Item 1. Description of Business

Company Overview

ADM Tronics Unlimited, Inc. is a technology-based developer and manufacturer of diversified lines of products in the following three areas: (1) environmentally safe chemical products for industrial use, (2) therapeutic non-invasive electronic medical devices and (3) cosmetic and topical dermatological products. The Company currently derives most of its revenues from the development, manufacture and sale of chemical products, and, to a lesser extent, from its therapeutic non-invasive electronic medical devices and topical dermatological products.

The Company is a corporation that was organized under the laws of the State of Delaware on November 24, 1969. The Company's operations are conducted through the Company itself and its three subsidiaries, Ivivi Technologies, Inc. ("Ivivi"), Pegasus Laboratories, Inc. ("Pegasus") and Sonotron Medical Systems, Inc. ("SMI"). As of June 29, 2005, the Company owned approximately 68.5%, 100% and 88% of the outstanding capital stock of Ivivi, Pegasus and SMI, respectively.

Company Products

Chemical Products for Industrial Use

The Company develops, manufactures and sells chemical products to industrial users. Such products consist primarily of the following:

o Water-based primers and adhesives;

o Water-based coatings and resins; and

o Water-based chemical additives.

Water-based primers and adhesives are chemical compounds used to bind different plastic films, metal foils and papers. Examples are the binding of polyethylene to polyester, nylon, vinyl, aluminum, paper and cellophane. The Company's water-based primers and adhesives are similar in function to solvent-based primers that are widely used to bind plastic films, papers and foils. Solvent-based systems have come under criticism since they have been found to be highly pollutant, dangerous to health and generally caustic in nature. Based upon the Company's experience since 1969, including information furnished to the Company by certain of its customers, the Company believes that water-based systems have no known polluting effects and pose no known health hazards. There can, of course, be no assurance that any governmental restrictions will not be imposed on the Company's water-based products or that such products will be accepted as replacements for solvent based products.

Coatings and resins for the printing industry are used to impart properties to the printed substrate. The Company's coatings and resins can be used to coat printed material for glossy or aesthetic appeal to make such material virtually impervious to certain types of grease and to impart other characteristics required or desired for various products and specifications.

Certain of the Company's chemical additives are used to impart properties to inks and other chemical products used in the food packaging and printing industries. These additives are used for their ability to improve the performance of such products.

None of the Company's chemical products are protected by patents, although the names of some of such products have been protected by trademarks. The Company does not believe that any such trademarks are material to its business. As of March 31, 2005, the dollar amount of backlog orders for the Company's chemical products believed by the Company to be firm, was not material.

Therapeutic Non-Invasive Medical Devices

Sonotron Technology

SMI, a wholly-owned subsidiary of the Company, has developed a technology, known as the "Sonotron Technology," which is described in detail below, and has utilized the Sonotron Technology to develop medical devices to treat subjects suffering from the pain of inflammatory joint conditions. Although some of the devices utilizing this technology are commercially available for the treatment of animals, none of such devices have received clearance from the U.S. Food and Drug Administration (the "FDA") for human application in the United States.

The late Dr. Alfonso Di Mino, founder of the Company, while employed by the Company, conceived and developed a technique pursuant to which a subject being treated is exposed to a corona discharge beam generated by combining audio and radio frequency waves (the "Sonotron Technology"). The Sonotron Technology is the subject of four United States patents (the "Sonotron Patents"), which expire in 2006, 2011, 2012 and 2016. Foreign patents relating to the Sonotron Technology have been issued in Brazil, Canada, France, Holland, Italy, Japan, Sweden, Switzerland, the United Kingdom and West Germany, which patents expire on various dates from 2007 through 2009.

The Company believes that the Sonotron Technology can be utilized to reduce lameness in both thoroughbred and standard-bred horses. In this connection, the Company commissioned the School of Veterinary Medicine of the University of Wisconsin-Madison (the "SVM") to gather data which would confirm the effectiveness of the Sonotron Device on horses. In a report dated December 10, 1987, the SVM concluded that the evidence from its experiments indicated that treatment with a Sonotron Device designed for veterinary use had a significant effect in reducing the level of lameness in ponies which had arthritis experimentally induced and as the degree of arthritic changes increased, the reduction in lameness was more dramatic and became statistically more significant. The SVM further found that there is statistical evidence that the therapy had a beneficial effect on the level of joint motion in the arthritic ponies and resulted in reduced joint swelling in ponies with severe arthritis. A significant reduction occurred in the degree of joint changes seen radiographically in the ponies with severe arthritis and in the milder cases of arthritis treated with low doses of the therapy. The SVM further reported that there were significant reductions in the severity of the growth of pathological lesions seen in ponies with mild arthritis which received low doses of therapy and that a trend appears to exist toward seeing reduced severity of lesions in ponies which had a severe degree of arthritis and were treated with a Sonotron Device designed for veterinary use. No differences in the degree of histopathological changes were noted between the treated ponies and the untreated ponies with mild or severe arthritis. The SVM did not arrive at any conclusions with respect to whether treatment with a Sonotron Device designed for veterinary use has a beneficial effect upon chronic degenerative joint disease in a horse and whether such treatment will be effective upon naturally occurring cases of equine degenerative joint disease. The Company has conducted tests utilizing Sonotron Devices designed for veterinary use on several race horses and has obtained results substantially as those of SVM. Significant further testing will be required to determine whether or not the administration of the Sonotron Technology to race horses will support the establishment of a viable market.

The Company granted to each of SMI and VET Sonotron Systems, Inc., a former majority-owned subsidiary of the Company ("VET"), a royalty-free, worldwide, exclusive, irrevocable license to the Sonotron Patents, the foreign patent applications and the Sonotron Technology. The license granted to SMI permits SMI to manufacture, to have manufactured and to sell apparatus utilizing the Sonotron Technology exclusively in connection with human medical applications thereof (the "SMI License"). The SMI License provides that future improvements or discoveries relating to the Sonotron Technology, if any, which are made by any officer or employee of the Company or any affiliates thereof, whether or not patentable, and applicable to human medical applications, are to be included in the SMI License. The license granted to VET is substantially identical in its terms to that of the SMI License, except that the use of the Sonotron Technology by VET is limited exclusively to veterinary applications. In 2003, all of the assets of VET, including such license, were transferred to SMI, and VET ceased operations and was abandoned by the Company in order to minimize the ongoing expense of maintaining the corporate entity and for other cost saving reasons.

The FDA permits companies to begin to recoup certain expenses by charging others for use of medical machines, provided that the use of such machines does not constitute a commercial distribution thereof. Accordingly, the Company is permitted to maintain a clinic and treatment center utilizing Sonotron Devices, but may not advertise or otherwise promote Sonotron Devices as being safe and effective for their intended use. Since 1989, four clinics have operated at various times, none of which produced any significant revenues.

The Company intends to use data obtained from clinics utilizing the Sonotron Device as well as additional data it may obtain from others in the Company's FDA application, if filed. As of June 29, 2005, there were five Sonotrons in use by clinical investigators collecting data for submission to the FDA. The Company believes that sufficient data may be collected from these investigations to support a submission to the FDA; however, there can be no assurance that such data will be sufficient or if sufficient will result in the filing of an application with the FDA. There can be no assurance that the Company will obtain sufficient data in the foreseeable future, if at all, to file an FDA application for FDA clearance of the Sonotron Device for marketing in the United States for human application or that any data theretofore or thereafter obtained by the Company will be satisfactory or will be sufficient to support the Company's FDA application. The Company does not intend to make any material changes to the Sonotron Devices nor have any such changes been made since the completion of the research and development. In the event that Sonotron Devices cannot be marketed pursuant to FDA clearance and the data obtained by the Company are not favorable or, for any other reason, the Company's FDA application is not filed or, if filed, is not approved by the FDA, neither the Company nor SMI will be able to market the Sonotron Devices in the United States to others in connection with human applications, other than for research purposes. Under such circumstances, it is probable that the Sonotron Devices will not be able to be marketed with respect to human applications thereof in many foreign countries.

In 1997, Dr. Di Mino developed a device which utilizes the Sonotron Technology to non-invasively treat neural-cerebral conditions (the "NCCD Device"). The NCCD Device is a non-invasive electronic therapy device which is designed to emit certain radio and audio waves at prescribed power outputs to a patient's brain and spinal cord. Since 1997, the NCCD Device has been in the prototype stage. Limited initial preliminary tests on human subjects on a non-controlled basis appear to indicate that treatment with the NCCD Device has a beneficial effect on the symptoms related to certain neuro-cerebral disorders. The results ranged from minor improvement in certain limited symptoms to dramatic overall improvements. Based upon such results, subject to obtaining sufficient capital, the Company intends to conduct extensive controlled clinical studies of the NCCD Device. Testing involves applying radio and audio waves to the patients' spinal cords and cerebrum on a weekly basis for several weeks to small groups of patients having cerebral palsy, multiple sclerosis and Parkinson's Disease.

In order to commercially exploit the NCCD Device, the Company must successfully conduct significant engineering and design work. Such work includes the design and manufacture of a pre-production model and the production of approximately 40 similar units for use in the proposed clinical studies. If the clinical studies establish the efficacy of the NCCD Device, the Company intends to seek FDA approval of the NCCD Device. The Company also plans to file applications for certain foreign and domestic patents in connection with the NCCD Device. There can be no assurance that any clinical studies of the NCCD Device will yield successful results or that FDA approval will be obtained. The Company believes that the cost of clinical studies and the engineering and design work will be approximately $2,000,000. Because the Company does not presently have sufficient funds to complete such tests and studies, the Company has sought and will continue to seek financing for such purposes. There can be no assurance that the Company will be able to obtain such financing on terms not unfavorable to the Company, if at all.

As of March 31, 2005, the dollar amount of backlog orders for Sonotron Devices was not material.

SofPulseTM

Ivivi, a majority-owned subsidiary of the Company, focuses on designing and commercializing its proprietary electrotherapeutic technologies and products for the non-invasive treatment of a wide array of acute and chronic disorders of soft tissue. Its most advanced proprietary products utilize pulsed electromagnetic field, or PEMF, technology to induce small electrical currents in soft tissue to stimulate a therapeutic physiological response in the target area. Ivivi is currently utilizing PEMF technology, through its patented SofPulse device line of products, for the treatment of edema (swelling) and pain in soft tissue.

Ivivi was incorporated in March 1989 under the name AA Northvale Medical Associates, Inc. as a majority-owned subsidiary of the Company. From March 1989 until August 1998, Ivivi had very limited operations, which included the operation of medical clinics for conducting clinical studies on certain products of the Company. In August 1998, the Company purchased certain assets from Electropharmacology, Inc. ("EPI") that were then used by EPI in connection with the SofPulse device business, including the right to use the EPI patents, and immediately transferred all of those assets to Ivivi. The assets included all of EPI's rights, title and interest in the SofPulse device business as well as certain rights related to three patents related to the SofPulse device that were issued in 1994, 1996 and 1998. In January 2000, Ivivi acquired all of the rights to the EPI patents. While Ivivi has conducted development and sales and marketing activities, it has generated limited revenues and have incurred significant losses to date.

The SofPulse device has been cleared by the FDA for the treatment of pain and edema in soft tissue. The SofPulse device can be used for the treatment of chronic wounds, as well as for post-surgical treatments, including following plastic and reconstructive surgery. In July 2004, the Center for Medicare and Medicaid Services (formerly the Health Care Financing Administration), or CMS, issued a National Coverage Determination, or NCD, requiring reimbursement by Medicare for the use of electromagnetic therapy for the treatment of chronic wounds.

