Scantek Medical, Inc (SKML) - Description of business

GENERAL

Scantek Medical, Inc. (OTCBB: SKML.OB) (the "Company"), a Delaware corporation, was organized under the name "Jenncor Acquisition Inc." on June 10, 1988, to obtain funding for prospective business opportunities available to publicly held entities. Until October 3, 1991, when the Company exchanged its shares with Scantek Digital Systems Inc. ("SDSI"), the Company's only business activities involved raising capital through a public offering pursuant to Regulation A of the Securities Act of 1933, as amended (the "Act"). Pursuant to the share exchange between the Company and SDSI, the then holder of several patents relating to a medical product known as the BreastCare(TM)/BreastAlert(TM), Differential Temperature Sensor/Breast Abnormality Indicator (the "BreastCare(TM)/BreastAlert(TM)"), SDSI became a wholly-owned subsidiary of the Company. The Company was formerly a developmental stage company and became fully operational in early 1999.

On June 6, 2000, the Company opened its web site, www.scantekmedical.com. The web site provides information about the Company and its business, and its principal product, BreastCare(TM)/BreastAlert(TM). Also included are summaries of clinical studies, sales and distribution progress and plans, press releases and financial information, participation at medical conferences, and links to other sites for information on breast cancer.

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The Company is headquartered in Cedar Knolls New Jersey, where it maintains approximately 14,000 square feet of manufacturing and administrative space. At this facility, the Company has two production lines in which to manufacture the BreastCare(TM)/BreastAlert(TM). These production lines are capable of producing two million units per shift annually. The Company maintains an administrative staff and intends to add to its staff in key functional areas, pending funding of the Company and revenue from sales of the BreastCare(TM)/BreastAlert(TM) units.

The Company is a medical company engaged in developing, manufacturing, selling and licensing of products and devices to assist in the early detection and diagnosis of disease. At the present time, the Company is focusing on manufacturing, selling and licensing the Company's first product, the BreastCare(TM)/BreastAlert(TM) in response to the global demand for the early detection of breast disease, a major threat to women's health in developing as well as industrial countries. In today's health care environment, containment of medical care cost is a major priority. The Company has focused its business on easy to use low cost products and devices for its domestic and international markets, which will have an impact on preventive health care and cost containment. The BreastCare(TM)/BreastAlert(TM) has United States Food and Drug Administration ("FDA") marketing clearance; the BreastCare(TM)/BreastAlert(TM) is to be used by physicians as an adjunct to clinical breast examination, mammography and other established procedures for the detection of breast disease. The BreastCare(TM)/BreastAlert(TM) is a single-use, non-invasive, easy to use and cost-effective test to alert the physician to the possibility of a physiological condition that may be thermally active cancer.

The BreastCare(TM)/BreastAlert(TM) can detect cellular abnormalities as small as one-half centimeter in diameter as established through biopsy proven tumors. The Company believes that this technology upon which the BreastCare(TM)/BreastAlert(TM) is based will be useful in measuring certain other body disorders.

THE PRODUCT

At present, the fear of breast cancer continues to escalate, comparatively because little is actually known with respect to managing breast cancer. It is estimated worldwide, that each year, over 300,000 women will die from breast cancer. In fact, according to the America Cancer Society, this grave disease has been identified to be the medical issue of highest priority for women's health. Moreover, it cannot be predicted who will develop this epidemic cancer; any woman at any age may develop breast cancer. Breast cancer is the second leading cause of death for women in the U.S., but the most common for women between the ages of 35 and 54. Worldwide, breast cancer ranked highest as the leading cause of cancer deaths for women. Early detection and diagnosis of breast cancer are important in the reduction of mortalities.

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In the United States, American women are afforded with a preventive health measure, mammography. In developing countries however, mammography is not readily available to women, even for those women who have the resources to pay for such. There is a void between manifestation of the breast cancer and detection due to unavailable screening systems. Failure to intervene during this period may significantly reduce the likelihood of survival because the cancer then metastasizes. The American Cancer Society, on Cancer Facts & Figures in 2002, reported that if cancer is localized at the time of diagnosis, there is a 96% chance of a 5-year survival rate, which has risen from 72% in 1940. Nevertheless, in spite of research and efforts to detect breast cancer in the early stages, the rate of mortality due to breast cancer in developing countries has consistently increased over the past four decades.

Management believes that the BreastCare(TM)/BreastAlert(TM) will help to detect breast cancer in its early stages. Management believes that the BreastCare(TM)/BreastAlert(TM) will assist in the recognition of abnormal early cellular development by recording the heat differentiation of corresponding areas of the breast. The BreastCare(TM)/BreastAlert(TM) is not a definitive test for cancer (i.e., a biopsy, the removal and examination of, usually microscopic, tissue from the living body, performed to establish a precise diagnosis) but is a risk marker to identify and follow breast abnormalities by means of temperature conductivity integration when used adjunctly with clinical palpation and mammography.

