a.  The Company.
 
Pace Medical, Inc. (the “Company”) is principally engaged in the design, manufacture and sale of single and dual-chamber temporary cardiac pacemakers, a dual-chamber pacing analyzer, surgical and temporary pacemaker extension cables, and related accessories.
 
The Company was incorporated in 1985 and commenced operations on January 1, 1986 following the acquisition of APC Medical Ltd (“APC Medical”) which is now a wholly-owned subsidiary of the Company.  Unless otherwise specifically referenced herein, the term “Company” includes APC Medical.
 
APC Medical is the successor to Devices Limited (a former unit of Johnson & Johnson), a U.K. manufacturer of medical electronic equipment, permanent pacemakers and leads, and temporary pacemakers, which was a pioneer in the pacing industry.   APC Medical is a U.K. limited company with facilities located in Welwyn Garden City, Herts, England.  APC Medical provides the Company with a foreign based manufacturing operation and an international marketing and sales presence through a network of experienced sales representatives and distributors in the U.K., Europe, and other world markets.  A portion of the Company’s manufacturing continues to be done by APC Medical, and APC Medical markets the Company’s products outside the U. S. and Canada under the APC Medical name.  The Company is responsible for marketing in the U.S. and Canada and conducts most of its manufacturing and new product development operations in the U.S.
 
b.  Description of Business of the Company.
 
The Company designs, manufactures and sells single and dual-chamber temporary cardiac pacemakers, a dual-chamber pacing analyzer, surgical and temporary pacemaker extension cables, and related accessories.  The Company is not engaged in the business of designing, manufacturing, or marketing permanent implantable cardiac pacemakers and, due to the high risk of liability associated with such pacemakers, does not intend to enter this business.  Temporary pacemakers involve some risk of liability because they may be life-supporting medical devices, but their ability to be tested, repaired and replaced without surgery diminishes the risks to the patient and the potential of liability in comparison to permanent implantable pacemakers.
 
A pacemaker is an electronic device which stimulates an impaired heart, thereby causing it to beat at a rate which will meet normal bodily demands.  A pacemaker consists of two elements, a pulse generator (which provides the power source and the
 

 
timing circuit) and a pacing lead (which conducts the electrical impulses from the pulse generator to the heart).  Temporary pacemakers are made for temporary external applications for short-term electrical conduction and cardiac rhythm disorders and are not implanted in a patient’s body.  In contrast, permanent pacemakers are implantable and made for longer term applications.  All pacemakers, whether temporary or permanent, are connected to the heart by a lead, which consists of an insulated wire and an electrode.
 
Pacemakers - whether temporary or permanent - are also characterized as either asynchronous pacemakers, which supply impulses to the heart at a fixed rate on a continuous basis, or “demand” pacemakers, which supply impulses to the heart on an “as needed” basis only when the natural heartbeat is inadequate.  Demand pacemakers are either ventricular demand pacemakers which supply impulses as needed to correct a heart’s irregular beating pattern or DDD dual chamber pacemakers, which supply impulses as needed to provide heartbeat regularity and in addition increase the heart’s pumping capacity.  Pacemakers, permanent or temporary, may also either be programmable or non programmable.  Programmable pacemakers may have one or more operational modes and each mode permits the attending physician to program different pacing parameters as dictated by the patient’s conditions.  Thus, a physician may use one multiple mode pacemaker to treat a variety of patient conditions with appropriate pacing parameters.  In this manner, a multiple mode pacemaker offers a physician the versatility to treat changing patient conditions with a single pacemaker.  In addition, because temporary pacemakers are reusable external devices, one multiple mode temporary pacemaker can be used repeatedly for different patients experiencing a variety of medical conditions.
 
Pacing leads - whether temporary or permanent - consist of an insulated wire, an electrode, and a connector.  The lead is usually inserted through a vein into the interior of the heart.  The temporary bipolar ventricular pacing leads are radiopaque, permitting viewing on diagnostic and monitoring equipment and utilize a polyurethane material as the outer insulator, stainless steel wire as the conductor, and are offered in 4, 5 and 6 French sizes.  These are compatible with all known temporary pacemakers being sold worldwide at this time.
 
The Company believes, based upon industry publications, that the worldwide market for temporary pacemakers, temporary pacing leads, pacing analyzers, myocardial heartwires, lead introducers, and surgical extension cables is approximately $100 million annually.  The Company further believes based upon management’s experience that in number of units sold, percent of market and dollar volume, the programmable DDD dual chamber temporary pacemakers will experience the fastest rate of growth of all lines in the temporary pacemaker business during the next five years.
 