The SofPulse device consists of the following two components:

o a PEMF signal generator; and

o an applicator that is placed over the area to be treated.

The signal generator produces a specific electromagnetic signal that is pulsed through a cable and into the applicator, which functions as a broadcast antenna. Without touching the skin, the applicator transmits the electromagnetic signal into the desired area, penetrating medical dressings, casts, coverings, clothing and virtually all other non-metal materials. This process allows the SofPulse device to be used immediately following acute injury, trauma and surgical wounds, as well as in chronic conditions, unimpeded by standard clinical practices and more importantly, requiring no alteration of those practices to accommodate the therapy provided by the SofPulse device. The SofPulse device has been used in over 600,000 treatments by healthcare professionals on medical conditions, such as:

o acute or chronic wounds, including post-surgical wounds;

o edema and pain following reconstructive and plastic surgery; and

o pain associated with the inflammatory phase of chronic conditions.

For such purpose, the Company regards each 15-minute application of the SofPulse device on a target area of a patient as one treatment.

The Company has included the SofPulse device, which consists of a PEMF signal generator and an applicator that is placed over the area to be treated, in each of the following products:

o SofPulse I. The first generation of the SofPulse device that consists of a unit that houses the PEMF signal generator and a swing arm that positions the applicator over the target area. The unit is self-contained, and is supplied with a portable cart and swing arm assembly that enables it to be transported easily. Both the generator and the applicator easily disengage from the cart and arm for situations where space is limited or where the patient is in an awkward position.

o SofPulse II. The SofPulse II is a smaller and lighter version of the swing arm applicator used in the first generation of the SofPulse device, eliminating the need for the swing arm. This version is a comfortable, flexible ring, ranging in diameter from four to ten inches, and weighing only ounces, that plugs in to the same signal generator used in the Company's first generation of SofPulse device.

o Podiatric Boot. The Podiatric Boot utilizes an applicator that is ergonomically designed to position around the foot and lower calf and plugs into the same signal generator used in the Company's first generation of SofPulse device.

o Compression Garments. The Company has developed a battery-operated, disposable version of the SofPulse device that weighs ounces and can be incorporated into or onto post surgical compression garments, including garments that are placed on virtually all plastic surgery patients immediately following surgery. These "smart" compression garments will be activated at the time the garments are placed on the patient. This new technology will cycle on and off automatically throughout the day for up to 30 days. The Company expects that this product will be sold, and not rented to physicians and patients.

The Company is considering additional applications of the SofPulse device, as well as developing other products using PEMF. For example, the Company is currently researching and clinically testing potential applications of the PEMF technology for therapeutic angiogenisis (the regeneration of new blood vessels) and vascularization (the creation of new blood vessels) for use in circulatory and cardiac impairment conditions as well as for proliferation of implanted stem cells. The Company is also exploring the possibility of utilizing PEMF technology in an over-the-counter application for pain and edema to compete as a non-invasive, non-pharmacological alternative to other pain treatments, such as acetaminophen, without any of the potential known side-effects or complications that are associated with such products. The Company's ability to successfully expand the use of the SofPulse device for these applications will depend on a number of risks, including:

o establishing the efficacy of such applications;

o obtaining regulatory approval or clearance as needed for the use of the Company's technology for these applications;

o developing and commercializing new products utilizing the Company's technology for these applications; and

o establishing market acceptance and reimbursement of its products for these uses.

Aurex-3

Dr. Di Mino developed an electronic device (the "Aurex-3") for the treatment of Tinnitus. Tinnitus is a human medical condition which manifests itself in a constant and annoying ringing in the ears. The Aurex-3 uses a probe that transmits a vibratory and audio signal. In February 1997, Dr. Di Mino filed a patent application for a United States patent with respect to the Tinnitus Device. Dr. Di Mino advised the Company that any patents issued to him in connection with the Tinnitus Device will be assigned to the Company. Although significant testing of the Aurex-3 has not been conducted, pre-production and production prototypes were built and testing and marketing strategies have been developed. In May 1998, a 510-K Pre-market Notification ("PMN") was filed by the Company with the FDA. In August 1998, the United States Patent and Trademark Office issued a patent with respect to the Aurex-3 and the FDA notified the Company that the PMN was accepted. Accordingly, the Company may market the product in the United States for its intended indication, "[t]he treatment and control of tinnitus." From August 1998 to November 1999, the Company finalized manufacturing plans for the Aurex-3. In July 1999 the Company began taking advance orders for Aurex-3 units from distributors and patients and began to deliver the units in November 1999. Sales of the Aurex-3 have not been material. There can be no assurance that the Company will receive significant orders for the Aurex-3 or, if such orders are received, that the Company will be able to manufacture the Aurex-3 in sufficient quantities.

At the end of December 1999, six Aurex-3 devices were made available to the Dutch Commission on Tinnitus & Hyperacusis by a third party. On December 24, 1999, six participants were examined by the Dutch Commission for their tinnitus and trained in the use of the Aurex-3 by an audiologist and adviser of the group. After a six-week trial period with six participants, during which one participant reported a worsening of tinnitus, the Dutch Commission concluded that no positive results could be reported. Although the Dutch Commission tentatively concluded that the Aurex-3 seldom or never has a positive effect on tinnitus, especially on high frequency tinnitus, it did not exclude the possibility that application of the Aurex-3 on patients with a low tone tinnitus might show better results.

The Company believes that the Dutch Commission's conclusions are flawed primarily because of the small number of participants and the probable selection of participants whose condition could not be improved through the use of the Aurex-3. In addition, in the Company's limited experience, when potential users of the Aurex-3 were pre-screened to eliminate those with non-noise induced or variable intensity tinnitus, more than 60% of the users of the Aurex-3 have experienced significant improvement.

In November 2002, the Company sold, among other things, certain rights to the Aurex-3 to a wholly owned subsidiary of New England Acquisitions, Inc. The purchase price was 150,375 shares of New England's common stock and its subsidiary's agreement to make certain payments with respect thereto. New England's subsidiary provided a sample Aurex-3 to a Chinese distributor for its evaluation. The distributor advised the subsidiary, on the basis of limited use, that the sample has not been found to be effective. If the subsidiary did not make required minimum royalty payments or purchase certain quantities of products from the company within one year of its purchase of the rights, subject to extension by the Company, it could lose certain rights of exclusivity. In January, 2004 the Company notified New England that it had not purchased the minimum quantity of Aurex-3 devices and therefore the Company exercised its right to terminate the exclusive provision of the agreement.

Needle Eater

In May 1999 the Company acquired certain assets related to the Needle-Eater, a patented device used to dispose of used syringes and other medical sharps. The Company acquired the worldwide rights to the patent covering the technology in the Needle-Eater product; an inventory of finished units and parts; the rights to trademarks; and, information needed to assist it in manufacturing the units. The Company paid $14,206 to the previous owner of the Needle-Eater, and issued options to purchase an aggregate of 500,000 shares of the Company's common stock at an exercise price of $.625 per share, all of which have expired. The Company also agreed to pay a consulting fee of $750 per month for 24 months and a royalty of 5% on gross sales of Needle-Eater products for the life of the patent as well as certain other compensation. To date, sales of Needle Eater products have not been material.

Ultra-Violet Blood Irradiation

From 1997 to 2001, the Company, through a wholly-owned subsidiary, engaged in biotechnology research in the development of a medical therapeutic technology to treat viral and bacterial infections in humans and animals. The technology utilizes a process, commonly referred to as UBI or Ultra-Violet Blood Irradiation, wherein a measured sample of blood is intravenously removed from a patient, exposed to a specific ultra-violet light source, collected in a container and then returned to the patient, all in a closed system. The Company's subsidiary pursued the development of a blood irradiation device and related components. In December, 2001 the Company and its subsidiary discontinued such research as a result of litigation between the Company and a former employee of a Company's subsidiary.

Cosmetic and Topical Products

The Company, through its subsidiary, Pegasus, has developed several cosmetic and topical products. The Company has not realized any significant revenues from such products and there can be no assurance that any such products will account for significant revenues or any profits in the future.

Although the Company believes that its proposed products can be successfully marketed for over-the-counter use through one or more entities representing numerous retail pharmacies and otherwise, there can be no assurance that sales of such products will be material or that the Company will be able to derive any profits therefrom.

In November 2002, the Company sold certain rights to an ethnic shave cream, a burn lotion and the Aurex-3 to a wholly owned subsidiary of New England Acquisitions, Inc. The purchase price was 150,375 shares of New England's common stock and its subsidiary's agreement to make certain payments. The agreement provided that if the subsidiary did not make required minimum royalty payments or purchase certain quantities of products from the Company within one year of its purchase of the rights, it would lose certain rights of exclusivity. In January, 2004 the Company notified New England's subsidiary that it had not made the required payments and the Company thereby terminated the exclusive rights.

Customers

During the Company's fiscal years ended March 31, 2005, 2004 and 2003, sales of chemical products accounted for approximately 68%, 80% and 80% of the Company's operating revenues, respectively; sales and/or rentals of medical device products accounted for approximately 32%, 20% and 20% of the Company's operating revenues, respectively; and sales of our cosmetic and topical dermatological products were not material. No contract exists with any of the Company's customers that would obligate any customer to continue to purchase and/or rent products from the Company.

During the fiscal year ended March 31, 2005, two customers each accounted for approximately 8% of the Company's net sales of chemical products. The termination of business relations with any of the Company's significant chemical customers would have a material adverse effect on the Company's business and the financial condition of the Company.

During the fiscal year ended March 31, 2005, although sales and/or rentals of Sonotron devices and SofPulse devices were not significant, one customer accounted for approximately 85% of sales of the Sonotron devices and one customer accounted for approximately 34% of sales and/or rentals of SofPulse devices. Because the Company is seeking to increase future sales and/or rentals to those customers, the termination of business relations with those customers could have a material adverse effect on the Company's future business and financial condition.

Marketing and Distribution

A majority of the Company's chemical product sales are distributed to customers directly from the Company's headquarters. Customers place purchase orders with the Company and chemical products are then shipped via common carrier truck delivery on an "FOB shipping point" basis. A portion of the sales are accomplished through distributors who place purchase orders with the Company for certain quantities of the Company's chemical products which are shipped by common carrier to their respective warehouses. These stocking distributors then ship product to the ultimate customer via common carrier from their inventory of the Company's chemical products.

In April 2003, SMI entered into a distribution agreement with THM Group, LLC ("THM") with respect to the distribution and sale by THM of the veterinary Sonotron Device for the treatment of animals. Pursuant to the agreement THM was granted an exclusive territory comprising North America and Europe for a term of three years conditioned upon THM arranging for the purchase of certain minimum quantities of product from SMI on an annual basis. In April 2005, SMI terminated the agreement with THM due to THM's failure to arrange for the minimum purchases required thereby.

Ivivi is currently marketing and generating revenues in the wound care and plastic surgery markets. In order to facilitate the marketing of its products, it has developed and intends to further develop relationships with sales and distribution companies currently operating in these markets. In the wound care market, it is focusing its marketing efforts on the long-term acute care hospitals because of the high concentration of wound care patients and fixed reimbursements from Medicare. In the plastic surgery market, it is currently focusing its efforts on surgical procedures requiring compression garments, by establishing relationships with garment manufacturers and their principle distributors. Ivivi also intends to pursue additional markets and applications, assuming it obtains FDA approval, such as angiogenesis and vascularization for the treatment of certain circulatory impairment conditions and pain relief. As Ivivi develops additional products and technologies, it intends to develop the distribution arrangements for this market in concert with overall regulatory and marketing approaches.