One of the important biological activities of malignant tumors is the increased rate of growth as compared to the surrounding or "host" tissue. The malignant propensities are directly related to the speed of cell division; this in turn is reflected by accelerated local metabolism, which is adequately supported by increased blood and lymphatic vascularity. These biological alterations can be detected by measuring temperature differences in the tumor and its immediate environment, or by comparing to the same area of the opposite breast.

The BreastCare(TM)/BreastAlert(TM) is designed to assist in the detection of pathology of the breast by recognizing "significant" heat differences in the underlying tissue of a particular area, by comparing corresponding (mirror-image) segments of one breast to the other. The cause of the hyperthermia cannot be determined by this test alone; therefore, the BreastCare(TM)/BreastAlert(TM) serves as an early warning signal to alert the doctor to the fact that there is evidence of a pathological process, one of which could be thermally active breast cancer, which should be further evaluated within a particular area of the breast.

The BreastCare(TM)/BreastAlert(TM) is designed to complement, not replace, conventional breast abnormality screening methods and devices. It is intended for use by women of all ages. The BreastCare(TM)/BreastAlert(TM) is available for a routine, primary office care procedure used by physicians, gynecologists and other medical specialists as part of a breast disease monitoring program adjunctively with Breast Self Examination (BSE), Clinical Breast Examination (CBE), (depending upon a patient's age, family history, and other factors) mammography and other established clinical procedures.

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The basis for the BreastCare(TM)/BreastAlert(TM) is based upon data going back a number of years which show that blood on the venous side of breast cancers is warmer than blood on the arterial side of the lesion. This indication of heat generation is presumably due to increased metabolic rate of neoplastic tissue, including more rapid cell division, angiogenesis, etc. However, heat is not specific to neoplasia and may for example be due to inflammation. The presence of asymmetrical patterns (one side is warmer than the other by 2 degrees Fahrenheit) is a sign that may be detected with the BreastCare(TM)/BreastAlert(TM).

The BreastCare(TM)/BreastAlert(TM) consists of a pair of mirror-image, non-invasive, lightweight, disposable soft pads, each of which has three wafer-thin foil segments containing columns of heat sensitive chemical sensors that change color from blue to pink reflecting an 8.5 degree temperature range between 90 and 98.5 Fahrenheit. When placed against a woman's breast inside her brassiere for a period of 15 minutes, the BreastCare(TM)/BreastAlert(TM) registers the temperature variations due to heat conducted from within the breast tissue to the surface of the skin. The result will be digitally, not analogically, indicated by color changes for each temperature gradation. Significant temperature differences (2 degrees Fahrenheit or four bars) in the corresponding areas of the breast may indicate an abnormal unilateral thermal activity long before a lump is discovered by self-examination, clinical examination or other detection methods such as mammography, ultrasound, etc. Accordingly, by comparing the mirror-image temperature differences between the two breasts registered by the BreastCare(TM)/BreastAlert(TM), a determination can be made as to whether a sufficient abnormality is present to warrant further site-specific testing by other diagnostic techniques, including, but not limited to mammography and/or biopsy. The BreastCare(TM)/BreastAlert(TM) test does not replace recommended guidelines for scheduled mammographic screening.

The BreastCare(TM)/BreastAlert(TM) is a safe, non-invasive, economical and easy to use test. The BreastCare(TM)/BreastAlert(TM), which is disposable, can be administered and evaluated by health care providers after minimal instruction and a permanent record of results can be placed in the patient's files. Management believes that the utilization of the BreastCare(TM)/BreastAlert(TM) is cost effective and when used in combination with a mammographic work-up or at intervals of recommended screenings, will have an impact on breast cancer mortality and improve a woman's preventive health strategy.

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SCIENTIFIC BASIS

Infrared thermography for the evaluation of breast lesions was introduced in 1956, and systems employing thermosensitive liquid crystal films have generated renewed interest since 1978. Studies by Dr. Michael Gautherie, University of Strasbourg, France and others dating from 1970 have directly evaluated the heat of cancerous breast tissue compared with that of healthy breast tissue. These studies found that tumor temperature was always higher than the surrounding temperature and suggested that the increase in tumor heat resulted from an increased metabolism. Furthermore, two other phenomena were found to occur: (i) tumor heat was found to be transported within the surrounding breast tissue (principally by blood convection through the veins) resulting in local or diffuse increases in skin temperature and (ii) vascular changes were observed in the tumor area and further in the subcutaneous breast tissues. In short, both hyperthermia and hypervascularization were found to have occurred in the tumor and at its periphery, in comparison to the temperature and blood flow of healthy tissue in the contralateral breast. Further research by Dr. Gautherie and others has demonstrated an unequivocal relationship between the metabolic heat production of cancer tissue and the doubling time of tumor volume: the faster the tumor grows the more heat it generates.