 
Current Products
 
The Company has several products now being marketed in the U.S. that have received marketing approval from the U.S. Food and Drug Administration (“FDA”).  In general, FDA approval can be obtained by three means:  an application for approval under statutory section 510(k), a premarket approval application (“PMA”), or a supplemental premarket approval application (“SPMA”).  See “Government Regulation”.
 
A 510 (k) approval is the simplest manner in which a manufacturer may bring a new product to market.  In granting 510(k) approval, the FDA is allowing the marketing of a product based on its assessment that the product is “substantially equivalent” to devices which are already in the market and presents no new issues involving safety and effectiveness.  Approval of a 510(k) application by the FDA is not approval of the device itself as it is not based on an in depth examination of the product.
 
A PMA is the typical means by which a new product is introduced into the market when a 510(k) is not appropriate because: 1) new issues of safety and effectiveness may be involved, 2) there is no comparable pre-enactment, substantially equivalent device for comparison, and 3) the methodologies involved in the design and manufacture of the device may present safety issues of a compelling nature requiring an in depth review by the FDA.  If the product is a Class III device, a controlled clinical study to demonstrate safety and effectiveness may be required.  When the FDA issues its approval of a PMA, it is, in fact, approving the device itself for use in specific approved circumstances.
 
An SPMA is a means by which a new product may be approved by the FDA, when its characteristics and indications for use are similar to a PMA device, and its methods of design, manufacture and control present no new or unusual safety and effectiveness issues.  A controlled clinical study may still be a requirement for an SPMA approval.
 
All new products that are to be introduced to the United States market will require FDA approval prior to being made available for commercial marketing.  See “Government Regulation”.
 
The products currently marketed by the Company are as follows:
 
Temporary Cardiac Pacemakers.  The Company’s Model 4570 MICRO-PACE, dual-chamber, temporary cardiac pacemaker, is a programmable eleven (11) mode, single and dual-chamber temporary cardiac pacemaker consisting of three (3) atrial modes, AOO, AAI, AAT, four (4) ventricular modes VDD, VOO, VVI, VVT, and four (4) dual modes DOO, DVI, DDI, DDD.  The MICRO-PACE is a technically advanced dual-chamber temporary cardiac pacemaker which utilizes a copyrighted computer software-based microprocessor design.  See “Licenses and Proprietary Technology”.  With the MICRO-PACE unit, the physician is able to select the proper physiological parameters in accordance with each individual patient’s needs.  The MICRO-PACE unit
 

 
has features that address the typical complications previously associated with advanced dual-chamber pacing modes.  The simplified keyboard operation, visual display, built-in safety features, wide selection of parameter and operation modes, size and battery operation are all features that make the MICRO-PACE unit an innovation in temporary cardiac pacing.  The Model 4570 MICRO-PACE, dual-chamber, DDD, temporary cardiac pacemaker is an enhanced version of the Company’s original MICRO-PACE unit, Model 4553, which received FDA approval in 1991.  The Model 4570 received FDA SPMA approval in August, 1995.  It has the ability to sense, pace and track in the DDD mode at high-rates, thus allowing cardiologists and surgeons to address the needs of post-operative, open-heart patients, regardless of their age.  In particular, the device will greatly assist the recovery of both infants and young children, who have very fast atrial heart rates (180-210 bpm) and have developed temporary heart block, following open-heart surgery.  To the Company’s knowledge, the Model 4570, dual-chamber, temporary pacemaker was the first device of its kind in the world with the ability to sense and pace at high rates in the DDD mode, thereby restoring A-V synchrony and improving cardiac output.
 
The Company also manufactures three (3) types of single-chamber temporary cardiac pacemakers.  Model EV4542 and Model EV4543 are ambulatory units which attach comfortably to the patient and allow for ambulatory pacing, if required.  They are highly desirable due to their small size and they offer a great deal of flexibility with regard to the selection of required pacing parameters.  These miniature pacemakers are battery operated and have over a decade of reliability and performance.  Model 4170 attaches to the patient’s bed rail and is more rugged in construction.  The Company believes based upon management’s experience in the market that APC Medical and its predecessors have supplied the majority of the temporary external pacemakers sold in the United Kingdom.
 
