PART I

ITEM 1. DESCRIPTION OF BUSINESS

We are an Internet-based healthcare technology company that provides Web-based electronic data capture (“EDC”) solutions and related value-added services to pharmaceutical and biotechnology companies, clinical research organizations (“CRO’s”), academic research institutions and other clinical trial sponsors. TrialMaster®, our Internet-based software, allows clinical trial sponsors and investigative sites to securely collect, validate, transmit, and analyze clinical study data including patient histories, patient dosing, adverse events, and other clinical trial information. At every research site, clinical research data is entered electronically. All participants in the clinical trial process are connected and have access to the data in real time. Clinical trial sponsors can review, monitor, and analyze the data remotely and in real time.

Medical Error Reporting System (“MERS-TH”) was co-developed with Columbia University during 2002. MERS-TH provides our clients, U.S. and European based hospitals and medical centers, a standardized system for collecting data on medical errors, adverse events and near misses. Medical errors lead to between 40,000 and 90,000 deaths annually and cost the U.S. health care system over $33 billion annually.

TrialMaster

TrialMaster is a Web-based software application that uses Internet technologies for EDC to conduct and manage clinical trial data from geographically dispersed sites.

We believe TrialMaster offers the following advantages which increase the efficiency and decrease the costs of the clinical trial process:

	•		Accelerates initiation and completion of clinical trials by approximately 30%;
	•		Provides real-time access to clinical trial data;
	•		Eliminates double data entry and paper based reports;
	•		Decreases the cost of data collection in clinical trials by up to 80%;
	•		Provides real time connection between all participants in the clinical trial process;
	•		Improves data entry accuracy by up to 80%; and
	•		Secures collection and storage of clinical trial data, through encryption and multilevel storage in two locations.

Market Opportunity

Clinical trials are the critical component in bringing a drug or medical device to market. All prescription drug therapies must undergo extensive testing as part of the regulatory approval process. Clinical trials are currently conducted in an antiquated manner and fail to optimize the resources available for a successful clinical trial. We believe that our solution significantly reduces costs, improves data quality and expedites results. The data integrity, system reliability, management control and auditable quality of TrialMaster will aid clinical trial sponsors that want to improve clinical trial efficiencies, speed-up results and ensure regulatory compliance.

In order for a drug or medical device to be marketed in the United States, Europe or Japan, the drug or device must undergo extensive testing and regulatory review to determine that it is safe and effective. The regulatory review process for new drugs and devices is time consuming and expensive. A new drug application (“NDA”) can take up to two years before it is approved by the FDA. This is in addition to three to five years of studies required to provide the data to support the NDA. The amount of money and time currently spent on clinical trials is enormous. The following points are illustrative of the dynamics:

	•		It can cost as much as $800,000,000 to bring a blockbuster drug to market.
	•		Drug companies lose as much as $13 million in potential revenue for each day a trial is delayed on a blockbuster drug such as Lipitor™.

We believe TrialMaster provides us with strong market opportunities, including:

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The Clinical Trial Industry is a Large and Growing Industry.

The clinical trial industry currently represents a $57 billion a year marketplace. The expected 10% annual growth in this industry is powered by the development of new drugs and treatments, increasing complexity and number of clinical trials, increasing number of patients in the average application, aging population and strong demand for drugs to treat this aging population.

CenterWatch estimates that in 2000 $4.8 billion was spent in the United States on clinical research data management and handling. We believe that in 2002 approximately 10%-15% of all clinical trials were conducted using Web-based (EDC) solutions.

Industry Trends

Industry and regulatory trends have led pharmaceutical, biotechnology, and medical device companies to increase research and development for proprietary new drugs and medical devices. To keep pace in today’s market companies must conduct both more and increasingly complex clinical trials, develop multinational clinical trial capability, and, at the same time, control costs. These trends have created even greater competitive demands on the industry to bring products to market efficiently and quickly.

Competitive Pressures

Increased competition and pressure from generic brands and increased volume of new drug candidates from the genomics industry has forced pharmaceutical companies to shorten the clinical trial processes to bring new drugs to market as soon as possible. New drugs are also needed because shortened life cycles of drugs have narrowed the window of opportunity for companies to enjoy extraordinary returns from patented drugs. According to Accenture, pharmaceutical companies are striving to select winning drugs earlier and to reduce the time it takes to bring the drug to market by one-third.

Expensive and Inefficient Paper-Based Clinical Trials Compared to EDC Solution

One of the bottlenecks in the clinical trials process is in the collection, validation and management of data. Traditional paper-based clinical trials are an inefficient process. We believe once several clinical trial sponsors, specifically market-leading CRO’s, conduct trials using our Web-based trial solution, other sponsors will use it in order to remain competitive relative to the costs in conducting trials and the time to completion.

Emerging Market of Web-Based EDC

Web-based EDC has been around for four years and only between 10% and 15% of all clinical trials are currently conducted using Web-based EDC. We believe that the move toward emerging Web-based technologies is natural since it involves management of large quantities of trial data in different formats, which is by definition one of the core skills and competencies of the IT industry. While industry growth estimates vary, all predictions indicate that EDC is anticipated to become widely accepted. For example, Forrester Research and Frost & Sullivan each predict annual double-digit growth in the use of EDC technologies between 2001 and 2006; Accenture predicts that by 2003, 60% of all clinical trials will use some form of EDC.

Unique Competitive Advantages

We believe we are well positioned to succeed within the emerging EDC industry due to our competitive strengths which include:

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      A focus toward customer requirements .

Unlike competitors that have “global” solutions with standard data fields, screens and forms, we provide a fully customized solution to meet very specific client needs. TrialMaster V3.0 is a robust, dynamically-driven software platform. It has been designed, based on our past experience, to include many “custom” features our clients have sought in our past engagements. Its flexible architecture allows us to perform client specific customizations in what we believe are industry best turnaround times. Our team of developers and programmers ensures user acceptance and system performance and provides customer-focused support services to guarantee a smooth integration of technology into each sponsor’s clinical trials. We assist with the design, installation, and integration of TrialMaster with existing systems, host the clinical trial data in a secure and controlled state-of-the-art facility, provide customer support 24 hours a day, 7 days a week, and train on-site personnel.