Ivivi is currently a party to, and intends to continue to seek, collaborative and strategic agreements to assist it in the marketing of its products. Ivivi has engaged third-party distributors to market its products in the United States and intends to engage additional distributors and sales organizations to expand the scope of its markets nationally and internationally, with an initial international focus in Western Europe. Ivivi has granted these distributors the exclusive right to distribute its SofPulse device products to long-term acute care hospitals, acute care facilities, rehabilitation/wound centers, nursing homes and skilled nursing facilities. Additionally, Ivivi has contracted with one distributor to help it penetrate the home health care market. Ivivi intends to continue to seek similar agreements with strategic partners to establish new marketing and distribution channels for SofPulse as well as its next generation products.

On April 1, 2005, Ivivi entered into an agreement (the "Global Agreement") with Global Medical, L.L.C. ("Global") pursuant to which Global shall provide to Ivivi certain managerial services (the "Services") with respect to the medical devices and products manufactured, distributed, sold or rented by Ivivi (the "Ivivi Products"). The term of the Global Agreement is two years commencing on April 1, 2005, which term shall renew for successive one-year terms if mutually agreed in writing by the parties.

The Services to be provided under the Global Agreement include, among others, marketing and promotion of the Ivivi Products; management and support of Ivivi's outside sales force; customer service and support; warehousing, packaging, shipment, delivery, distribution and tracking of the Ivivi Products; biomedical service, preventative maintenance and other repair/refurbishment of the Ivivi Products; invoicing and collections; training of customers, caregivers and distributors and other outside sales personnel; tracking of trial evaluations and demonstrations of the Ivivi Products; and data-gathering and reporting for regulatory compliance purposes. Under the terms of the Global Agreement, as compensation for the Services, Ivivi shall pay Global: (i) $45,000 each month during the term of the Global Agreement (prorated for each partial calendar month during the term of the Global Agreement); and (ii) an amount equal to 18% of the aggregate amount invoiced by Global (net of taxes, returns and adjustments) on behalf of and in the name of Ivivi, for the sale or rental of Ivivi Products during the preceding month ("Percentage Payments"); provided, however, that if any additional personnel (beyond the amount designated in the Global Agreement) hired to perform the Services becomes an employee of Ivivi, the amount of the Percentage Payments with respect to invoices from accounts within territories covered by such additional personnel shall be reduced to 5%.

Subject to the terms and conditions of the Global Agreement, during the two-year period commencing on October 1, 2005 and ending on October 1,2007, Ivivi shall have the right (but not the obligation) to purchase some or all of the assets of Global that are utilized in the performance of the Services (the "Acquisition") in exchange for: (i) Ivivi's assumption of the on-going salary obligations (exclusive of previously granted but not yet paid bonuses or other incentive compensation) of the Global personnel performing the Services who will thereafter become employees of Ivivi; and (ii) Ivivi's grant to Global of equity securities of Ivivi. Under the terms of the Global Agreement, if Ivivi exercises its right with respect to the Acquisition pursuant to the terms and conditions thereof, Ivivi and Global shall use their good faith best efforts to consummate the Acquisition in a timely fashion.

In April 2004, the Company signed an agreement with Carepoint Group of the United Kingdom ("Carepoint") granting Carepoint exclusive, worldwide rights to manufacture and distribute the Aurex-3, for the treatment and control of tinnitus. The agreement provides that Carepoint will manufacture a redesigned version of the device and market it throughout the world. Carepoint is required to pay royalties to the Company on revenues generated pursuant to the agreement. The Company retains manufacturing and distribution rights for the new version of the device for the United States. There can be no assurance that Carepoint and/or the Company will successfully distribute the new version of the device or generate meaningful revenues pursuant to the agreement.

Manufacturer and Suppliers

Manufacturer

The Company manufactures its chemical products and SMI's and Ivivi's medical device products at its facilities located in Northvale, New Jersey.

The Company, Ivivi and SMI are parties to a manufacturing agreement, pursuant to which the Company serves as the exclusive manufacturer of all current and future medical, non-medical electronic and other devices or products to be produced by such subsidiaries. Pursuant to the terms of the manufacturing agreement, for each product that the Company manufactures for a subsidiary, the subsidiary pays the Company an amount equal to 120% of the sum of (i) the actual, invoiced cost for raw materials, parts, components or other physical items that are used in the manufacture of the product and actually purchased for the subsidiary by the Company, if any, plus (ii) a labor charge based on the Company's standard hourly manufacturing labor rate. The subsidiaries generally purchase and provide the Company with all of the raw materials, parts and components necessary to manufacture their respective products and, as a result, the manufacturing fee paid to the Company is generally 120% of the labor rate charged by the Company.

The Company warrants the products it manufactures for its subsidiaries against defects in material and workmanship for a period of 90 days after the completion of manufacture. After such 90-day period, the Company has agreed to provide repair services for the products to the subsidiary at its customary hourly repair rate plus the cost of any parts, components or items necessary to repair the products unless the subsidiary provides such parts, components or items to the Company.

Under the manufacturing agreement, all inventions, patentable or otherwise, trade secrets, discoveries, ideas, writings, technology, know-how, improvements or other advances or findings relating to the subsidiaries' products and technologies shall be and become the exclusive proprietary and confidential information of such subsidiary or any person to whom such subsidiary may have assigned rights therein. The Company has no rights in any such proprietary or confidential information and is prohibited from using or disclosing any of such proprietary or confidential information for its own benefit or purposes, or for the benefit or purpose of any other person other than the subsidiary without such subsidiary's prior written consent. The Company has also agreed to cooperate with each subsidiary in securing for it any patents, copyrights, trademarks or the like which it may seek to obtain in connection therewith. If the Company breaches any of the confidentiality agreements contained in the manufacturing agreement, or if these agreements are not sufficient to protect a subsidiary's technology or are found to be unenforceable, the subsidiary's competitors could acquire and use information that it considers to be our trade secrets and the subsidiary may not be able to compete effectively.

Since the Company is the exclusive manufacturer of all of the subsidiaries' current and future products under the manufacturing agreement, if the operations of the Company are interrupted or if orders or orders of other customers of the Company exceed the manufacturing capabilities of the Company, the Company may not be able to deliver products on time and the subsidiaries may not be able to deliver their respective products to their respective customers on time. Under the terms of the manufacturing agreement, if the Company is unable to perform its obligations thereunder or is otherwise in breach of any provision thereof, the subsidiaries have the right, without penalty, to engage third parties to manufacture some or all of their products. In addition, if a subsidiary elects to utilize a third-party manufacturer to supplement the manufacturing being completed by the Company, such subsidiary has the right to require the Company to accept delivery of the products from these third-party manufacturers, finalize the manufacture of the products to the extent necessary for such subsidiary to comply with FDA regulations and ensure that the design, testing, control, documentation and other quality assurance procedures during all aspects of the manufacturing process have been met.

As the exclusive manufacturer of the medical devices of its subsidiaries, the Company is required to comply with QSR requirements, which require manufacturers, including third-party manufacturers, to follow stringent design, testing, control, documentation and other quality assurance procedures during all aspects of the manufacturing process. In addition, the Company's manufacturing facility is required to be registered as a medical device manufacturing site with the FDA and is subject to inspection by the FDA. The Company has been registered by the FDA as a Registered Medical Device Establishment since 1988 allowing it to manufacture medical devices in accordance with procedures outlined in FDA regulations, which include quality control and related activities. Such registration is renewable annually and although the Company does not believe that the registration will fail to be renewed by the FDA, there can be no assurance of such renewal. The failure of the Company to obtain any annual renewal would have a material adverse effect on its subsidiaries if they were not able to secure another manufacturer of their products.

Suppliers

The Company purchases the raw materials used in the manufacture of its chemical products from numerous sources. The Company believes that all necessary raw materials for its chemical products are readily available and will continue to be so in the foreseeable future. The Company has never had, nor does it anticipate experiencing, any shortages of such materials. The raw materials for chemical products consist primarily of water, resins, elastomers and catalysts. The Company generally maintains sufficient quantities of inventories of its chemical products to meet customer demands. When orders are received by the Company for its chemical products, the Company's customers require immediate shipment thereof. Accordingly, in order to satisfy its customers' needs, the Company has maintained an inventory ranging, in dollar amounts, from 15% to 30% of sales of chemical products in the form of either raw materials or finished goods.

Ivivi and SMI purchase and provide the Company with the raw materials, parts, components and other items that are required to manufacture their respective products. Such subsidiaries rely on a single or limited number of suppliers for such raw materials, parts, components and other items. Although there are many suppliers for each of these raw materials, parts, components and other items, the subsidiaries are dependent on a limited number of suppliers for many of the significant raw materials and components. Neither Ivivi nor SMI have any long-term or exclusive purchase commitments with any of its suppliers. Their failure to maintain existing relationships with their respective suppliers or to establish new relationships in the future could also negatively affect their ability to obtain raw materials and components used in their products in a timely manner. If either Ivivi or SMI is unable to obtain ample supply of product from its existing suppliers or alternative sources of supply, it may be unable to satisfy customers' orders which could reduce its revenues and adversely affect its relationship with its customers.

Research and Development

During the Company's fiscal years ended March 31, 2005 and 2004, the Company made no material expenditures with respect to company-sponsored research and development activities relating to its chemical business other than a portion of the regular salaries of its executive officers which may be allocated thereto. During such fiscal years, the Company did not expend any funds on customer-sponsored research and development activities with respect thereto.

During the Company's fiscal years ended March 31, 2005 and 2004, other than the regular compensation paid by the Company to its executive officers, the Company did not spend any appreciable amounts on testing, application, clinical studies and company-sponsored research and development activities in connection with the Sonotron Technology and other activities determined in accordance with generally accepted accounting principles. During each of such years no material amounts were spent on customer-sponsored research and development activities relating to the development of new products, services or techniques or the improvement of any of the foregoing.

Ivivi's research and development efforts continue on several fronts directly related to the SofPulse technology, including its expansion into the angiogenesis and vascularization market, as well as new technologies and products. Following the development of new technologies and products by Ivivi, Ivivi may enter into joint ventures, license agreements or other relationships with third-parties to commercialize such technologies and products. Ivivi's research and development expenditures (excluding consulting fees and portions of salaries related to research and development) were approximately $400,513 and $0 for the fiscal years ended March 31, 2005 and 2004, respectively.

Ivivi is currently a party to two sponsored research agreements with Montefiore Medical Center pursuant to which Ivivi funds research in the fields of pulsed magnetic frequencies and neurosurgery, each under the supervision of a principal investigator who is affiliated with Montefiore Medical Center. Ivivi's sponsored research agreement pursuant to which it funds research in the field of pulsed magnetic frequencies under the supervision of Berish Strauch, M.D., of Montefiore Medical Center's Department of Plastic Surgery, commenced on October 17, 2004 and expires on December 31, 2009, subject to renewal in one-year increments by mutual agreement. The sponsored research agreement pursuant to which Ivivi funds the research in the field of neurosurgery under the supervision of Diana Casper, Ph.D., of Montefiore Medical Center's Department of Neurosurgery, commenced on September 24, 2004 and expires on September 24, 2005. Ivivi's sponsored research agreements provided for total payments to be made to Montefiore Medical Center of $524,435, payable at various times from September 2004 through April 2005. The amounts owed to Montefiore Medical Center have been paid in full.