Pacing Analyzer.  The Model 4800 AccuPace™, dual-chamber pacing analyzer, combines the benefits of dual-chamber multi-mode, multi-parameter pacing with testing features that evaluate, display, store, and print out the important characteristics of the patient’s lead system.  The temporary pacing feature allows the physician to perform pre-implant stimulation studies of the basic pacing parameters and functions on the patient prior to the implantation of a permanent pulse generator.  Considerable attention has been paid in the design of this product to the “user friendly” aspects of its operation.  The Company received 510(k) approval from the FDA covering the Model 4800 AccuPace™, dual-chamber, pacing analyzer in September, 1994.
 
Extension Cables.  The Company manufactures a wide variety of temporary cardiac pacemaker extension cables and surgical extension cables in order to satisfy the many different applications encountered during patient pacing.  The extension cables can be used with most manufacturers’ temporary external pacemakers and pacing system analyzers currently being marketed.  Many of the cables can be resterilized after use, while others are disposable.  All have protected connector pins to prevent a potential safety hazard.
 

 
New and Proposed Products
 
The Company generally introduces a new product outside the United States first and, upon the receipt of FDA approval, commences marketing of the product in the United States.  Introduction of all of the Company’s new products in the United States is subject to FDA approval.  See “Current Products” and “Government Regulation”.   The Company currently has three new temporary pacemaker products under development.       The Company currently intends to file appropriate regulatory submissions with the FDA covering these devices during the year 2005.   The new products include a single chamber device and two dual chamber devices.
 
Marketing
 
The Company’s temporary cardiac pacemakers and associated accessories are sold to hospitals both domestically and abroad to OEM accounts and through independent sales representatives and independent distributors.
 
Domestic Sales (North America).  The Company’s domestic sales consist primarily of single and dual-chamber temporary pacemakers shipped to OEM accounts under either private labels or the Company’s name.  The Company also utilizes manufacturers’ representatives and distributors.  The Company oversees and supports the representative and distributor organizations.
 
International Sales.  The Company has entered into a distributor arrangement with respect to certain international markets with APC Cardiovascular Ltd., an entity controlled by Derrick Ebden, who is a director of the Company and the former managing director of APC Medical.  APC Cardiovascular sells the Company’s products directly and through a network of approximately thirty (30) distributor organizations extending from Ireland to Japan.  APC Cardiovascular and these distributors are experienced in selling medical (cardiovascular) products and well established in the territories that they cover.
 
The Company focuses on two major domestic and international selling markets.  These markets are as follows:
 
1.  OEMs.  Original Equipment Manufacturers (companies currently manufacturing implantable pacemakers) often need a second source of supply and, in many cases, require special types of temporary cardiac pacemakers that they do not manufacture.  Purchase of such temporary cardiac pacemakers and leads from the Company enables the OEMs to expand their product lines and offer a more complete service to their customers.
 
2.  Representatives/Distributors.  In addition to APC Cardiovascular, the Company utilizes representative and distributor organizations in the United States and Canada.  Only those who have proven medical sales experience and integrity in making day-to-day calls on hospital purchasing directors and physicians are considered.
 

 
The Company conducts training and education programs for its sales representatives upon engagement of the representative and upon introduction of new products.  The sales representatives, in turn, provide service, training and other assistance to physicians.  The Company intends to enter into contracts with its representatives which may be terminated on short notice by either party.
 
The establishment of customer relationships with physicians is an important competitive factor in the industry.  Although a company’s products themselves must be competitive for a company to compete successfully, an experienced salesperson with established physician rapport may overcome small differences in products.  While the Company, therefore, depends upon the sales activities of its representatives, the Company does not believe that the loss of any one sales representative would adversely affect its business.
 
The Company’s distributors and sales representatives are not restricted in marketing products that compete with the Company’s products.  The Company believes that its distributors and sales representatives do not presently market competing temporary cardiac pacemakers, but do presently market competing accessory products.
 
During 2004 and 2003, 90% and 93%, respectively, of the Company’s sales were to one customer.
 
Working Capital Practices.
 
In the United States, the Company sells its pacing products through independent sales representatives, OEM accounts, and distributors.  The OEM accounts and distributors buy pacemakers directly from the Company and are billed at a discounted rate, 30 days net.  When the Company’s products are sold on a factory direct basis or through sales representatives, the Company bills the hospitals directly.  The Company generally pays the representative its commission during the month following the collection of funds.  The Company’s practice is to attempt to realize accounts receivable within 30 to 60 days after shipment.  The Company believes, based upon management’s experience, that the foregoing working capital practices are similar to those of the pacemaker industry in general.
 