      Quality EDC solution offered at a discount to the market price.

Our business strategy focuses on the continued development, marketing and sale of our TrialMaster product. TrialMaster V3.0 was introduced less than a year ago. As of today, we are involved in conducting or developing multi-center, clinical trials for ten clients. We completed a multi-center, multi-national clinical trial with a European-based medical device company and a European-based clinical research organization. This clinical trial encompassed 400 patients in 42 sites throughout Canada, Western Europe, and Scandinavia. We are in negotiations with several U.S.-based pharmaceutical and clinical research organizations to implement TrialMaster. During the second half of 2002 we signed contracts with five new clients with contractual values exceeding $1 million.

Industry Background

Worldwide research and development expenditures by the pharmaceutical, medical device and biotechnology industries reached an estimated $57 billion in 2000, with $23 billion being spent by North American-based pharmaceutical and medical device companies. It is estimated that pre-clinical and clinical trial costs represent approximately one-third of the total spent on research and development, with 8.5% of the total costs spent on data management.

Pre-clinical and clinical trials historically were performed almost exclusively by in-house personnel at the major pharmaceutical companies. Over the last two decades, clinical trial sponsors have transitioned to a model that includes the outsourcing of clinical trial management to clinical research organizations (“CROs”).

We believe that certain industry and regulatory trends summarized below have led pharmaceutical, biotechnology and medical device companies to increase research and development for proprietary new drugs and medical devices. These trends have required companies to conduct increasingly complex clinical trials, and develop multinational clinical trial capability, while seeking to control costs.

Increasing Cost Containment Pressures . The increasing pressure to control rising health care costs, and the penetration of managed health care and health care reform, have caused changes in the pharmaceutical, medical device and biotechnology industries.

Managed Care . Managed care providers and insurance carriers have become major participants in the delivery of pharmaceuticals along with pharmacy benefits organizations. These companies are seeking to depress the prices of drugs and devices.

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Consolidation . There have been several mergers within the pharmaceutical industry, and as a result large scale employee lay-offs and cutbacks have been instituted.

Generic Drug Effect . Competition from generic drugs following patent expiration, has resulted in increasing market pressure on profit margins.

Increasingly Complex and Stringent Regulation . Increasingly complex and stringent regulatory requirements have increased the volume and quality of data required for regulatory filings and escalated the demand for real time, high accuracy data collection and analysis during the drug development process.

Reducing Drug Development Time Requirements . To reduce costs, maintain market share and speed revenue production, pharmaceutical, medical device and biotechnology companies face increasing pressure to bring new drugs to market in the shortest possible time.

New Drug Development Pressures . To respond to the demand for products for an aging population and for the treatment of chronic disorders and life-threatening conditions, research and development expenditures have increased as a result of the constant pressure to develop and patent new therapies.

Growth of Biotechnology Industry . The biotechnology industry and the number of drugs produced by it which require FDA approval have grown substantially over the past decade.

These trends have created even greater competitive demands on the industry to bring products to market efficiently and quickly.

Clinical Trial Overview

In order for a drug or medical device to be marketed in the United States, Europe or Japan, the drug or device must undergo extensive testing and regulatory review to determine that it is safe and effective. To support an application for regulatory approval, clinical data must be collected, reviewed and compiled. Clinical data is collected from case report forms (“CRF’s”) that are submitted to and filled out by an investigator, typically a doctor or research assistant who is participating in the clinical trial. CRF’s can be five to several hundred pages long, and document a series of visits by patients over a period of time.

Once information is collected by the investigator and the CRF is completed, the investigator submits the CRF to the sponsor or the CRO. The data is then input manually into a database. Typically, double data entry is used to resolve errors.

TrialMaster allows participants in the clinical trial process, such as a sponsor or CRO, to perform data collection, handling and transmission via a direct, secure Internet connection. After the CRF’s are Internet enabled and the validation criteria encoded, the CRF forms are distributed via the Internet from our server to the sites where the clinical trials will take place.

The TrialMaster Suite of Products

TrialMaster is an open system that is fully integratable with existing legacy data systems such as Oracle® and Microsoft SQL®. The application utilizes a standard browser such as Internet Explorer 5.0®. TrialMaster allows clinical data to be entered directly from a source document, such as a patient record or doctor’s notes, via computer. The clinical data is transmitted via the Internet to a secure server where the data is validated and stored. The cost for implementing the application is based on a data point per page/per patient fee which increases or decreases depending on the size and length of the trial.

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Some of the features and benefits of TrialMaster include:

	•		Internet-based network — no special client software required
	•		Role-based security — data presented on basis of role in the trial (i.e., investigator, sponsor, trial manager)
	•		Audit trail of all transactions — all original data and changes are recorded
	•		Primary data validation — data ranges and requirements are checked upon entry of data
	•		Customized reports based on client’s specifications
	•		Messaging system — sends email notifications based upon client defined events
	•		Data export — client can export database in a variety of formats for interim analysis
	•		Real time data access — clients can monitor trial progress and make go/no-go decisions
	•		ASP model — uses our secure data infrastructure and can be installed utilizing client-supplied equipment as an option
	•		Fully compliant with FDA 21 CFR Part 11 and subsequent April 1999 Guidance to Industry

TrialMaster is intended to enhance the clinical trial process in the following three areas:

Data Collection is Faster and Cheaper . Clinical data is collected from the CRF’s that are provided by the CRO and submitted to and filled out by an investigator — a doctor or a research assistant — who is participating in the clinical trial. The forms are five to several hundred pages per patient and encompass a series of visit by patients over a period of time. Currently, the cost to process data is approximately $7.00 to $25.00 per page per patient. Under the TrialMaster system, the cost to process the data is approximately two to five times less per page per patient. The time to process the data under the current manual system can take anywhere from one to eight weeks, which is significantly reduced utilizing TrialMaster because the data is entered in real-time with validation occurring instantly.