Under each sponsored research agreement, Montefiore Medical Center is required to use its reasonable efforts to complete the applicable research project that is directed and controlled by the principal investigator, subject to informal consultation with Ivivi's technical representative, Arthur A. Pilla, Ph.D. Under each agreement, Montefiore Medical Center is required to promptly disclose any discovery or invention made by it, the principal investigator or any other personnel in the performance of the research project, and title to any and all of such discoveries or inventions and all other intellectual property rights developed that relate to any of Ivivi's products will be Ivivi's sole and exclusive property. Ivivi also has the first option to obtain a worldwide royalty bearing license to all other inventions not owned by Ivivi that are conceived or made during the performance of the research project. Although Montefiore Medical Center and its employees have sole ownership of any copyrighted or copyrightable works (including reports and publications) that are created by them in the performance of the research project, Ivivi has an irrevocable royalty-free, nontransferable, non-exclusive right to copy and distribute research reports furnished to Ivivi under each agreement and to prepare, copy and distribute derivative works based on these research reports. Further, subject to certain limited exceptions, each of Montefiore Medical Center, the principal investigator and us are required to keep all confidential information of the other party in strict confidence for a period of five years after the end of the term of each agreement.

In June 2005, Diana Casper, Ph.D. received notification that an R-22, a two-year grant in the amount of approximately $270,000, was approved by the National Institute of Health, for the purpose of further studying the effect of Ivivi's technology on enhancing survival of brain cells, (i.e. neurons as basic science research for developing treatments for various human neurological disorders).

Competition

The Company's chemical business is highly competitive and substantially all of the Company's competitors possess greater experience, financial resources, operating history and marketing capabilities than does the Company. Although the Company does not believe that there are one or more dominant competitors in such industry, there can be no assurance that the Company will be able to effectively compete with any or all of its competitors on the basis of price, service or otherwise. Competitors may be better able to withstand a change in conditions within the chemical products industry and throughout the economy as a whole. In addition, current and anticipated future consolidation among our competitors and customers may cause the Company to lose market share as well as put downward pressure on pricing. Furthermore, there is a trend in the chemical industry toward relocation of manufacturing facilities to lower-cost regions such as Asia. Such relocation may permit some of the Company's competitors to lower their costs and improve their competitive position. If the Company does not compete successfully, its business, operating margins, financial condition, cash flows and profitability could be adversely affected.

The Company's results of operations depend, in part, on its ability to expand its chemical product offerings. The Company is committed to remaining a competitive producer and believes that its portfolio of new or re-engineered products is strong. However, the Company may not be able to continue to develop new products, re-engineer our existing products successfully or bring them to market in a timely manner. While the Company believes that the products, pricing and services it offers customers are competitive, it may not be able to continue to attract and retain customers to which to sell its chemical products.

The manufacture, distribution and sale of medical devices and equipment designed to relieve swelling and pain or to treat chronic wounds is highly competitive and substantially many of the Company's competitors possess greater experience, financial resources, operating history and marketing capabilities than the Company. For example, Diapulse Corporation of America, Inc. manufactures and markets devices that are deemed by the FDA to be substantially equivalent to SofPulse, Regenesis Biomedical, Inc., manufactures and markets a device that is similar to the Company's first generation SofPulse device, and KCI Concepts, Inc., manufactures and markets negative pressure wound therapy devices in the wound care market. A number of other manufacturers, both domestic and foreign, and distributors market shortwave diathermy devices that produce deep tissue heat and that may be used for the treatment of certain of the medical conditions in which the SofPulse is also indicated. In addition, SofPulse may be deemed to be competitive with pain relief drugs as well as pain relief medical devices. The Company also faces competition from companies that have developed other forms of treatment, such as hyperbaric oxygen chambers, thermal therapies and hydrotherapy. Other companies with substantially larger expertise and resources than the Company's may develop or market new products that directly compete with SofPulse or other products or technologies developed by the Company. In addition, other forms of treatment that compete with the Company's technologies and products may achieve more rapid acceptance in the medical community.

In addition, several other companies manufacture medical devices based on the principle of electrotherapeutic technologies for applications in bone healing and spinal fusion, and may adapt their technologies or products to compete directly with the Company. The Company is also aware of other companies that manufacture and market devices in the same target markets as the Company does. Certain of these companies have significant product sales and have greater financial, technical, personnel and other resources than the Company. Also, universities and research organizations may actively engage in research and development to develop technologies or products that will compete with the Company's technologies and products. Barriers to entry in the Company's industry include (i) a large investment in research and development; (ii) numerous costly and time-consuming regulatory hurdles to overcome before any products can be marketed and sold; (iii) high costs for marketing and for building an effective distribution network; and (iv) the ability to obtain financing during the entire start up period.

The medical products market is characterized by rapidly changing technology that may result in product obsolescence or short product life cycles. The Company's ability to compete will be dependent on the Company's ability to continually enhance and improve its products and to develop successfully or acquire and market new products. There can be no assurance that the Company will be able to compete successfully, that competitors will not develop technologies or products that render the Company's medical device products obsolete or less marketable or that the Company will be able to enhance successfully its existing products or develop or acquire new products. Furthermore, there can be no assurance that other technologies or products that are functionally similar to those of the Company are not currently under development.

Government Regulation

Several of the Company's products are medical devices subject to extensive and rigorous regulation by the FDA, as well as other regulatory bodies. The FDA regulations govern the following activities that the Company performs and will continue to perform to help ensure that medical products distributed worldwide are safe and effective for their intended uses:

o product design and development;

o product testing;

o product manufacturing;

o product safety;

o product labeling;

o product storage;

o record keeping;

o pre-market clearance or approval;

o advertising and promotion;

o production; and

o product sales and distribution.

FDA's Pre-market Clearance and Approval Requirements

Unless an exemption applies, each medical device the Company wishes to commercially distribute in the United States will require either prior 510(k) pre-market notification ("PMN") clearance or pre-market approval ("PMA") from the FDA. The FDA classifies medical devices into one of three classes. Devices deemed to pose lower risks are placed in either class I or II, which requires the manufacturer to submit to the FDA a PMN requesting permission to commercially distribute the device. This process is generally known as 510(k) clearance. Some low risk devices are exempt from this requirement. Devices deemed by the FDA to pose the greatest risk, such as life-sustaining, life-supporting or implantable devices, or devices deemed not substantially equivalent to a previously cleared 510(k) device, are placed in class III, requiring pre-market approval.

510(k) Clearance Pathway

When a 510(k) clearance is required, the Company must submit a PMN demonstrating that its proposed device is substantially equivalent to a previously cleared 510(k) device or a device that was in commercial distribution before May 28, 1976 for which the FDA has not yet called for the submission of PMA applications. By regulation, the FDA is required to clear or deny a PMN within 90 days of submission of the application. As a practical matter, clearance often takes significantly longer. The FDA may require further information, including clinical data, to make a determination regarding substantial equivalence. On January 17, 1991, EPI received FDA clearance for commercial marketing of the SofPulse device for the treatment of pain and edema in soft tissue pursuant to a 510(k) PMN. In 1999, the Company received FDA clearance for the commercial marketing of the Aurex-3 pursuant to a 510(k) PMN.

Pre-market Approval Pathway

A PMA application must be submitted to the FDA if the device cannot be cleared through the 510(k) process. The process of submitting a satisfactory PMA application is significantly more expensive, complex and time consuming than the process of establishing "substantial equivalence" to a device marketed prior to 1976 pursuant to a PMN and requires extensive research and clinical studies. A PMA application must be supported by extensive data, including, but not limited to, technical, preclinical, clinical trials, manufacturing and labeling to demonstrate to the FDA's satisfaction the safety and effectiveness of the device. Upon completion of these tasks, an applicant is required to submit to the FDA all relevant clinical, animal testing, manufacturing, laboratory specifications and other information. If accepted for filing, the application is further reviewed by the FDA and subsequently may be reviewed by an FDA scientific advisory panel comprised of physicians, statisticians and other qualified personnel. A public meeting may be held before the advisory panel in which the PMA application is reviewed and discussed. Upon completion of such process, the advisory panel issues a favorable or unfavorable recommendation to the FDA or recommends approval with conditions. The FDA is not bound by the

opinion of the advisory panel. The FDA may conduct an inspection to determine whether the applicant conforms with CGMP guidelines. If the FDA's evaluation is favorable, the FDA will subsequently publish a letter approving the PMA application for the device for a mutually agreed upon indication of use. Interested parties can file comments on the order and seek further FDA review. The PMA process may take several years and no assurance can be given concerning the ultimate outcome of PMA applications submitted by an applicant.

In March 1989, in response to a PMN filed by the Company with the FDA, the FDA notified the Company that the then current model of the Sonotron Device, under the FDA's standards, was not substantially equivalent to certain medical devices marketed in interstate commerce prior to May 28, 1976. In March 1991, a further PMN was filed with the FDA on behalf of the Company with respect to the then current model of the Sonotron Device which was subsequently voluntarily withdrawn by the Company. The FDA advised the Company that its determination with respect to the initial PMN was based upon (a) the new intended use of applying superficial heat at non-therapeutic temperatures for the treatment of osteoarthritis, and (b) new types of safety and effectiveness questions that are raised by the new technological characteristics of the Sonotron Devices when compared to certain devices marketed before May 28, 1976. In the event that Sonotron Devices cannot be marketed pursuant to a PMN, before Sonotron Devices can be marketed in the United States, the Company would be required to obtain a PMA before the Sonotron Devices can be marketed in the United States for commercial distribution in connection with human applications. There can be no assurance that any approval can be obtained from the FDA in the foreseeable future, if at all.

In January 1991, the FDA advised EPI of its determination to treat the MRT100, the first model of the SofPulse device, as a class III device. The FDA retains the right to require the manufacturers of certain Class III medical devices to submit a PMA application in order to sell such devices or to promote such devices for specific indications. To date, the Company has not been asked by the FDA to seek pre-market approval for the SofPulse device; however, there can be no assurance that the Company will not be required to do so and that, if required, the Company will be able to comply with such requirement for the SofPulse device.

Pervasive and Continuing Regulation

After a device is placed on the market, numerous regulatory requirements apply. These include:

o quality system regulations, or QSR, which require manufacturers, including third-party manufacturers, to follow stringent design, testing, control, documentation and other quality assurance procedures during all aspects of the manufacturing process;

o labeling regulations and FDA prohibitions against the promotion of products for uncleared, unapproved or "off-label" uses;

o medical device reporting regulations, which require that manufacturers report to the FDA if their 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 the malfunction were to recur; and

o post-market surveillance regulations, which apply when necessary to protect the public health or to provide additional safety and effectiveness data for the device.

The FDA has broad post-market and regulatory enforcement powers. The Company is subject to unannounced inspections by the FDA to determine its compliance with the QSR and other regulations, and these inspections may include the Company's manufacturing facilities, or any other manufacturing subcontractors that the Company may engage. The Company has been registered by the FDA as a Registered Medical Device Establishment allowing it to manufacture medical devices in accordance with procedures outlined in FDA regulations which include quality control and related activities. Such registration is renewable annually and although the Company does not believe that the registration will fail to be renewed by the FDA, there can be no assurance of such renewal. The failure of the Company to obtain any annual renewal would have a material adverse effect on it.