Since in most cases an insurance company or government program, including Medicare and Medicaid, reimburses the hospital or patient for pacemakers, any future reductions in government funding of health insurance may limit funds available to certain government third-party payers to pay for the Company’s products, thereby adversely affecting the Company’s sales.
 
The nature of the Company’s pacemaker products requires that sufficient inventories of finished goods and critical components be maintained to insure that the rapid delivery requirements of its customers are met.  Over the last several years, the Company has not been able to maintain a satisfactory inventory of finished goods due
 

 
to component shortages. This has affected both our international and domestic sales.  See “Sources of Supply”, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.
 
Product Warranties Temporary Cardiac Pacemakers and Pacing Analyzers.  Temporary cardiac pacemakers and pacing analyzers carry a one year warranty.  The Company warrants these products to be free from defects in materials for one (1) year from the date of delivery when operated in accordance with the written operating instructions which accompany the instrument.  The Company’s obligations under this warranty are limited to repair or replacement of parts found to be defective during the warranty period.  Expendable items, such as batteries, straps, and extension cables are not covered in this warranty.  The Company believes, based upon management’s experience, that these warranty items are consistent with practice in the pacemaker industry in general.
 
Product Liability and Limits of Insurance Coverage
 
Because the Company’s temporary cardiac pacemakers and pacing analyzers may be life-supporting medical devices, the Company’s liability for any presently unknown product design or manufacturing deficiencies could be substantial and could exceed the limits under existing product liability insurance.  The Company maintains product liability coverage outside the United States with annual limits of £1,000,000 (approximately $1,916,000 as of December 31, 2004).  The Company does not have product liability insurance in the United States, and any claim could adversely affect the Company’s financial condition and results of operations.  The Company believes, based upon management’s experience, that its liability exposure is lessened because it does not manufacture or sell permanent implantable cardiac pacemakers or leads.  However, the cost of recalling its products upon discovery of any material defects would be substantial and could have an adverse effect on the Company and its financial condition and results of operations.
 
Research and Product Development
 
The Company continually engages in programs of product improvement and new product development.  Research and development activities are carried on in the Company’s own laboratories by the equivalent of two full time employees.  These technically trained employees also devote part of their time to clinical evaluation and operational activities with respect to existing products.  The acquisition of new products and/or technology transfer is also available through licensing arrangements with other firms.  See “Patents and Licenses”.  The Company also has a Medical Advisory Board consisting of two physicians specializing in cardiology and surgery and utilizes its individual members for advice and consultation on development and improvement of the Company’s products.
 

 
During the years ended December 31, 2003 and December 31, 2004, the Company expended $202,511 and $117,191, respectively, on product development.
 
Quality Assurance
 
Quality control procedures begin upon the receipt of raw components and materials and continue during production and after final assembly.  The Company keeps accurate and concise quality control and production records for each temporary pacemaker and all other products manufactured.
 
The Company’s quality control testing of components, sub-assemblies and final products is extensive.  Approximately three employees are engaged in inspection and quality control activities.  Because of the life-enhancing function pacemakers perform, all pacing system components and related products are manufactured to precise specifications.
 
Sources of Supply
 
Many of the components incorporated by the Company in its pacemaker products are produced to its specifications by various suppliers.  The Company maintains a list of alternate sources of supply in order to minimize disruptions if conditions require selecting substitute vendors.  However, some components of products and products under development are purchased from sole suppliers.  The Company purchases approximately 80% of its component parts in the United States with the remainder being purchased in Europe.  The failure to obtain necessary quantities of materials or components in a timely fashion from vendors who are sole suppliers has materially impacted the Company’s ability to complete the development of new products.   The lack of finished goods has affected both our international and domestic sales.  See “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.
 
The Company’s products, which are primarily manufactured in the U.S., are partly assembled on a contract basis by outside contractors.  The Company believes that alternate contractors would be available if such contractor were to cease operations.  However, any cessation of operations by such contractor would disrupt the Company’s U.S. production and might adversely affect the Company’s business.
 
Government Regulation
 
Since temporary pacemakers and temporary pacemaker leads are “devices” as defined by the Federal Food, Drug, and Cosmetic Act, as amended (21 U.S.C. 321 et seq.) (the “Act”), all of the Company’s pacemaker products are subject to the regulatory authority of the United States Food and Drug Administration (“FDA”).  This authority was substantially increased by the passage of the Medical Device Amendments of 1976 in May 1976.
 