Data is Collected More Accurately. Upon its submission, data is reviewed to determine if the collected data is within the parameters of the clinical trial. If data is outside of the clinical trial parameters or there are typographical errors or similar data problems, the data collection process will generate an edit query. This edit query must be submitted to the investigator for resolution and resubmitted for data processing. Under the current manual system, the cost to process an edit query is approximately $80 to $115 per query; for a large trial, it is not uncommon to generate 500 to 1,000 edit queries a week. The time to process the data for each patient under the current manual system can take anywhere from three to eight weeks. By using TrialMaster, the number of edit queries are significantly reduced because the system validates data as it is input, and the cost of the queries can be reduced by up to 80% to 85%.

Clinical Studies Can Be Monitored More Efficiently . Monitors are an integral and necessary part of the clinical trial process. These individuals travel to clinical sites to ensure that the investigators are complying with good clinical practice standards. They make sure clinical data is collected and submitted in a safe, timely and accurate manner. Monitoring and its associated costs, such as travel, can exceed one-quarter of the total costs of a clinical trial. Under the current system, the cost for a monitoring visit can vary from $1,000 to $3,000 per visit, and a trial can require as many as three to seven visits. The number of visits can be reduced when using TrialMaster because the status of sites can be monitored remotely and in real-time. Under the current system, the time for each visit is usually one to two days; utilizing TrialMaster, we believe monitoring hours can be reduced by 50% and monitoring visits can be more efficiently scheduled due to the availability of more accurate and complete information on the trials.

TrialMaster Sales and Marketing

EDC services are currently used in approximately 10% to 15% of clinical trials. We are focusing our sales efforts primarily on small and mid-size pharmaceutical, medical device and clinical research organizations. We believe small and mid-size companies are unlikely to have the technological resources necessary to develop a product like TrialMaster which will offer these companies operating efficiencies in the clinical trial process as well as potential cost savings.

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TrialMaster can be used within any segment of the pharmaceutical, biotechnology or medical device industries that undertakes clinical trials. We have focused our sales and marketing efforts on the pharmaceutical industry, a $57 billion market dominated by companies such as Pfizer, Johnson & Johnson and Eli Lilly. We believe the following are the relevant factors for approaching this market:

	•		access to “validators” for the market,
	•		relatively standardized and advanced approach to clinical trial process,
	•		a very competitive market with relatively short product cycles providing for a need to get products to market quickly, and
	•		a tight group of opinion leaders within the market segment with which we have direct relationships.

Our marketing strategy also includes establishing relationships with “opinion leaders” and decision makers within the clinical trial industry. In this regard, we have created a Medical Advisory Board to advise us on the development and marketing of the TrialMaster system. The Medical Advisory Board will also provide a platform to contact these opinion leaders and to provide information about the application. We are also using traditional methods to market TrialMaster, including advertising in trade periodicals and attending a number of medical conventions including those of the American College of Cardiology, Drug Information Association and The American Heart Association.

During fiscal 2002 CV Therapeutics accounted for approximately 44%, the Children’s Research Institute for 13%, Guidant Cardiac Surgery for 11% and Ivax Research for 9% of our net sales.

Medical Error Reporting System – MERS-TH

MERS-TH is a Web-based software application that uses Internet technologies. MERS-TH is a reporting system used to collect, classify and analyze medical events from geographically dispersed sites. MERS-TH provides the opportunity to study and monitor actual and near-miss errors to facilitate the improvement of the care-giving process. We developed MERS-TH in conjunction with Columbia University during 2002.

We believe MERS-TH will improve the process of collecting, cataloging and studying medical errors. MERS-TH provides the following benefits:

	•		Standardized error classification system and reporting will allow larger hospital and health care providers to streamline the reporting process;
	•		Real-time access to data; Seamless installation into existing health care reporting systems utilizing data imports;
	•		Improves existing QA systems’ effectiveness without creating additional layers of responsibility;
	•		Facilitates compliance with governmental mandated reporting requirements; and
	•		Secure collection and storage of data through encryption.

Medical Errors Defined

Types of Medical Errors

•

Diagnostic

	•		Error or delay in diagnosis;
	•		Failure to act on results of testing or monitoring;
	•		Using outdated tests.

•

Treatment

	•		Error in the performance of an operation, procedure or test;
	•		Error in administering the treatment;
	•		Error in the dose or method of using a drug.

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•

Preventive

	•		Failure to provide prophylactic treatment;
	•		Inadequate monitoring or follow-up treatment.

•

Other

	•		Equipment failure;
	•		Other system failure.

A “near miss” is an event or situation that could have resulted in an accident, injury, or illness, but did not, either by chance or through timely intervention.

Market Opportunity

In November 1999, the Institute of Medicine (“IOM”) issued a report titled “ To Err is Human: Building a Safer Health System,” detailing its findings from reviewing medical errors in the U.S. health care system. The report found that between 44,000 and 98,000 people are killed annually from preventable medical errors and that another one million people are injured by errors in treatment at hospitals. Beyond their cost in human lives, preventable medical errors are estimated to cost as much as $29 billion annually in U.S. hospitals. These costs include; the expense of additional care necessitated by the errors, lost income and household productivity, and disability. The report called on states to create mandatory reporting systems, starting with hospitals. The consequences of medical mistakes are often more severe than the consequences of mistakes in other industries—leading to death or disability rather than inconvenience on the part of consumers.

Most hospitals underestimate or are underreporting the number of errors and injuries that occur due to a workplace culture that tends to punish those making mistakes and because hospital personnel tend to regard health care provider errors as evidence of personal carelessness. Dr. Lucien Leape of the Harvard School of Public Health estimates that only 2 to 3% of major errors are reported through hospital incident reporting systems. Worse yet, another study found that 70% of adverse events found in a review of 1,133 medical records were preventable.

A wide body of research, including studies by the Agency for Healthcare Research and Quality (“AHRQ”), support the IOM conclusions. Studies conducted during the 90’s have shown that adverse events occur to approximately 3 to 4% of patients. Another study conducted by Dr. Leape found that the average intensive care unit (“ICU”) patient experienced almost two errors per day, a proficiency level of 99 percent. However, one out of five of these errors was potentially serious or fatal. If performance levels of 99.9%— substantially better than those found in the ICU—applied to the airline industry, it would equate to two dangerous landings per day at O’Hare International Airport in Chicago.