Failure to comply with applicable regulatory requirements can result in enforcement action by the FDA, which may include any of the following sanctions:

o fines, injunctions, consent decrees and civil penalties;

o recall or seizure of the Company's products;

o operating restrictions, partial suspension or total shutdown of production;

o refusing the Company's requests for 510(k) clearance or pre-market approval of new products or new intended uses;

o withdrawing 510(k) clearance or pre-market approvals that are already granted; and

o criminal prosecution.

The FDA also has the authority to require us to repair, replace or refund the cost of any medical device that has been manufactured for us or distributed by the Company. If any of these events were to occur, they could have a material adverse effect on the Company's business.

The Company is also subject to a wide range of federal, state and local laws and regulations, including those related to the environment, health and safety, land use and quality assurance. The Company believes that it is in compliance with these laws and regulations as currently in effect, and its compliance with such laws will not have a material adverse effect on the Company's capital expenditures, earnings and competitive and financial position.

International Regulations

International sales of medical devices are subject to foreign governmental regulations, which vary substantially from country to country. The time required to obtain clearance or approval by a foreign country may be longer or shorter than that required for FDA clearance or approval, and the requirements may be different. There can be no assurance that the Company will be successful in obtaining or maintaining necessary approvals to market its products in certain foreign markets, or obtain such approvals for additional products that may be developed or acquired by the Company.

The primary regulatory environment in Europe is that of the European Union, which consists of 25 countries encompassing most of the major countries in Europe. Three member states of the European Free Trade Association have voluntarily adopted laws and regulations that mirror those of the European Union with respect to medical devices. Other countries, such as Switzerland, have entered into Mutual Recognition Agreements and allow the marketing of medical devices that meet European Union requirements.

The European Union has adopted numerous directives and European Standardization Committees have promulgated voluntary 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 a CE conformity marking (which stands for Conformite Europeenne), indicating that the device conforms with the essential requirements of the applicable directives and, accordingly, can be commercially distributed throughout the member states of the European Union, the member states of the European Free Trade Association and countries which have entered into a Mutual Recognition Agreement. The method of assessing conformity varies depending on the type and class of the product, but normally involves a combination of self-assessment by the manufacturer of the product and a third-party assessment by a Notified Body, an independent and neutral institution appointed by a country to conduct the conformity assessment. This third-party assessment may consist of an audit of the manufacturer's quality system and specific testing of the manufacturer's device. An assessment by a Notified Body in one member state of the European Union, the European Free Trade Association or one country which has entered into a Mutual Recognition Agreement is required in order for a manufacturer to commercially distribute the product throughout these countries. ISO 9001 and ISO 13845 certification are voluntary harmonized standards. Compliance establishes the presumption of conformity with the essential requirements for a CE Marking.

Reimbursement

In the United States, health care providers, such as hospitals and physicians, that purchase or lease medical devices, generally rely on third-party payors, principally Medicare, Medicaid and private health insurance plans, including health maintenance organizations, to reimburse all or part of the cost of the treatment for which the medical device is being used. Successful commercialization of the Company's products will depend, in part, upon the availability of reimbursement for the cost of the treatment from third party health care payors such as Medicare, Medicaid and private health insurance plans, including health maintenance organizations. Such third party payors have increasingly challenged the price of medical products and services, which has and could continue to have a significant effect on the purchasing patterns of many health care providers. Several proposals have been made by federal and state government officials that may lead to health care reforms, including a government directed national health care system and health care cost-containment measures. The effect of changes in the health care system or method of reimbursement for the SofPulse Device or any other medical device which may be marketed by the Company in the United States cannot be determined by the Company.

The SofPulse Device is rented principally to nursing homes and extended care facilities that receive payment coverage for products and services they utilize from various public and private third-party payors, including the Medicare program and private insurance plans. As a result, the demand and payment for the Company's products are dependent, in part, on the reimbursement policies of these payors. The manner in which reimbursement is sought and obtained for any of the Company's medical device products varies based upon the type of payor involved and the setting to which the product is furnished and in which it is utilized by patients.

The Company cannot determine the effect of changes in the healthcare system or method of reimbursement for the SofPulse device or any other medical device which may be marketed by it in the United States. For example, from 1991 to 1997, the SofPulse device was marketed primarily for use in nursing homes for the Medicare reimbursable treatment of chronic wounds through a rental program. Due to changes in reimbursement made by CMS, in 1997, which prohibited Medicare coverage of the use of the technology used in the SofPulse device in the treatment of non-healing wounds, the nursing home revenue diminished significantly by 2001 and the Company pursued alternative markets and applications for use of the SofPulse device. In December 2003, CMS reversed its policy and issued an NCD providing for Medicare reimbursement for electromagnetic therapies for non-healing wounds, which became effective in July 2004. In response to this significant regulatory change, the Company re-entered the wound care market.

The Company believes that government and private efforts to contain or reduce health care costs are likely to continue. These trends may lead third-party payors to deny or limit reimbursement for the Company's products, which could negatively impact the pricing and profitability of, or demand for, the Company's products.

Medicare

Medicare is a federally funded program that provides health coverage primarily to the elderly and disabled. Medicare is composed of four parts: Part A, Part B, Part C and Part D. Medicare Part A (hospital insurance) covers, among other things, inpatient hospital care, home health care and skilled nursing facility services. Medicare Part B (supplementary medical insurance) covers various services, including those services provided on an outpatient basis. Medicare Part B also covers medically necessary durable medical equipment and medical supplies. Medicare Part C, also known as "Medicare Advantage," offers beneficiaries a choice of various types of health care plans, including several managed care options. Medicare Part D is the new Voluntary Prescription Drug Benefit Program, which becomes effective in 2006. The Medicare program has established guidelines for the coverage and reimbursement of certain equipment, supplies and support services. In general, in order to be reimbursed by Medicare, a health care item or service furnished to a Medicare beneficiary must be reasonable and necessary for the diagnosis or treatment of an illness or injury or to improve the functioning of a malformed body part and not otherwise excluded by statute. In October 2004, CMS issued a quarterly update that allows skilled nursing facilities, or SNFs, and providers of healthcare in the home to use the electromagnetic therapy code in the Healthcare Common Procedure Code System, the standardized coding system developed by CMS to ensure that Medicare reimbursement claims are processed in an orderly and consistent manner for consolidated billing enforcement. Although CMS has provided for reimbursement for the use of electromagnetic therapy by SNFs, CMS has not yet provided for reimbursement for the use of electromagnetic therapy by providers of healthcare in the home. However, the Company is pursuing obtaining clearance for use of electromagnetic therapy by providers of healthcare in the home, but it may not be able to obtain such clearance.

The methodology for determining the amount of Medicare reimbursement of the Company's products varies based upon, among other things, the setting in which a Medicare beneficiary receives health care items and services.

Hospital Setting

Since the establishment of the prospective payment system in 1983, acute care hospitals are generally reimbursed for certain patients by Medicare for inpatient operating costs based upon prospectively determined rates. Under the prospective payment system, or PPS, acute care hospitals receive a predetermined payment rate based upon the Diagnosis-Related Group, or DRG, which is assigned to each Medicare beneficiary's stay, regardless of the actual cost of the services provided. Certain additional or "outlier" payments may be made to a hospital for cases involving unusually high costs or lengths of stay. Accordingly, acute care hospitals generally do not receive direct Medicare reimbursement under PPS for the distinct costs incurred in purchasing or renting the Company's products. Rather, reimbursement for these costs is included within the DRG-based payments made to hospitals for the treatment of Medicare-eligible inpatients who utilize the products. Long-term care and rehabilitation hospitals also are now paid under a PPS rate that does not directly account for all actual services rendered. Since PPS payments are based on predetermined rates, and may be less than a hospital's actual costs in furnishing care, hospitals have incentives to lower their inpatient operating costs by utilizing equipment and supplies, such as our medical device products, that will reduce the length of inpatient stays, decrease labor or otherwise lower their costs. In addition, the amount that the hospital receives under PPS could limit the amount that the Company could charge a hospital for the use of its products.

Certain specialty hospitals also use the Company's medical device products. Such specialty hospitals are exempt from the PPS and, subject to certain cost ceilings, are reimbursed by Medicare on a reasonable cost basis for inpatient operating and capital costs incurred in treating Medicare beneficiaries. Consequently, such hospitals may have additional Medicare reimbursement for reasonable costs incurred in purchasing or renting the Company's products. There has been little experience with PPS for long-term care and rehabilitation hospitals. A final rule for rehabilitation hospital PPS became effective on January 1, 2002. A final ruling was published in August 2002 implementing PPS for long-term care hospitals with a phased-in transition period, effective October 1, 2002. The Company cannot predict the impact of the rehabilitation hospital PPS or the long-term care hospital PPS on the health care industry or on the Company's financial position or results of operations.

Skilled Nursing Facility Setting

On July 1, 1998, reimbursement for SNFs under Medicare Part A changed from a cost-based system to a prospective payment system which is based on resource utilization groups ("RUGs"). Under the RUGs system, a Medicare patient in a SNF is assigned to a RUGs category upon admission to the facility. The RUGs category to which the patient is assigned depends upon the medical services and functional support the patient is expected to require. The SNF receives a prospectively determined daily payment based upon the RUGs category assigned to each Medicare patient. These payments are intended generally to cover all inpatient services for Medicare patients, including routine nursing care, capital-related costs associated with the inpatient stay and ancillary services. Effective July 2002, the daily payments were based on the national average cost. Although the Refinement Act and BIPA increased the payments for certain RUGs categories, certain provisions of the Refinement Act and BIPA covering these payment increases expired on September 30, 2002 and, in effect, the RUGs rates for the most common categories of SNF patients decreased. Because the RUGs system provides SNFs with fixed daily cost reimbursement, SNFs have become less inclined to use products which had previously been reimbursed as variable ancillary costs.

Insurance

The Company may be exposed to potential product liability claims by those who use the Company's products. Therefore, the Company maintains a general liability insurance policy, which includes aggregate product liability coverage of $2,000,000 for certain of the Company's products. The Company does not have product liability coverage for its medical device products, other than the SofPulse which is covered by a product liability policy held by Ivivi. The Company believes that its present insurance coverage is adequate for the types of products currently marketed. There can be no assurance, however, that such insurance will be sufficient to cover potential claims or that the present level of coverage will be available in the future at a reasonable cost.

Employees

As of June 29, 2005, the Company had an aggregate of 16 employees, 10 of which are employed directly by the Company and six of which are employed by
Ivivi. As of such date, the Company had five full-time salaried employees in executive or managerial positions, two of whom were executive officers of the Company, and one part-time employee.

Recent Developments

Private Placement

In December 2004 and February 2005, the Company, together with Ivivi, its majority-owned subsidiary, completed two private placements pursuant to which they issued, jointly and severally, unsecured convertible notes (collectively, the "Notes") in an aggregate principal amount of $3,637,500 and $2,450,000, respectively. The private placements were completed in seven separate closings from July 2004 through February 2005. The proceeds of the private placements are being used primarily by Ivivi for the research and development and sales and marketing of the SofPulse device line of products and for the research and development of other potential products being developed by
Ivivi. Reference is made to the Company's Current Reports on Form 8-K, dated August 31, 2005, December 1, 2004 and February 10, 2005.

