listed therein.
5
.1*
Opinion of Dreier LLP.
10
.1*
Form of Indemnification Agreement for directors and executive
    officers.
10
.2
1996 Stock Option Plan.
10
.3
2003 Stock Incentive Plan, as amended.
10
.4*
2005 Stock Incentive Plan.
10
.5
Employment Agreement dated as of January 5, 2004 between
    the Registrant and Joseph V. Gulfo.
10
.6
Consulting Agreement dated as of May 31, 2005 between the
    Registrant and Marek Elbaum.
10
.7
Lease Agreement dated as of December 16, 1998, by and
    between the Registrant and Bridge Street Properties LLC, for
    office space located at One Bridge Street, Irvington, New York.
10
.8
First Amendment to the Lease Agreement dated as of May 17,
    2001 by and between the Registrant and Bridge Street Properties
    LLC.
10
.9
Second Amendment to the Lease Agreement dated as of
    June 19, 2003 by and between the Registrant and Bridge
    Street Properties LLC.
10
.10
Lease Agreement dated as of November 23, 2004, by and
    between the Registrant and Bridge Street Properties LLC, for
    office space located at 3 West Main Street, Irvington, New York.
10
.11*
Consulting Agreement dated as of June 1, 2005 between the
    Registrant and Gerald Wagner Consulting, LLC.
10
.12*
Consulting Agreement dated as of June 20, 2003 between the
    Registrant and Breaux Castleman, as amended.
23
.1
Consent of Eisner LLP, Independent Registered Public Accounting
    Firm.
23
.2*
Consent of Counsel (included in Exhibit 5.1).
24
.1
Power of Attorney (included on signature page).
*
To be filed by amendment.