Other industries, e.g., aviation or manufacturing, have done a better job than the health care industry in managing the risk level inherent in their operating activities. Some industries, such as the aviation industry, have adopted quality improvement, safety assurance and error reduction programs as a core mission. A review of the experience in non-health-care industries offers some lessons that may be applicable to reducing medical errors. Characteristics found in industries effectively reduce errors include:

	•		Development of tracking mechanisms that expose errors;
	•		Thorough investigation of errors;
	•		Applying to error reduction a systems oriented approach that combines human intervention, technical tools and organizational remedies;
	•		Systems solutions that are focused on fixing the problem, not the blame;
	•		Changing organization cultures so that an environment of error reduction is embraced; and
	•		Allocating the resources necessary to fix the problems.

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One of the problems with concluding that a chronic medical error problem exists is that medical errors usually affect only one patient at a time; therefore, they are treated as isolated incidents. Health-care errors are also underreported due to liability and confidentiality concerns. Implementing a broad-based solution that is available to the healthcare industry can help begin to remedy the first problem. Only changing the culture intrinsic to the industry can combat the second.

Regulatory Background

In December of 1999, President Clinton directed the Quality Interagency Coordination Task Force (“QuIC”) to evaluate recommendations from To Err is Human and to respond with a strategy to identify prevalent threats to patient safety and reduce medical errors. The QuIC is a multi-agency task force with participants including the Department of Health and Human Services; Department of Defense; and the Department of Veteran Affairs. The latter two are of significance since they collectively manage over 1,771 health care sites serving 11 million patients annually.

In response to the IOM report, the President directed the QuIC to prepare a set of recommendations for specific actions to improve health care outcomes and prevent medical errors. Specifically, the President requested that the QuIC report:

	•		Identify prevalent threats to patient safety and medical errors that can be prevented through the use of decision-support systems;
	•		Identify additional strategies to reduce medical errors and ensure patient safety in Federal health care programs;
	•		Evaluate the extent to which medical errors are caused by misuse of medications and medical devices, and consider steps to strengthen the FDA’s reporting structure on these types of errors; and
	•		Identify opportunities for the Federal Government to take specific action to improve patient safety and health care quality through collaboration with the private sector.

The IOM’s report resulted in a flurry of regulatory activity. To date, almost 20 states have implemented laws making error reporting systems mandatory. The goal of such legislation is to improve patient safety and to hold health care organizations responsible for the quality of care they provide.

The IOM and QuIC made several recommendations in their respective reports. Amongst their recommendations are to:

	•		Create a national mandatory reporting system;
	•		Include patient safety in performance standards for health care organizations – require specific performance levels in order to retain the rights to provide goods and services;
	•		Ask independent accrediting organizations to demonstrate how they are coordinating and strengthening their patient safety standards;
	•		Identify a core set of errors reporting data;
	•		Identify and attempt to pool existing data sets (such as State mandatory errors reporting data) that can be brought together to enhance the knowledge and understanding of errors.

AHRQ and the CDC have expanded their research efforts in the area of informatics to include initiatives aimed at developing and evaluating electronic systems to identify, track, and address patient safety concerns. Additional, Governmental participation especially in requiring the pooling of data, and in setting and enforcing safety standards from its vendors is likely. On a more global basis, establishing a national MERS-TH database will provide useful data to study system failure points, enable benchmarking and provide data to study the efforts that prevented near misses from becoming errors. The errors that are cataloged will provide useful information on the causes of health care problems. Perhaps more importantly near misses occur more frequently than errors and reveal a greater variety of systemic problems with processes and procedures.

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MERS-TH Description

When designing MERS-TH the following design criteria was identified as crucial for an ideal reporting system:

Error reporting should:

	•		Be confidential and non-punitive;
	•		Be relatively easy to integrate into an existing quality assurance system;
	•		Include near-misses and no harm events, in addition to errors;
	•		Classify events by what and where events happened, where and how they were discovered, and by the underlying root causes of the errors;
	•		Use a uniform method for recording data;
	•		Include a process for analyzing data and sharing solutions; and
	•		Feed into a non-regulatory central system where the aggregated data can be further analyzed.

Since quality assurance (“QA”) programs are already required by regulation, it is vital that the design of an error reporting system be complementary to existing QA systems to avoid employee resistance. The system therefore could not duplicate existing QA systems, but instead needed to meet the above criteria and still be compatible with existing QA systems.

MERS-TH provides a software-based process to sort error reports based on the potential for risk to a patient and provides health care organizations a consistent method for classifying the causes of events. The system has been designed to handle high volume environments without becoming cumbersome to use at the local hospital level.

MERS-TH has been developed with the knowledge that errors can never be eliminated; however they can be reduced by managing, identifying and addressing the risks inherent in health care services. MERS-TH provides a standardized means of organized data collection and analysis of medical errors, adverse events and near misses. Its effectiveness depends on the willingness of individuals to report such information.

How does MERS-TH work?

	•		Detection : Identify, report and record the event.
	•		Selection : Determine the extent of investigation needed.
	•		Investigation : Find out more about the context in which the event occurred, and conduct a root cause analysis, if necessary.
	•		Description and Classification : Assign standardized codes to describe the event and root causes.
	•		Computation : Analyze the aggregate data to identify patterns and trends.
	•		Interpretation : Use the results to guide organizational risk reduction efforts.

Barriers to Implementation

Information systems and technical problems . To be practical, error prevention will need to rely on sophisticated management and clinical information systems, both as sources of data on adverse events and as a component of interventions to reduce errors. However, information systems existent in health care organizations today are neither sufficiently integrated nor flexible enough to serve either of these purposes. We believe MERS-TH bridges this gap by combining a user-friendly interface that will avoid initial user reluctance, with an engine dynamically driven by its database that provides a flexible system that is readily integrated into existing healthcare information structures.

Cost and structural problems. Although considerable cost savings can be realized by the effective reduction of medical errors, instituting such programs will require a substantial initial investment. In addition, the relative autonomy of departments within some health care institutions is a potential barrier to rapid organization change and the adoption of new models and procedures to prevent errors. We view the cultural changes needed to implement new error reduction campaigns as the more relevant obstacle. MERS-TH is a reasonably priced alternative for fulfilling an organization’s MIS needs in combating medical errors. Most health-care organizations have capital expenditure budgets that dwarf the investment necessary to implement MERS-TH.