The Notes are due and payable five years from the date of issuance, unless earlier converted. The Notes bear interest at 6% per annum and under certain circumstances, the principal and accrued interest on the Notes will either be: (i) convertible into the Company's common stock at $.29 per share or
(ii) convertible into Ivivi's common stock at $8.30 per share. Pursuant to the terms of the private placements completed in each of December 2004 and February 2005, the number of shares of the Company's common stock and the number of shares of Ivivi's common stock issuable upon conversion of the convertible notes issued therein and the exercise of the warrants will increase by 1% and 2%, respectively, for each 30-day period, or portion thereof, after March 1, 2005 and June 30, 2005, respectively, that a registration statement covering the shares of the Company's common stock and the shares of Ivivi's common stock, respectively, underlying securities issued in the private placement is not declared effective.

For each Note in the principal amount of $100,000 issued in the Private Placements, one warrant for the purchase of up to 344,828 shares of the Company's common stock at $.41 per share (the "Company Warrant") and one warrant for the purchase of up to 12,048 shares of Ivivi's common stock at $5.70 per share (the "Ivivi Warrant") were issued. Each of the Company Warrants and the Ivivi Warrants provides that in addition to paying the exercise price, the holder must surrender the non-exercised warrant (i.e., either the Company Warrant or the Ivivi Warrant).

Initial Public Offering of Ivivi

On February 11, 2005, the Company issued a press release pursuant to which the Company announced the filing of a registration statement on Form SB-2 by Ivivi related to the proposed initial public offering of Ivivi's common stock. Reference is made to the Company's Current Report on Form 8-K dated February 11, 2005. We cannot assure you that the offering will be consummated on terms acceptable to us, if at all. In the event the offering is completed, the Company's ownership of Ivivi will be decreased significantly.

Risk Factors

An investment in our stock involves a high degree of risk. You should carefully consider the following information, together with other information in this prospectus, before buying shares of our stock. If any of the following risks or uncertainties occur, our business, financial condition and results of operations could be materially and adversely affected, the trading price of our stock could decline and you may lose all or a part of the money you paid to buy our stock.

Risks Relating to Our Chemical Business

New environmental or other regulations could increase the Company's operating costs.

Like other manufacturers, the Company is subject to a broad range of Federal, state and local laws and requirements, including those governing discharges in the air and water, the handling and disposal of solid and hazardous substances and wastes, the remediation of contamination associated with the release of hazardous substances, work place safety and equal employment opportunities. The Company has made expenditures to comply with such laws and requirements. The Company believes, based on information currently available to management, that it is in compliance with applicable environmental and other legal requirements and that the Company will not require material capital expenditures to maintain compliance with such requirements in the foreseeable future. Governmental authorities have the power to enforce compliance with such laws and regulations, and violators may be subject to penalties, injunctions or both. Third parties may also have the right to enforce compliance with such laws and regulations. As the Company develops new formulations for its chemical products, those products may become subject to additional review and approval requirements governing the sale and use of its products. Although the Company's manufacturing processes do not currently result in the generation of hazardous wastes, this may not always be the case and material costs or liabilities may be incurred by the Company in the future as a result of the manufacturing operations. It is also possible that other developments, such as additional or increasingly strict requirements of laws and regulations of these types, or enforcement policies thereunder, could significantly increase the Company's costs of operations.

Because we use various materials and substances in manufacturing our chemical products, our production facilities are subject to operating hazards that could cause personal injury and loss of life, severe damage to, or destruction of, property and equipment and environmental contamination.

We are dependent on the continued operation of our production and distribution facility. This facility is subject to hazards associated with the manufacture, handling, storage and transportation of chemical materials and products, including natural disasters, mechanical failure, unscheduled downtime, labor difficulties, transportation interruptions, and environmental hazards, such as spills, discharges or releases of toxic or hazardous substances and remediation complications. These hazards can cause personal injury and loss of life, severe damage to, or destruction of, property and equipment and environmental contamination and other environmental damage and could have a material adverse effect on our financial condition. In addition, due to the nature of our business operations, we could become subject to scrutiny from environmental action groups.

We rely significantly on raw materials in the production of our chemical products and fluctuations in costs of such raw materials would increase our operating expenses.

Our manufacturing operations with respect to our chemical products depend upon obtaining adequate supplies of our raw materials on a timely basis. The loss of a key source of supply or a delay in shipments could have an adverse effect on our business. We are exposed to price risks associated with these raw material purchases. The availability and prices of raw materials may be subject to curtailment or change due to, among other things, new laws or regulations,

suppliers' allocations to other purchasers, interruptions in production by suppliers, changes in exchange rates, cost components of raw materials and worldwide price levels. Our results of operations could be adversely affected if we were unable to obtain adequate supplies of raw materials in a timely manner or if the costs of raw materials increased significantly.

We face competition from other chemical companies, which could adversely affect our revenue and financial condition.

We actively compete with companies producing the same or similar products and, in some instances, with companies producing different products designed for the same uses. We encounter competition in price, delivery, service, performance, product innovation and product recognition and quality, depending on the product involved. For some of our products, our competitors are larger and have greater financial resources. As a result, these competitors may be better able to withstand a change in conditions within the industries in which we operate, a change in the prices of raw materials or a change in the economy as a whole. Our competitors can be expected to continue to develop and introduce new and enhanced products, which could cause a decline in market acceptance of our chemical products. Current and future consolidation among our competitors and customers may also cause a loss of market share as well as put downward pressure on pricing. Our competitors could cause a reduction in the prices for some of our chemical products as a result of intensified price competition. Competitive pressures can also result in the loss of major customers. If we cannot compete successfully, our business, financial condition and results of operations could be adversely affected.

We face competition from other chemical companies, which could force us to lower our prices thereby adversely affecting our operating margins, financial condition, cash flows and profitability.

The markets in which we operate are highly competitive, and this competition could harm our business, results of operations, cash flow and financial condition. Our competitors include major international producers as well as smaller regional competitors. We believe that a significant competitive factor for our products is selling price. We could be subject to adverse results caused by our competitors' pricing decisions. In addition, current and anticipated future consolidation among our competitors and customers may cause us to lose market share as well as put downward pressure on pricing. Furthermore, there is a trend in the chemical industry toward relocation of manufacturing facilities to lower-cost regions such as Asia. Such relocation may permit some of our competitors to lower their costs and improve their competitive position. Some of our competitors are larger, have greater financial resources and have less debt than we do. As a result, those competitors may be better able to withstand a change in conditions within our industry and throughout the economy as a whole. If we do not compete successfully, our business, operating margins, financial condition, cash flows and profitability could be adversely affected.

Failure to develop new chemical products and/or improve our existing products will make us less competitive.

Our results of operations depend, in part, on our ability to expand our chemical product offerings. We are committed to remaining a competitive producer and believe that our portfolio of new or re-engineered products is strong. However, we may not be able to continue to develop new products, re-engineer our existing products successfully or bring them to market in a timely manner. While we believe that the products, pricing and services we offer customers are competitive, we may not be able to continue to attract and retain customers to which to sell our chemical products.

Failure to make continued improvements in our productivity could hurt our competitive position.

In order to obtain and maintain a competitive position, we believe that we must continue to make improvements in our productivity. When we invest in new technologies or processes, we face risks related to cost overruns and unanticipated technical difficulties. Our inability to anticipate, respond to or utilize changing technologies could have a material adverse effect on our business and our results of operations.

Changes in our customers' products could reduce the demand for our chemical products, which may decrease our net sales and operating margins.

Our chemical products are used for a broad range of applications by our customers. Changes, including technological changes, in our customers' products or processes may make our chemical products unnecessary, which would reduce the demand for those products. Other customers may find alternative materials or processes that no longer require our products. If the demand for our chemical products is reduced, our net sales and operating margins may be reduced as well.

We have few proprietary rights with respect to our chemical products, the lack of which may make it easier for our competitors to compete against us.

None of our chemical products are protected by patents. We do attempt to protect the names of some of our chemical products through trademarks and some of our other limited proprietary property through trade secret, nondisclosure and confidentiality measures; however, such protections may not preclude competitors from developing similar technologies.

Risks Relating to Our Medical Device Business

The medical products market is highly competitive and susceptible to rapid change and such changes could render any products developed by us uneconomical or obsolete.

The medical products market is characterized by extensive research and development activities and significant technological change. Our ability to execute our business strategy depends in part upon our ability to develop and commercialize efficient and effective products based on our technologies. We compete against established companies as well as numerous independently owned small businesses, including Diapulse Corporation of America, Inc., which manufactures and markets devices that are deemed by the FDA to be substantially equivalent to SofPulse; Regenesis Biomedical, which manufactures and markets devices that are similar to our first generation SofPulse device; and KCI Concepts, Inc., which manufactures and markets negative pressure wound therapy devices in the wound care market. We also face competition from companies that have developed other forms of treatment, such as hyperbaric oxygen chambers, thermal therapies and hydrotherapy. In addition, companies are developing or may, in the future, engage in the development of products and/or technologies competitive with our products. We expect that technological developments will occur and that competition is likely to intensify as new technologies are employed. Many of our competitors are capable of developing products based on similar technology, have developed and are capable of continuing to develop products based on other technologies, which are or may be competitive with our products and technologies. Many of these companies are well-established, and have substantially greater financial and other resources, research and development capabilities and more experience in obtaining regulatory approvals, manufacturing and marketing than we do. Our ability to execute our business strategy and commercially exploit our SofPulse device must be considered in light of the problems, expenses, difficulties, complications and delays frequently encountered in connection with the development of new medical processes, devices and products and their level of acceptance by the medical community. Our competitors may succeed in developing competing products and technologies that are more effective than our products and technologies, or that receive government approvals more quickly than our new products and technologies, which may render our existing and new products or technology uncompetitive, uneconomical or obsolete. See "Item 1. Business - Competition."

A portion of our revenues are currently dependent on our products that utilize PEMF technology, and increasing our revenues will depend on our ability to increase market penetration, as well as our ability to develop and commercialize new products and technologies.

Products based on non-invasive, electrotherapeutic technologies represent known methods of treatment that we believe have been under-utilized clinically. Physicians and other healthcare professionals may not use SofPulse

or other potential products and technologies developed by us unless they determine that the clinical benefits to the patient are greater than those available from competing products or therapies or represent equal efficacy with lower cost. Even if the advantage of our products and technologies is established as clinically and fiscally significant, physicians and other healthcare professionals may not elect to use SofPulse or other products and technologies developed by us for any number of reasons. For example, the first generation of the SofPulse device cannot be used in hospital intensive care units because the power output of the device can interfere with medical monitoring equipment. The rate of adoption and acceptance of our products and technologies, including the SofPulse device, may also be affected adversely by unexpected side effects or complications associated with our products, consumers' reluctance to invest in new products and technologies, the level of third-party reimbursement and widespread acceptance of other products and technologies. Consequently, physicians and other healthcare professionals, healthcare payors and consumers may not accept SofPulse device products or new products or technologies developed by us. Broad market acceptance of the SofPulse device products and other products and technologies developed by us in the future may require the education and training of numerous physicians and other healthcare professionals, as well as conducting or sponsoring clinical and fiscal studies to demonstrate the cost efficiency and other benefits of such products and technologies. The amount of time required to complete such training and studies could be costly and result in a delay or dampening of such market acceptance. Moreover, healthcare payors' approval of use for our products and technologies in development may be an important factor in establishing market acceptance.