 
Under the Act, the FDA has authority to: (i) set mandatory performance standards for medical devices; (ii) classify devices which need premarket clearance by the FDA to provide reasonable assurances of safety and effectiveness and require submission of proof of safety and effectiveness prior to the marketing of such devices; (iii) regulate clinical testing of new devices; (iv) establish “good manufacturing practices” which must be observed in the manufacture of devices; (v) require the registration of device manufacturers and their products; (vi) conduct periodic detailed inspections of device manufacturing establishments and, for some devices, inspections of records found in such establishments; (vii) establish record-keeping and reporting requirements; (viii) require reporting of product defects to the FDA; (ix) require defect notification and replacement or repair of defective products, or refund of their purchase price and reimbursement of certain associated cost of consumers and distributors, without relieving manufactures of tort liability for any injury resulting from the defect; (x) “ban” a device found to present substantial deception or an unreasonable or substantial risk of illness or injury; (xi) require that all labels and labeling for a device be adequate and truthful; and (xii) regulate the advertising of certain devices.  The FDA has published regulations with respect to most of the categories outlined above, including regulations establishing good manufacturing practices that apply to all of the Company’s operations, regulations classifying “devices” and regulations regarding clinical testing of new devices.
 
Under the FDA regulations implementing the 1976 Amendments, the Company’s pacing leads and temporary cardiac pacemakers are classified as “Class III” medical devices.  The Act requires “premarket approval” by the FDA of new “Class III” medical devices as a condition for “commercial distribution” of such devices and approval of substantial changes in current products prior to the products being commercially distributed.  Obtaining such approval requires the filing of applications with the FDA containing proof that the products are safe and effective.  This process can be both costly and time consuming.
 
Medical devices which are “substantially equivalent” to devices marketed in interstate commerce prior to May 28, 1976 may be sold commercially upon FDA determination of such substantial equivalence.  The Company has obtained favorable FDA determination letters with respect to many of its current pacemaker products.  The Company will be seeking similar FDA determination of substantial equivalence on other products.  See “Business-New and Proposed Products”.
 
The Company is not in a position to make a judgment as to the full impact of the FDA regulations on continuing operations, particularly the pre-market approval procedures, but it expects to have to devote substantial time and significant expense to compliance matters in the foreseeable future.  In addition, there is no assurance that changes in governmental regulations will not adversely affect the Company.
 
Where a device is found to be in violation of the requirements of the Act or regulations thereunder, the FDA is authorized to seek an injunction against the further manufacture and distribution of the device and to have the device seized.  The FDA
 

 
may itself administratively restrain a device for up to 30 days pending institution of further regulatory action.  In addition to these remedies, the FDA may seek criminal penalties against corporations and individuals who ship or cause the shipment of prohibited devices in interstate commerce or who otherwise violate the Act.  Finally, the FDA has developed a “recall” procedure under which a manufacturer or distributor may be requested to remove a product from interstate commerce if that product violates the Act.
 
Pursuant to its regulatory authority, the FDA has conducted routine inspections of the Company’s manufacturing facilities, none of which has resulted in any action by the FDA to impose administrative or judicial sanctions against the Company, or in any interruption of commercial distribution of the Company’s products.
 
The FDA’s regulatory authority over devices continues after the product is approved for marketing, and the FDA may pursue its remedies described above if it finds that the device proves to be unsafe or ineffective.  To date, the FDA has made no such determination with respect to any of the Company’s products and the Company has no reason to believe that the FDA will do so in the future.  If there should be substantial failures in any of the Company’s products presently being sold, it is likely that such products would have to be taken off the market either pursuant to FDA action, or otherwise, and the Company’s business would be adversely affected.
 
Certain states may also regulate medical devices, but such state regulation, if different from federal requirements, must have prior FDA approval.  The Company’s products are also subject to various regulations by governments outside the United States.  Many foreign countries have regulations similar to the FDA that must be adhered to.  Also the Medicines and Healthcare products Regulatory Agency (MHRA) in the U.K. carefully monitors the performance of U.K. manufacturing companies.  The Company believes that its products are in compliance with such other regulations.
 
In 1993, member countries of the European Union established minimum standards for certain medical devices which were to be sold there after June 13, 1998.  These requirements are set forth in what has become known as the “Medical Device Directive”.  Companies manufacturing such devices were required to become registered as meeting the quality system requirements for the medical products, a version of ISO 9000, known as EN 46000.  Additionally, products to be sold in the European Union had to be independently certified as meeting the requirements of the Medical Device Directive on issues involving safety, labeling and performance.  Both of these matters are handled by independent organizations known as “Notified Bodies”.  British Standards Institution (BSI) was chosen as the Company’s Notified Body in 1997.  The Company was successful in obtaining registration to EN 46001 (ISO 9001) and in obtaining certification of its products, all of which now bear the CE Mark.
 