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MERS-TH Sales and Marketing

MERS-TH is currently installed and is being evaluated as part of an approximately six month pilot study at the University of Columbia, the University of Chicago and Cornell University. The sales and marketing of MERS-TH will be done separately from TrialMaster and is likely to command specialized sales personnel with risk management backgrounds. As our co-developer in the project, Columbia University provides an extensive network of research associates as potential clientele. Our initial target will be the domestic market with academic institutions and private and public hospitals and medical centers targeted equally. The European market provides an equally attractive sales market. Illustrative of the potential market for MERS-TH is the number of hospitals in operation domestically and in the European market. This includes:

	•		Privately run U.S. hospitals – 5,565;
	•		Government run U.S. hospitals – 1,771;
	•		European academic and state-run hospitals – 14,000

The market for error reporting systems is in its initial stages, with few competitors and no products currently exerting market dominance. Our internal estimates are that error reporting systems may account for as much as a $500 million annual market. Given the likelihood that governmental regulation may make error reporting systems mandatory; we believe that this market provides enormous short and long-term prospects.

Systems

We provide application hosting services for our web-based clinical trial applications utilizing a secure, medical-grade network infrastructure. We maintain both a primary data center and a secondary disaster recovery site. These sites utilize identical configurations with the primary site located at our headquarters while the secondary site is located at a BellSouth co-location facility in Atlanta, GA.

Internet communications to the data center is maintained via two high-speed digital data communication lines; a primary and a “shadow” line. The shadow monitors the primary line and automatically becomes active should an interruption in communications occur to the primary line. These lines are connected to a Cisco high-speed dual line router. Data is then passed from the router to a Cisco PIX hardware firewall. The hardware firewall is capable of providing 120 Mbps data throughput and up to 125,000 simultaneous sessions. The two Cisco PIX firewalls located at the primary data center and at the secondary disaster recovery site are linked via a secure, static, encrypted virtual private network (VPN) connection. The PIX provides firewall, VPN, and intrusion detection functions to the network. Data from the PIX is passed to an HP high-speed data switch. The switch is capable of processing data at a rate of 36.6 Gbps. The switch is used to connect all of our servers to the PIX.

Our software applications were developed utilizing Microsoft’s Distributed Network Architecture (DNA). Thus, the network was designed to accommodate the security and scalability of the DNA framework. Using this approach, servers are paired so that the production server is visible to the internet while the database server is not. Data from the database is made available to authorized users via our proprietary software object module running on the production server. Communication between the servers is handled by the HP switch.

HP Netserver computers running Microsoft Windows 2000 are used in all production and database servers. The servers are configured with dual Intel Pentium class processors, dual power supplies, and hot-swappable RAID disk storage for maximum availability and reliability. Database servers are configured with one gigabyte of RAM memory and 36 gigabytes of disk storage. Production servers are configured with 512 megabytes of RAM memory and 27 gigabytes of disk storage. All servers are capable of supporting up to one gigabyte of RAM memory and one terabyte (1,099,511,627,776 bytes) of disk storage. Up-time of 100% has been experienced since the deployment of these servers.

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The current production environment employs two production/database server pairs at the primary data center which is mirrored at the co-location facility. Database synchronization between the primary data center and the co-location facility is accomplished utilizing transaction replication technology via the VPN link established between the two locations.

Research and Development

We acquired the technology, developed by Education Navigator, Inc., for our TrialMaster product in June 1998. Since that date, our completion of TrialMaster and its subsequent improvements and refinements have been handled by our in-house staff of programmers. During fiscal 2002, we spent approximately $465,000 on research and development activities, the majority of which represented salaries to our developers. In fiscal 2001 we spent approximately $392,000 on research and development activities. We intend to continue to improve and broaden our product line to increase our ability to compete in our market segment.

Competition

We compete in the EDC market. This industry can be characterized as rapidly evolving, highly competitive and fragmented. There are other entities that compete with TrialMaster. The principal competitors include Phase Forward Incorporated and eResearch Technology. We believe that 25 to 30 viable competitors in varying degrees of development exist. Many of these competitors have significantly greater financial, technical and marketing resources, or name recognition than we do. In addition, other companies could enter the EDC market due to the vast size of the market opportunity. We believe that the most significant competitive factors we face are a lack of operating history and the poor financial results experienced during the period covering fiscal 2000 to 2002.

We believe, however, that our technical expertise, the knowledge and experience of our principals in the industry, quality of service, responsiveness to client needs and speed in delivering solutions will allow us to compete favorably within this market. Further, we believe that none of the aforementioned companies have developed an approach to the clinical trial process that is as flexible and customizable as TrialMaster.

Government Regulation

We do not believe that we are currently regulated by the FDA or any specific government or quasi-governmental agency. There can be no assurance, however, that we will not become subject to government regulation in the future. See “Risk Factors” below.

Intellectual Property Rights

Our success depends in part on our ability to protect our intellectual property. To protect our proprietary rights, we rely generally on copyright, trademark and trade secret laws, confidentiality agreements with employees and third parties, and agreements with consultants, vendors and customers, although we have not signed such agreements in every case. Despite such protections, a third party could, without authorization, copy or otherwise obtain and use our software. We can give no assurance that our agreements with employees, consultants and others who participate in development activities will not be breached, or that we will have adequate remedies for any breach, or that our trade secrets will not otherwise become known or independently developed by competitors.

We have a patent application pending with respect to our TrialMaster product. This application was filed in May 2000 and remains pending. We are also in the process of registering a number of trademarks including “OMNICOMM SYSTEMS, INC.,” and we have federally registered “TRIALMASTER” and “OMNICOMM SYSTEMS,” as well as copyrights on any computer software applications produced by us. We intend to make such other state and federal registrations as we deem necessary and appropriate to protect our intellectual property rights.

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Employees

We currently have 18 full time employees, of which three are executives, two are administrative, eight are programmers, two are technology and systems managers and three are in sales and marketing. We believe that relations with our employees are good. None of our employees is represented by a union.