We may be required to undertake time-consuming and costly development activities and seek regulatory clearance or approval for new products or technologies. Although we have received FDA clearance for the SofPulse device for the treatment of edema and pain in soft tissue, we may not be able to obtain regulatory clearance or approval of new products or technologies or new treatments through existing products. In addition, we have not demonstrated an ability to market and sell our SofPulse device products, much less multiple products simultaneously. If we are unable to increase market acceptance of our current products or develop and commercialize new products in the future, we will not be able to increase our revenues. The completion of the development of any new products or technologies or new uses of existing products will remain subject to all the risks associated with the commercialization of new products based on innovative technologies, including:

o our ability to fund and establish research that supports the efficacy of new technologies and products;

o our ability to obtain regulatory approval or clearance of such technologies and products, if needed;

o our ability to obtain market acceptance of such new technologies and products;

o our ability to effectively and efficiently market and distribute such new products;

o the ability of ADM Tronics or other manufacturers utilized by us to effectively and efficiently manufacture such new products; and

o our ability to sell such new products at competitive prices that exceed our per unit costs for such products.

We will need additional capital to market our existing medical device products and to develop and commercialize new technologies and products and it is uncertain whether such capital will be available.

Our medical device business is capital intensive and will require additional financing in order to:

o fund research and development;

o expand sales and marketing activities;

o develop new or enhanced technologies or products;

o respond to competitive pressures; and

o acquire complementary technologies or take advantage of unanticipated opportunities.

Our need for additional capital will depend on:

o the costs and progress of our research and development efforts;

o the preparation of pre-market application submissions to the FDA for our new products and technologies and costs associated therewith;

o the number and types of product development programs undertaken;

o the number of medical devices, including the SofPulse device, we have manufactured for sale or rental;

o the costs and timing of expansion of sales and marketing activities;

o the amount of revenues from sales of our existing and potentially new products;

o the cost of obtaining and maintaining, enforcing and defending patents and other intellectual property rights;

o competing technological and market developments; and

o developments related to regulatory and third-party coverage matters.

We will need to obtain capital to continue to operate and grow our medical device business. Our ability to obtain additional financing in the future will depend in part upon the prevailing capital market conditions, as well as our business performance. There can be no assurance that we will be successful in our efforts to arrange additional financing on terms satisfactory to us or at all. If additional financing is raised by the issuance of common stock you may suffer additional dilution and if additional financing is raised through debt financing, it may involve significant restrictive covenants which could affect our ability to operate our business. If adequate funds are not available, or are not available on acceptable terms, we may not be able to continue our operations, grow our medical device business or take advantage of opportunities or otherwise respond to competitive pressures and remain in business.

If we are unable to receive reimbursement from third-parties, including reimbursement from Medicare, our growth and revenues will be adversely affected in markets where we rely on insurance coverage for payment.

Some healthcare providers such as hospitals and physicians that purchase, lease or rent medical devices in the United States generally rely on third-party payors, principally Medicare and private health insurance plans, including health maintenance organizations, to reimburse all or part of the cost of the treatment for which the medical device is being used. Commercialization of our medical device products and technologies marketed in the United States will depend in part upon the availability of reimbursement for the cost of the treatment from third-party healthcare payors such as Medicare and private health insurance plans, including health maintenance organizations, in non-capitated markets, markets where we rely on insurance coverage for payment. Such third-party payors are increasingly challenging the cost of medical products and services, which have and could continue to have a significant effect on the ratification of such technologies and services by many healthcare providers. Several proposals have been made by federal and state government officials that may lead to healthcare reforms, including a government directed national healthcare system and healthcare cost-containment measures. The effect of changes in the healthcare system or method of reimbursement for the SofPulse device and any other products or technologies that we may market in the United States cannot be determined.

While third-party payors generally make their own decisions regarding which medical procedures, technologies and services to cover, Medicare and other third-party payors may apply standards similar to those used by CMS in determining whether to provide coverage for a particular procedure, technology or service. The Medicare statute prohibits payment for any medical procedures, technologies or services that are not reasonable and necessary for the diagnosis or treatment of illness or injury. In 1997, CMS, which is responsible for administering the Medicare program, had interpreted this provision to prohibit Medicare coverage of procedures that, among other things, are not deemed safe and effective treatments for the conditions for which they are being used, or which are still investigational. However, in July 2004, reimbursement of the use of the technology used in our SofPulse device in the treatment of non-healing wounds was reinstated by CMS after being discontinued from July 1997 through July 2004. In October 2004, CMS issued a quarterly update that allows skilled nursing facilities, or SNFs, and providers of healthcare in the home to use the electromagnetic therapy code in the Healthcare Common Procedure Code System, the standardized coding system developed by CMS to ensure that Medicare reimbursement claims are processed in an orderly and consistent manner for consolidated billing enforcement. Although CMS has provided for reimbursement for the use of electromagnetic therapy by SNFs, CMS has not yet provided for reimbursement for the use of electromagnetic therapy by providers of healthcare in the home. In addition, the regulatory environment could again be changed to bar CMS coverage for treatment of chronic wounds utilizing our SofPulse device or to limit the amount of coverage patients or providers are entitled to receive. Either of these events would adversely affect our revenues and operating results. See "Item 1. Business - Reimbursement."

We cannot predict what additional legislation or regulations, if any, may be enacted or adopted in the future relating to our business or the healthcare industry, including third-party coverage and reimbursement, or what effect any such legislation or regulations may have on us. Furthermore, significant uncertainty exists as to the coverage status of newly approved healthcare products, and there can be no assurance that adequate third-party coverage will be available with respect to any of our future products or new applications for our present products. In currently non-capitated markets, failure by physicians, hospitals, nursing homes and other users of our products to obtain sufficient reimbursement for treatments using our technologies would adversely affect our revenues and operating results. Alternatively, as the U.S. medical system moves to more fixed-cost models, such as payment based on diagnosis related groups, prospective payment systems or other forms of capitation, the market landscape may be altered, and the amount we can charge for our products may be limited.

If we are unable to achieve market acceptance of our medical device products or any new technologies or uses we develop in new markets where third-party reimbursement is unlikely, our growth could be impeded which could result in an inability to increase our revenues.

As part of our growth strategy, we intend to market our SofPulse device products to plastic surgeons and other plastic surgery practitioners. The use of the SofPulse device in these markets is unlikely to be reimbursed by insurance and, accordingly, we may experience cost resistance from physicians and patients in these markets that could adversely affect our growth strategy, our operating results and our ability to increase our revenues.

Our subsidiaries, SMI and Ivivi, outsource the manufacturing of their products to us and if our operations are interrupted or if our orders exceed our manufacturing capabilities, our subsidiaries may not be able to deliver their products to customers on time.

Pursuant to a manufacturing agreement between SMI, Ivivi and us, we are the exclusive manufacturer of the products of SMI and Ivivi. We operate a single facility and have limited capacity that may be inadequate if SMI's or Ivivi's customers place orders for unexpectedly large quantities of their products, or if our other customers place large orders of products, which could limit our ability to produce the products of SMI or Ivivi. In addition, if our operations were halted or restricted, even temporarily, or we are unable to fulfill large orders, SMI and Ivivi could experience business interruption, increased costs, damage to their reputations and loss of their customers. Although SMI and Ivivi have the right to utilize other manufacturers if we are unable to perform under our agreement, manufacturers of their products need to be licensed with the FDA, and identifying and qualifying a new manufacturer to replace us as the manufacturer of their products could take several months during which time, they would likely lose customers and their revenues could be materially delayed and/or reduced. See "Item 1. Business - Manufacturer and Suppliers."

SMI and Ivivi depend on a limited number of suppliers for their respective components and raw materials and any interruption in the availability of these components and raw materials used in their products could reduce their respective revenues.

SMI and Ivivi rely on a limited number of suppliers for the components and raw materials used in their medical devices. Although there are many suppliers for each of their component parts and raw materials, they are dependent on a single or limited number of suppliers for many of the significant components and raw materials. This reliance involves a number of significant risks, including:

o unavailability of materials and interruptions in delivery of components and raw materials from suppliers;

o manufacturing delays caused by such unavailability or interruptions in delivery; and

o fluctuations in the quality and the price of components and raw materials.

Neither SMI nor Ivivi has any long-term or exclusive purchase commitments with any of its suppliers. Their failure to maintain existing relationships with their suppliers or to establish new relationships in the future could also negatively affect their ability to obtain components and raw materials used in their products in a timely manner. If they are unable to obtain ample supply of product from their existing suppliers or alternative sources of supply, they may be unable to satisfy their customers' orders which could reduce their revenues and adversely affect their relationships with their customers. See "Item 1. Business - Manufacturers and Suppliers."

Our ability to execute our business plan depends on the scope of our intellectual property rights and not infringing the intellectual property rights of others. The validity, enforceability and commercial value of these rights are highly uncertain.

Our ability to compete effectively with other companies is materially dependent upon the proprietary nature of our technologies. We rely primarily on patents and trade secrets to protect our medical device technologies.

We have:

o one patent on the SofPulse device, which expires in 2015, as well as two other patents for certain embodiments of PEMF and other aspects of the SofPulse device, and four patents on the Sonotron Technology, which expire in 2006, 2011, 2012 and 2016.

o one U.S. patent application with respect to the SofPulse device pending; and

o seven U.S. patents with respect to the SofPulse device pending.

Third parties may seek to challenge, invalidate, circumvent or render unenforceable any patents or proprietary rights owned by us based on, among other things:

o subsequently discovered prior art;

o lack of entitlement to the priority of an earlier, related application; or

o failure to comply with the written description, best mode, enablement or other applicable requirements.

In general, the patent position of medical device companies is highly uncertain, still evolving and involves complex legal, scientific and factual questions. We are at risk that:

o other patents may be granted with respect to the patent applications filed by us; and

o any patents issued to us may not provide commercial benefit to us or will be infringed, invalidated or circumvented by others.

The United States Patent and Trademark Office currently has a significant backlog of patent applications, and the approval or rejection of patents may take several years. Prior to actual issuance, the contents of United States patent applications are generally published 18 months after filing. Once issued, such a patent would constitute prior art from its filing date, which might predate the date of a patent application on which we rely. Conceivably, the issuance of such a prior art patent, or the discovery of "prior art" of which we are currently unaware, could invalidate a patent of ours or prevent commercialization of a product claimed thereby.

Although we generally conduct a cursory review of issued patents prior to engaging in research or development activities, we may be required to obtain a license from others to commercialize any of our new products under development. If patents that cover our existing or new products are issued to other companies, there can be no assurance that any necessary license could be obtained on favorable terms or at all.

There can be no assurance that we will not be required to resort to litigation to protect our patented technologies and other proprietary rights or that we will not be the subject of additional patent litigation to defend our existing and proposed products and processes against claims of patent infringement or any other intellectual property claims. Such litigation could result in substantial costs, diversion of management's attention, and diversion of our resources. In fact, on June 29, 2005, Ivivi filed a complaint against Regenesis Biomedical, Inc. alleging that Regenesis is infringing on one of Ivivi's U.S. patents through its sales of a product that competes with Ivivi's SofPulse(R) product. Although Ivivi is seeking money damages and an injunction against future sales of the competing product, there can be no assurance that it will be successful. See "Item 3. Legal Proceedings."

We also have applied for patent protection in several foreign countries. Because of the differences in patent laws and laws concerning proprietary rights between the United States and foreign countries, the extent of protection provided by patents and proprietary rights granted to us by the United States may differ from the protection provided by patents and proprietary rights granted to us by foreign countries.