 
Foreign Operations
 
For the years ended December 31, 2003 and December 31, 2004, revenues from export sales totaled $1,290,397 and $1,165,904, respectively (approximately 98% and 96%, respectively, of net sales).  APC Medical assembles a portion of the Company’s products in the United Kingdom for shipment to foreign and domestic customers.  APC Medical manufactures temporary pacemakers, temporary pacemaker extension cables, and surgical extension cables in its own facility for international and domestic distribution.  See “Notes to Consolidated Financial Statements”.
 
The Company’s operations can be affected by currency fluctuations.  Fluctuations between the pound and the dollar can affect the Company’s position in international competition, with a strengthening of the dollar making its products less expensive to customers in the United States and a weakening of the dollar making its products more expensive to customers in the United States.  In addition, the Company’s foreign business is subject to the usual risks incident to operating abroad, including currency restrictions, currency adjustments and changes in foreign laws.
 
Employees
 
At December 31, 2004, the total number of the Company’s full-time employees was 12.  APC Medical employed 6 of these employees.  The Company believes, based upon management’s opinion, that its relations with its employees are satisfactory.
 
Licensing and Proprietary Technology
 
The Company does not own any significant patents covering the technology incorporated in the Company’s products.  The Company is not aware that any of its products infringe on patents owned by others, however, the Company has not conducted a formal patent search to determine whether any of its products so infringe and there can be no assurance that the technology used in the Company’s products may not be covered by an existing or future patent owned by others.  If it is determined that the Company is infringing, then it is the Company’s intention to acquire licenses covering such technology, to the extent that licenses are available under such patents.  It is the Company’s belief that the payments of additional reasonable royalties would not impair its business.  However, if the owner of such a patent refused to grant a license to the Company, then one or more of the Company’s products might be at a competitive disadvantage in the market.  If the Company should decide to incorporate such technology into its products without first obtaining a license, the Company could be enjoined from marketing the product, which would adversely affect the Company’s business.
 
The Company is relying on the laws governing trade secrets and copyright to protect the software embodied in its products.  Despite these precautions, it may be possible to copy or otherwise obtain and use the Company’s products and technology
 

 
without authorization.  While the Company intends to vigorously prosecute any such unlawful use of its trade secrets or copyrights, there can be no assurance that it will be successful in any such prosecution.  The Company has two registered trademarks bifocal® and unifocal® covering its next generation temporary cardiac pacemakers.
 
Competition
 
In the temporary pacemaker market, the Company is in competition with approximately three companies.
 
The manufacturers of temporary pacemakers market their products on a direct basis, through manufacturers’ representatives and distributors, or to OEM implantable pacemaker manufacturers.
 
Many of the Company’s competitors use direct sales people who are controlled by, and sell pacemakers and other medical products exclusively for, their employers, unlike the Company’s independent sales representatives and distributors who direct their own activities and sell medical products manufactured by other companies.  Due to its limited resources, the Company has not to date been able to render specialized customer services equivalent to those provided by such manufacturers.
 
There are several foreign manufacturers developing and marketing temporary pacemakers.  Foreign manufacturers may receive the benefit of national and local laws protecting them from outside competition.
 
Product characteristics (including reliability, performance and longevity), design (lightness, compactness and contours), salesperson/physician relationships, warranty terms, service and price are all competitive factors in the industry.  The Company believes, based upon management’s experience, that it maintains a competitive position with respect to most of these elements.  Since the Company’s salespeople are not direct employees of the Company, the Company may have less control over salesperson/physician relationships than certain of its competitors whose salespeople are direct employees.
 
With the rapid progress of medical technology, and in spite of continuing research and development progress, the Company’s products are always subject to the risk of being rendered obsolete by the introduction of new products or techniques.
 
Some of the conditions and diseases which the Company’s pacemakers are designed to treat may, in some cases, also be treated by drug therapy.  The Company does not deem itself to be in direct competition with pharmaceutical companies because, at present, drug therapy is infrequently a viable alternative to the use of a pacemaker.  However, new drugs and methods of therapy may be developed by pharmaceutical or other health care companies which might compete with the Company’s products.  Most of such companies are larger than the Company and possess more substantial research facilities and other resources.
 

 
Environmental Laws
 
Due to the nature of its activities, the Company does not believe that compliance with environmental laws and regulations will have a materially adverse effect on its financial condition or operations.