Risk Factors

WE HAVE A LIMITED OPERATING HISTORY, WHICH MAKES IT DIFFICULT FOR YOU TO EVALUATE OUR BUSINESS .

We were incorporated in 1997 and initiated our development of TrialMaster in August 1998. We have a limited operating history on which you can base an evaluation of our business and prospects. Our revenue and income potential are unproven. An investor must consider the risks, uncertainties, expenses and difficulties frequently encountered by companies in their early stages of development, particularly companies with limited capital in new and rapidly evolving markets, including the Internet B2B market. These risks and difficulties include our ability to:

	•		develop our infrastructure;
	•		attract and maintain a base of end users;
	•		develop and introduce desirable services;
	•		provide customer support, personnel and facilities, to support our business;
	•		establish and maintain strategic relationships;
	•		establish and maintain relationships within the pharmaceutical, medical device, and biotechnology industries; and
	•		respond effectively to competitive and technological developments.

We cannot assure you that our business strategy will be successful or that we will successfully address any of these risks or difficulties.

WE ARE DEPENDENT ON A NEW BUSINESS MODEL WHOSE ACCEPTANCE IS UNCERTAIN.

We intend to derive revenues by providing web-based electronic data capture and management application for clinical research in the pharmaceutical, medical device, and biotechnology industries. While the market for clinical trials data capture is well established, the market for our Web-based electronic services is new and rapidly evolving, and there can be no assurance that our products and services will be accepted by the marketplace. Our customers have limited experience with Web-based clinical trials and may conclude that they are not a desirable, efficient or cost effective method of administering clinical trials. Failure to obtain significant customer acceptance and satisfaction will adversely affect our revenue.

WE HAVE A HISTORY OF LOSSES, ANTICIPATED FUTURE LOSSES AND MAY NEVER ACHIEVE OR MAINTAIN PROFITABILITY.

We incurred net losses attributable to common stockholders of $5,266,265 and $7,549,596 in fiscal 2002 and 2001, respectively. At December 31, 2002, we had an accumulated deficit of approximately $21,897,111 and a working capital deficit of approximately $1,516,794. We expect net losses and negative cash flow for the foreseeable future until such time as we can generate sufficient revenues to achieve profitability. We expect our operating cash flows to improve in fiscal 2003, but we have little control over the timing of contracted projects. We expect our client and contract base to expand and diversify to the point where it meets our on-going operating needs, but this may not happen in the short-term or at all. While we expect to achieve additional revenue through the growth of our business, we cannot assure you that we will generate sufficient revenue to fund our expenses and achieve and maintain profitability in any period.

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OUR FINANCIAL STATEMENTS CONTAIN A GOING CONCERN QUALIFICATION.

Because of our significant operating losses, accumulated deficit and the uncertainty as to our ability to secure additional financing, the report of our independent auditors on our consolidated financial statements for the year ended December 31, 2002 contained an explanatory paragraph indicating there was substantial doubt about our ability to continue as a going concern.

WE HAVE HAD LIMITED REVENUES TO DATE, AND WE MAY BE UNABLE TO FORECAST OUR REVENUES ACCURATELY.

We have had limited revenues to date and do not have historical financial data for a sufficient number of periods to accurately forecast revenues and results of operations. Therefore, our period-to-period comparisons contained in our SEC filings cannot be relied on as indicators of future performance. Such future revenues are difficult to forecast with any specificity.

WE WILL LIKELY NEED ADDITIONAL FINANCING, THE TERMS OF WHICH MAY BE UNFAVORABLE TO OUR THEN EXISTING STOCKHOLDERS.

Our plan of operations will require us to raise additional working capital if our revenue projections are not realized, and even if our projections are realized, we may need to raise additional financing to meet our ongoing obligations. In addition, we may also need to raise additional funds to meet known needs or to respond to future business contingencies, which may include the need to:

	•		fund more rapid expansion;
	•		fund additional capital or marketing expenditures;
	•		develop new or enhanced features, services and products;
	•		enhance our operating infrastructure;
	•		respond to competitive pressures; or
	•		acquire complementary businesses or necessary technologies.

If additional funds are raised through the issuance of equity or convertible debt securities, the percentage ownership of our stockholders will be reduced, and these newly-issued securities may have rights, preferences or privileges senior to those of existing stockholders or debt holders. We cannot assure you that additional financing will be available on terms favorable to us, or at all. If adequate funds are not available or are not available on acceptable terms, our ability to fund our operations and remain in business may be significantly limited.

WE MUST ESTABLISH, MAINTAIN AND STRENGTHEN THE TRIALMASTER BRAND TO ATTRACT USERS AND GENERATE REVENUE FROM EXISTING AND NEW BUSINESSES.

To successfully implement our business plan, we must establish, maintain and continually strengthen the TrialMaster brand. For us to be successful in establishing TrialMaster, pharmaceutical, medical device and biotechnology industries must perceive it as a desirable, efficient and cost effective method of real time data collection, compilation and validation which significantly reduces costs, improves data quality and expedites results. If our marketing efforts are not productive or if we cannot strengthen our brand, our efforts to establish and maintain our brand will be unsuccessful, and we may lose customers and be unable to attract new business.

WE FACE INTENSE COMPETITION AND WILL HAVE TO COMPETE FOR MARKET SHARE.

There can be no assurance that our products will achieve or maintain a competitive advantage. There are currently a number of companies who market services and products for Web-based clinical trials. Barriers to entry on the Internet are relatively low, and we expect competition to increase significantly in the future. We face competitive pressures from numerous actual and potential competitors, both online and offline, many of which have longer operating histories, greater brand name recognition, larger customer bases and significantly greater financial, technical and marketing resources than we do. We cannot assure you that the Web-based clinical trials maintained by our existing and potential competitors will not be perceived by clinical trial sponsors as being superior to ours.

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IF WE CANNOT PROTECT OUR PROPRIETARY INFORMATION, WE MAY LOSE A COMPETITIVE ADVANTAGE AND SUFFER DECREASED REVENUES AND CASH FLOW.

