from the prior year was primarily due to the above-mentioned improvement in manufacturing variances. The decline in gross profit percentage
in 2002 from the prior year was primarily due to the unfavorable shift in product mix.
Operating expenses were $15.3 million in 2003, compared with $14.5 million in 2002 and $16.0 million in 2001. The increase in operating expenses in
2003 from 2002 was primarily attributable to increased general and administrative (“G&A”) and selling (“Selling”) expenses. G&A expenses consist primarily
of salaries and other related expenses of administrative, executive and financial personnel and outside professional fees. The increase in G&A expenses in
2003 is primarily attributable to increased insurance costs, compensation and other taxes. The Company anticipates that G&A expenses are likely to increase
in the foreseeable future but at a rate less than the anticipated rate of increase in revenues. Selling expenses consist primarily of salaries, commissions and
other related expenses for sales and marketing personnel, marketing, advertising and promotional expenses. The increase in Selling expenses in 2003 is
primarily related to increased compensation costs and travel related expenses. The Company anticipates that Selling expenses are likely to increase in the
foreseeable future but at a rate less than the anticipated rate of increase in revenues. Research and development (“R&D”) expenses consist primarily of
salaries and other related expenses of the research and development personnel as well as costs associated with regulatory expenses.  The Company anticipates
that R&D expenses will continue at the current level for the foreseeable future. The decrease in operating expenses in 2002 from 2001 was primarily
attributable to decreased G&A and Selling expenses partially offset by increased R&D expenses. G&A expenses for 2002 were $857,000 lower than G&A
expenses for 2001, primarily due to a decrease in amortization expense as a result of a reduction in goodwill amortization in 2002 due to the adoption of
SFAS No. 142 as discussed in Note 2 to the Company’s Consolidated Financial Statements included herein.  Additionally, G&A expenses were lower in 2002
compared to 2001 primarily as a result of reduced depreciation and cost containment programs related to supplies, communication costs and professional
fees. The decrease in Selling expenses of $905,000 in 2002 from 2001 was primarily related to reduced outside services (primarily related to clinical
studies), reduced compensation costs and continuing cost reduction efforts. R&D expenses were $269,000 higher for 2002 compared with 2001. This
increase was primarily related to increased product development activities. 
The Company’s operating income for 2003 was $6.9 million, compared with $5.8 million in 2002 and $5.8 million in 2001. Revenue growth, manufacturing
efficiency improvements, cost containment and cost reduction activities were the major contributors to the operating income improvements during 2003.
Revenue growth, cost containment and cost reduction activities during 2002 were offset by lower gross margins compared with 2001, which combined to
cause relatively flat operating results. 
Interest expense was $195,000 in 2003 compared to $432,000 in 2002 and $300,000 in 2001. The decrease in 2003 is primarily related to lower average
borrowings during 2003 as compared with 2002. The increase in 2002 is primarily related to higher average borrowings during 2002 as compared with
2001 partially offset by a significant reduction in interest rates in 2002. The higher average borrowings during 2002 is primarily related to borrowing of
funds under the Company’s credit facility in late December 2001 in connection with its repurchase of outstanding common stock of the Company under a
tender offer. The other income in 2001 was primarily related to the Company’s one-time pre-tax gain of $428,000 on the sale of a patent.