We attempt to protect our trade secrets, including the processes, concepts, ideas and documentation associated with our technologies, through the use of confidentiality agreements and non-competition agreements with our current employees and with other parties to whom we have divulged such trade secrets. If our employees or other parties breach our confidentiality agreements and non-competition agreements or if these agreements are not sufficient to protect our technology or are found to be unenforceable, our competitors could acquire and use information that we consider to be our trade secrets and we may not be able to compete effectively. Most of our competitors have substantially greater financial, marketing, technical and manufacturing resources than we have and we may not be profitable if our competitors are also able to take advantage of our trade secrets.

We may decide for business reasons to retain certain knowledge that we consider proprietary as confidential and elect to protect such information as a trade secret, as business confidential information or as know-how. In that event, we must rely upon trade secrets, know-how, confidentiality and non-disclosure agreements and continuing technological innovation to maintain our competitive position. There can be no assurance that others will not independently develop substantially equivalent proprietary information or otherwise gain access to or disclose such information.

If the FDA or other state or foreign agencies impose regulations that affect our medical device products, our development, manufacturing and marketing costs will be increased.

The development, testing, production and marketing of our existing medical devices are, and devices we may develop in the future will be, subject to regulation by the FDA as devices under the 1976 Medical Device Amendments to the Federal Food, Drug and Cosmetic Act. Although we have received FDA clearance for the SofPulse device for the treatment of pain and edema in soft tissue, alternative uses for the SofPulse device and any new products developed by us may be subject to FDA regulation as well. In addition, although we have not been asked by the FDA to seek pre-market approval for the SofPulse device, there can be no assurance that we will not be required to do so and that, if required, we will be able to comply with such requirement for the SofPulse device. Before a new medical device, or a new use of, or claim for, an existing product can be marketed in the United States, it must first receive either 510(k) clearance or pre-market approval from the FDA, unless an exemption applies. Either process can be expensive and lengthy. The FDA's 510(k) clearance process usually takes from three to twelve months, but it can take longer and is unpredictable. The process of obtaining pre-market approval is much more costly and uncertain than the 510(k) clearance process and it generally takes from one to three years, or even longer, from the time the application is filed with the FDA. See "Item 1. Business - Government Regulation."

In the United States, medical devices must be:

o manufactured in registered and quality approved establishments by the FDA; and

o produced in accordance with the FDA Quality System Regulation ("QSR") for medical devices.

As a result, we, as well as ADM Tronics, the exclusive manufacturer of our SofPulse device, are required to comply with QSR requirements and if they fail to comply with these requirements, we will need to find another company to manufacture our SofPulse devices which could delay the shipment of our product to our customers. In addition, the Company's manufacturing facility:

o is required to be registered as a medical device manufacturing site with the FDA; and

o is subject to inspection by the FDA.

The FDA requires producers of medical devices to obtain FDA licensing prior to commercialization in the United States. Testing, preparation of necessary applications and the processing of those applications by the FDA is expensive and time consuming. We do not know if the FDA will act favorably or quickly in making such reviews, and significant difficulties or costs may be encountered by us in our efforts to obtain FDA licenses. The FDA may also place conditions on licenses that could restrict commercial applications of such products. Product approvals may be withdrawn if compliance with regulatory standards is not maintained or if problems occur following initial marketing. Delays imposed by the FDA licensing process may materially reduce the period during which we have the exclusive right to commercialize patented products. We have made modifications to our devices and may make additional modifications in the future that we believe do not or will not require additional clearances or approvals. If the FDA disagrees, and requires new clearances or approvals for the modifications, we may be required to recall and to stop marketing the modified devices. We also are subject to Medical Device Reporting regulations, which require us to report to the FDA if our products cause or contribute to a death or serious injury, or malfunction in a way that would likely cause or contribute to a death or serious injury. We are not aware of any death or serious injury caused by or contributed to by our medical device products, however, we cannot assure you that any such problems will not occur in the future with our existing or future products.

Additionally, our existing and future products may be subject to regulation by similar agencies in other states and foreign countries. While we believe that we have complied with all applicable laws and regulations, continued compliance with such laws or regulations, including any new laws or regulations in connection with our medical devices or any new products developed

by us, might impose additional costs on us or marketing impediments on our products which could adversely affect our revenues and increase our expenses. The FDA and state authorities have broad enforcement powers. Our failure to comply with applicable regulatory requirements could result in enforcement action by the FDA or state agencies, which may include any of the following sanctions:

o warning letters, fines, injunctions, consent decrees and civil penalties;

o repair, replacement, refunds, recall or seizure of our products;

o operating restrictions or partial suspension or total shutdown of production;

o refusing our requests for 510(k) clearance or premarket approval of new products, new intended uses, or modifications to existing products;

o withdrawing 510(k) clearance or premarket approvals that have already been granted; and

o criminal prosecution.

If any of these events were to occur, it could harm our business.

The FDA can impose civil and criminal enforcement actions and other penalties on us if we or our manufacturer fails to comply with stringent FDA regulations.

Medical device manufacturing facilities must maintain records, which are available for FDA inspectors documenting that the appropriate manufacturing procedures were followed. The FDA has authority to conduct inspections of our facility, as well as the facility of our manufacturer. Labeling and promotional activities are also subject to scrutiny by the FDA and, in certain instances, by the Federal Trade Commission. Any failure by us or the manufacturer of our products to take satisfactory corrective action in response to an adverse inspection or to comply with applicable FDA regulations could result in enforcement action against us or our manufacturer, including a public warning letter, a shutdown of manufacturing operations, a recall of our products, civil or criminal penalties or other sanctions. From time to time, the FDA may modify such requirements, imposing additional or different requirements which may require us to alter our business methods which could result in increased expenses. See "Item 1. Business - Governmental Regulation."

Risks Related to Our Company

We have been the subject of a "going concern" opinion from our independent auditors, which means that we may not be able to continue operations.

Our independent auditors have added an explanatory paragraph to their audit opinion issued in connection with the fiscal year ended March 31, 2005 financial statements, which states that we had substantial net losses of $2,324,413 and $141,738 for the years ended March 31, 2005 and 2004, respectively, and we had a stockholders' deficiency of $1,010,391 at March 31, 2005, which raises substantial doubt about our ability to continue as a going concern. Our financial statements do not include any adjustments that might result from the outcome of this uncertainty. This may have an adverse effect on our ability to obtain financing for our operations and to further develop and market our products.

We may be exposed to product liability claims for which our insurance may be inadequate.

Our business exposes us to potential product liability risks, which are inherent in the testing, manufacturing and marketing of chemical products and medical devices. Although we maintain a general liability insurance policy, which includes aggregate product liability coverage of $2,000,000 for certain of our products, there can be no assurance, that such insurance will be sufficient to cover potential claims or that the present level of coverage will be available in the future at a reasonable cost.

We do not have product liability coverage for our medical device products other than the SofPulse, which is covered by a $2.0 million product liability policy held by Ivivi. While we are not aware of side-effects resulting from the use of any of our products, there may be unknown long-term effects of their use that may result in product liability claims in the future. Further, we cannot provide any assurance that:

o our insurance will provide adequate coverage against potential liabilities if a product causes harm or fails to perform as promised;

o adequate product liability insurance will continue to be available in the future; or

o our insurance can be maintained on acceptable terms.

The obligation to pay any product liability claim in excess of whatever insurance we are able to obtain would increase our expenses and could greatly reduce our assets. See "Item 1. Business - Insurance."

The loss of any of our executive officers or key personnel may adversely affect our operations and our ability to execute our growth strategy.

Our ability to execute our business plan depends upon the continued services of Andre' DiMino, our President and Chief Executive Officer, as well as our key technology, marketing, sales and support personnel. We do not have employment or consulting agreements containing non-compete agreements with Mr. DiMino and certain of our key personnel, and we may not be able to retain these individuals. If we lost the services of Mr. DiMino or our key personnel, our business may be adversely affected and our stock price may decline. In addition, our ability to execute our business plan is dependent on our ability to attract and retain additional highly skilled personnel. We have key person life insurance in the amount of $2 million for Mr. DiMino, but not for any of our other executive officers or key employees.

Our President and Chief Executive Officer also serves as Chairman and Chief Financial Officer of Ivivi, which may cause him to devote a substantial portion of his work-time to Ivivi.

Andre' DiMino, our President and Chief Executive Officer, also serves as Chairman and Chief Financial Officer of Ivivi. While Mr. DiMino devotes a substantial portion of his work-time toward ADM Tronics, the remaining amount of his work-time may be devoted elsewhere, including at Ivivi. As a result, Mr. DiMino's attention to our business and operations may be diverted by his obligations elsewhere, including at Ivivi, and we may not be able to have access to Mr. DiMino as needed by us.

Our executive officers and directors and entities affiliated with them have substantial control over us, which could delay or prevent a change in our corporate control favored by our other shareholders.

Our executive officers and directors and entities affiliated with them may be deemed to beneficially own, in the aggregate, approximately 51.7% of our outstanding common stock. In particular, Mr. DiMino, together with members of the DiMino family, may be deemed to beneficially own approximately 38.7% of the outstanding shares of our common stock. The interests of our current officer and director shareholders may differ from the interests of our other shareholders. As a result, the current officers and directors would have the ability to exercise substantial control over all corporate actions requiring shareholder approval, irrespective of how our other shareholders may vote, including the following actions:

o the election of directors;

o adoption of stock option plans;

o the amendment of charter documents; or

o the approval of certain mergers and other significant corporate transactions, including a sale of substantially all of our assets.

Penny stock regulations may impose certain restrictions on marketability of our securities.

If our common stock were to be subject to penny stock rules, these rules may discourage broker-dealers from effecting transactions in our common stock or affect their ability to sell our securities. As a result, purchasers and current holders of our securities could find it more difficult to sell their securities. Our stock is traded on the OTC Bulletin Board. Trading volume of OTC Bulletin Board stocks have been historically lower and more volatile then stocks traded on an exchange or the Nasdaq Stock Market. In addition we may be subject to rules of the Securities and Exchange Commission that impose additional requirements on broker-dealers when selling penny stocks to persons other than established customers and accredited investors. In general, an accredited investor is a person with assets in excess of $1,000,000 or annual income exceeding $200,000 individually, or $300,000 together with his or her spouse. The relevant Securities Exchange Commission regulations generally define penny stocks to include any equity security not traded on an exchange or the Nasdaq Stock Market with a market price (as defined in the regulations) of less than $5 per share. Under the penny stock regulations, a broker-dealer must make a special suitability determination as to the purchaser and must have the purchaser's prior written consent to the transaction. Prior to any transaction in a penny stock covered by these rules, a broker-dealer must deliver a disclosure schedule about the penny stock market prepared by the Securities Exchange Commission. Broker-dealers must also make disclosure concerning commissions payable to both the broker-dealer and any registered representative and provide current quotations for the securities. Finally, broker-dealers are required to send monthly statements disclosing recent price information for the penny stock held in an account and information on the limited market in penny stocks.

Our stock price, like that of many small companies, has been and may continue to be volatile.

We expect that the market price of our common stock will fluctuate as a result of variations in our quarterly operating results and other factors beyond our control. These fluctuations may be exaggerated if the trading volume of our common stock is low.

We have not paid dividends in the past and do not expect to pay dividends in the future, and any return on investment may be limited to the value of your stock.

We have never paid any cash dividends on our common stock and do not anticipate paying any cash dividends on our common stock in the foreseeable future and any return on investment may be limited to the value of your stock. We plan to retain any future earnings to finance growth.