We are dependent, in part, on proprietary data, analytical computer programs and methods and related know-how for our day-to-day operations. We rely on a combination of confidentiality agreements, contract provisions and trade secret laws to protect our proprietary rights. Although we intend to protect our rights vigorously, there can be no assurance we will be successful in protecting our proprietary rights. If we are unable to protect our proprietary rights, or if our proprietary information and methods become widely available, we may lose any ability to obtain or maintain a competitive advantage within our market niche.

FAILURE TO ADAPT TO EVOLVING TECHNOLOGIES AND USER DEMANDS COULD RESULT IN THE LOSS OF USERS .

To be successful, we must adapt to rapidly changing technologies and user demands by continually enhancing our products and services and introducing new products and services. If we need to modify our products and services or infrastructure to adapt to changes affecting clinical trials, we could incur substantial development or acquisition costs. As described above, we will be dependent upon the availability of additional financing to fund these development and acquisition costs. If these funds are not available to us, and if we cannot adapt to these changes, or do not sufficiently increase the features and functionality of our products and services, our users may switch to the product and service offerings of our competitors.

A SYSTEM FAILURE COULD RESULT IN SIGNIFICANTLY REDUCED REVENUES.

Any system failure, including network, software or hardware failure that causes an interruption in our service could affect the performance of our TrialMaster software and result in reduced revenues. The servers that host our software are backed-up by remote servers, but we cannot be certain that the back-up servers will not fail or cause an interruption in our service. Clinical trial data could also be affected by computer viruses, electronic break-ins or other similar disruptions. Our users will depend on Internet service providers, online service providers and other web site operators for access to our products. Each of these providers may have experienced significant outages in the past and could experience outages, delays and other difficulties due to system failures unrelated to our systems. Further, our systems are vulnerable to damage or interruption from fire, flood, power loss, telecommunications failure, break-ins, earthquake and similar events. Our insurance policies have low coverage limits and may not adequately compensate us for any such losses that may occur due to interruptions in our service.

WE MAY BE UNABLE TO ADEQUATELY DEVELOP OUR SYSTEMS, PROCESSES AND SUPPORT IN A MANNER THAT WILL ENABLE US TO MEET THE DEMAND FOR OUR SERVICES.

Our future success will depend on our ability to develop effectively the infrastructure, including additional hardware and software, and implement the services, including customer support, necessary to meet the demand for our services. In the event we are not successful in developing the necessary systems and implementing the necessary services on a timely basis, our revenues could be adversely affected, which would have a material adverse effect on our financial condition.

WE ARE DEPENDENT ON THE CONTINUED CONTRIBUTIONS OF OUR KEY PERSONNEL.

We are currently dependent on our senior management and board of directors. The loss of their services, or the services of any other individual upon which we currently rely, may significantly adversely affect our performance and our ability to carry out the successful development and implementation of our business plan. Failure to retain management, directors and advisors or to attract and retain other key employees could have an adverse effect upon our growth and our ability to achieve and maintain profitability.

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WE MAY NOT BE ABLE TO HIRE AND RETAIN A SUFFICIENT NUMBER OF QUALIFIED EMPLOYEES AND, AS A RESULT, WE MAY NOT BE ABLE TO GROW AS WE EXPECT OR MAINTAIN THE QUALITY OF OUR SERVICES.

Our success will depend on our ability to hire, train, and retain highly skilled technical, marketing and sales and customer support personnel. Competition for these people is intense, especially for engineers and programmers, and we may be unable to successfully attract sufficiently qualified personnel. The pool of qualified technical people in the greater Fort Lauderdale, Florida area is limited. We will need to increase the size of our staff to support our anticipated growth, without compromising the quality of our offerings or customer service. There can be no assurance we will be able to hire, train and retain a sufficient number of qualified employees. If we were unable to recruit and retain a sufficient number of employees, we would be forced to limit our growth or possibly curtail our operations.

SINCE WE ARE A WEB-BASED COMPANY, OUR BUSINESS IS SUBJECT TO GOVERNMENT REGULATION RELATING TO THE INTERNET, WHICH COULD IMPAIR OUR OPERATIONS.

Because of the increasing use of the Internet as a communication and commercial medium, the government has adopted and may adopt additional laws and regulations with respect to the Internet covering such areas as user privacy, pricing, content, taxation, copyright protection, distribution and characteristics and quality of production and services.

WE DO NOT BELIEVE WE ARE SUBJECT TO REGULATION BY THE FDA, BUT WE HAVE MADE NO INDEPENDENT INQUIRIES.

Based upon our internal review of the relevant statutes, rules and regulations, we do not believe that our TrialMaster product is subject to FDA review or approval. However, because we have neither made independent inquiry of the FDA nor have we engaged special FDA counsel to provide us with an opinion regarding the applicability of the subject statutes, rules and regulations, our belief as to their inapplicability may be incorrect. In that event, we could be subject to fines and/or other sanctions which will adversely affect our results of operations. In addition, if at some time in the future the FDA adopts rules to which we become subject, the cost of compliance therewith may be significant to us which would likewise adversely affect our results of operations and liquidity.

WE MAY BE UNABLE TO PREVENT COMPETITORS FROM USING OUR INTELLECTUAL PROPERTY, AND WE FACE THE CONTINUING PROSPECT OF POTENTIALLY EXPENSIVE PATENT LITIGATION TO ASSERT OUR RIGHTS AND TO DEFEND OURSELVES AGAINST PATENT INFRINGEMENT CLAIMS ASSERTED BY OTHERS.

The clinical research business is crowded and includes a number of new entrants hoping to capitalize on advances in electronic data capture. Many of these new entrants have secured patent protection. We presently have a patent application pending for our TrialMaster product. The effect and extent of patent and other protection for our intellectual property is uncertain. Legal standards relating to the validity and scope of claims in the Internet fields are evolving. We cannot guarantee that our patent application will be approved. Even if it is approved, we cannot guarantee that our patent will be broad and effective, nor can there be any assurance that we will not be involved in litigation to protect our intellectual property and to defend ourselves against infringement claims by our competitors.

FUTURE SALES OF SHARES BY EXISTING STOCKHOLDERS AS WELL AS THE ISSUANCE OF ADDITIONAL SHARES OF OUR COMMON STOCK COULD RESULT IN A DECLINE IN THE MARKET PRICE OF THE STOCK.

We have agreed to register an aggregate of 40,012,316 shares of our common stock which are issuable upon the conversion of outstanding shares of our 5% Series A Convertible Preferred Stock, our Series B Convertible Preferred Stock, our Series C Convertible Preferred Stock, convertible notes and accrued interest and outstanding options and warrants. At such time as these shares are eligible for resale in the public market, such sales will have a dilutive effect on the market for our common stock and will in all likelihood adversely affect its market price.

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THE EXERCISE OF OUTSTANDING OPTIONS AND WARRANTS AND THE CONVERSION OF OUTSTANDING NOTES WILL BE DILUTIVE TO OUR EXISTING STOCKHOLDERS.

As of March 18, 2003, we had a total of 23,053,467 shares of our common stock underlying options, warrants and other convertible securities and 23,116,149 shares of common stock underlying convertible preferred stock. The exercise of these warrants and options and/or the conversion of these convertible securities will have a dilutive effect on our existing stockholders.

THERE IS ONLY A LIMITED PUBLIC MARKET FOR OUR COMMON STOCK.

There is a limited public market for our common stock. We cannot predict the extent to which investor interest in us will lead to the development of an active trading market or how liquid that trading market might become. If a liquid trading market does not develop or is not sustained, it may be difficult for investors to sell shares of our common stock.

FLUCTUATIONS IN OUR OPERATING RESULTS MAY ADVERSELY AFFECT OUR STOCK PRICE.

Historically, there has been volatility in the market price for our common stock. Our quarterly operating results, changes in general conditions in the economy, the financial markets or our industry segment, or other developments affecting us or our competitors, could cause the market price of our common stock to fluctuate substantially. We expect to experience significant fluctuations in our future quarterly operating results due to a variety of factors. Factors that may adversely affect our quarterly operating results include:

	•		the announcement or introduction of new products by us and our competitors;
	•		our ability to retain existing clients and attract new clients at a steady rate, and maintain client satisfaction;
	•		the amount and timing of operating costs and capital expenditures relating to expansion of our business and operations;
	•		government regulation; and
	•		general economic conditions and economic conditions specific to the clinical trials industry.

As a result of these factors, in one or more future quarters, our operating results may fall below the expectations of securities analysts and investors. In this event, the market price of our common stock would likely be materially adversely affected.

BECAUSE OUR STOCK CURRENTLY TRADES BELOW $5.00 PER SHARE, AND IS QUOTED ON THE OTC BULLETIN BOARD, OUR COMMON STOCK IS CONSIDERED A “PENNY STOCK” WHICH CAN ADVERSELY EFFECT ITS LIQUIDITY. OUR COMMON STOCK DOES NOT CURRENTLY QUALIFY FOR LISTING ON THE NASDAQ STOCK MARKET AND WE DO NOT FORESEE THAT WE WILL QUALIFY FOR SUCH A LISTING IN THE FORESEEABLE FUTURE.

If our common stock continues to be quoted on the OTC Bulletin Board, and the trading price of our common stock remains less than $5.00 per share, our common stock is considered a “penny stock,” and trading in our common stock is subject to the requirements of Rule 15g-9 under the Exchange Act. Under this rule, broker/dealers who recommend low-priced securities to persons other than established customers and accredited investors must satisfy special sales practice requirements. The broker/dealer must make an individualized written suitability determination for the purchaser and receive the purchaser’s written consent prior to the transaction.

SEC regulations also require additional disclosure in connection with any trades involving a “penny stock,” including the delivery, prior to any penny stock transaction, of a disclosure schedule explaining the penny stock market and its associated risks. These requirements severely limit the liquidity of securities in the secondary market because few broker or dealers are likely to undertake these compliance activities. In addition to the applicability of the penny stock rules, other risks associated with trading in penny stocks could also be price fluctuations and the lack of a liquid market.

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The Nasdaq Stock Market establishes listing qualifications for companies wishing to have their securities quoted on the Nasdaq SmallCap Market. In addition to minimum bid price and public float requirements, among other listing requirements in order for a security to be quoted on the Nasdaq SmallCap Market, the issuer must have minimum stockholders’ equity of at least $5,000,000. At December 31, 2002, we had total stockholder’s deficit of $2,374,631. Accordingly, it is unlikely that we will meet the initial listing standards of the Nasdaq SmallCap Market in the foreseeable future.

ITEM 2. DESCRIPTION OF PROPERTY

Our principal executive offices are located in commercial office space in approximately 4,400 square feet at 2555 Davie Road, Suite 110B, Fort Lauderdale, Florida, and our telephone number is (954) 473-1254. We lease these offices under the terms of a sublease expiring in September 2003. Our annual rental payments under this sublease are $66,900 plus sales tax.

Our secondary data site, which serves as our disaster recovery location, is located in Atlanta, Georgia and is leased from Bell South. We lease this space under the terms of a lease expiring in October 2004. Our annual lease payments are $53,460.

ITEM 3. LEGAL PROCEEDINGS

In January 2001, a former employee, Eugene A. Gordon, filed a lawsuit in Dade County, Florida alleging breach of his employment contract with us. The plaintiff alleged we owed him more than $100,000 for back payment of salary according to the terms of his employment contract. We disputed Mr. Gordon’s allegations and vigorously defended this lawsuit. As part of our defense, we filed a counterclaim against Mr. Gordon and a counter-suit against his wife. The parties entered into a settlement agreement on August 19, 2002. The parties subsequently filed and the court accepted a Joint Stipulation for Dismissal With Prejudice on September 6, 2002.

No legal proceedings of a material nature, to which we or our subsidiaries are a party, exist or were pending during the fiscal year ended December 31, 2002. Except for the legal proceedings disclosed above, we know of no other legal proceedings of a material nature pending or threatened or judgments entered against any director or officer of OmniComm in his capacity as such.

We may become involved in claims or legal actions arising in the ordinary course of business. In the opinion of our Management, the ultimate disposition of these matters should they arise will not have a material adverse effect on our consolidated financial position, results of operations or liquidity.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

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