The BreastCare(TM)/BreastAlert(TM) measures underlying breast tissue temperature and not skin surface temperature by retaining emitted heat when the BreastCare(TM)/BreastAlert(TM) is placed against the breast. It differs from preexisting infrared and liquid crystal thermography techniques, which allow the heat to escape or radiate during measurement. The BreastCare(TM)/BreastAlert(TM) takes into consideration that the average temperature patterns of a healthy woman's breast are closely symmetrical. This method detects abnormalities by comparing the temperature differences in the corresponding mirror image areas of a woman's breast.

Recently, the scientific foundation for the BreastCare(TM)/BreastAlert(TM) effectiveness has been considerably strengthened. Comprehensive research has established in detail the mechanisms by which malignancies radically alter the host tissue environment, notably through two quantitatively measurable processes: (i) A tumor significantly elevates overall rates of metabolic activity and (ii) A tumor greatly intensifies capillary vascularization in host tissues. In particular, this latter process of angiogenesis was a very critical finding because it is the probable mechanism by which cancers with an enhanced mestastic potential prepare to invade the host. These are only two of a number of measurable host alterations and each is associated with asymmetric heat distribution.

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SUMMARY CLINICAL TESTING HISTORY

Development and clinical trials of the BreastCare(TM)/BreastAlert(TM) were completed between 1980 and 1984. This testing showed that the BreastCare(TM)/BreastAlert(TM) is capable of detecting lesions in the breast earlier than through clinical examination by sensing metabolic changes in the breast. Biopsy and screening clinical trials were conducted at well-established U.S. institutions to assess and validate BreastCare(TM)/BreastAlert(TM) usefulness in detecting breast cancer at Memorial Sloan-Kettering Hospital in New York, at M.D. Anderson Memorial Hospital in Houston, at Brotman Memorial Hospital at UCLA, and at Guttman Breast Diagnostic Institute in New York. The BreastCare(TM)/BreastAlert(TM) was found to be accurate in terms of the documented sensitivity of the BreastCare(TM)/BreastAlert(TM) (true positive for cancer) and specificity (true negatives - no cancer detectable by accepted medical methods) in relation to the biopsy (the "Gold Standard" diagnostic procedure), clinical breast examination and mammography.

BreastCare(TM)/BreastAlert(TM) Test Results vs. Biopsy Findings: In the first study in 1984, the BreastCare(TM)/BreastAlert(TM) was the focus of a clinical trial involving 179 women who underwent a biopsy. This multi-center study was conducted at three prestigious cancer institutions: M.D. Anderson Hospital and Tumor Institute, Memorial Sloan-Kettering Hospital, and Brotman Memorial Hospital. The BreastCare(TM)/BreastAlert(TM) tested positive for the suspicion of cancer in 93 of the 112 women who were diagnosed with cancer, for an overall sensitivity index of 83.0% and was notably stronger in detecting unilateral cancers - a sensitivity index of 88.1% (that is, 74 of the 84 unilateral cancers diagnosed). The frequency of false negatives was higher among patients who underwent biopsies of both breasts (less than 3% of breast cancers are believed to be bilateral generally).

The biopsy results were subjected to a breakdown by the size of the cancer detected and the patient's age. The threshold tumor size detectable with the BreastCare(TM)/BreastAlert(TM) is five millimeters and up, an early-stage cancer; out of a total of eight cancers under 1.0 centimeters which were diagnosed during the screening study, seven tested positive using the BreastCare(TM)/BreastAlert(TM). It appears that the BreastCare(TM)/BreastAlert(TM) has the proven ability to detect small, early-stage cancers which are most likely to be associated with favorable treatment outcomes. Moreover, a breakdown of the BreastCare(TM)/BreastAlert(TM) results by age suggests an especially high efficacy in detecting suspicious abnormalities in younger women. This is noteworthy because a pre-screening method is critically needed for women under 50 who have not been urged or who have chosen not to seek a mammogram on an annual basis, since fast-growing, potentially aggressive cancers are associated with the women in this age distribution. The BreastCare(TM)/BreastAlert(TM) will be used adjunctively with palpation and mammography.

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BreastCare(TM)/BreastAlert(TM) Test Results vs. Clinical Findings vs. Mammography and Physical Examination: In the second clinical trial study in 1984, the BreastCare(TM)/BreastAlert(TM) was studied prospectively in 2,805 asymptomatic women for the test's ability to detect abnormalities suspicious of breast cancer. Specifically, the BreastCare(TM)/BreastAlert(TM) data was compared to the mammographic and clinical findings, as well as to a limited number of cytological findings. Of the 2,805 women screened, 99 were recommended for a biopsy based on the suspicion of cancer in 86 of the 99 women (a sensitivity index of 86.9%). Fifty-nine biopsies were subsequently performed and 13 of the 15 cancers diagnosed were positive for the BreastCare(TM)/BreastAlert(TM) test (a sensitivity index of 86.7% against biopsy). Of the 2,706 women who had no suspicion of cancer based on mammogram and/or clinical examinations, 2,340 had negative BreastCare(TM)/BreastAlert(TM) results (a specificity index of 86.5%).

The BreastCare(TM)/BreastAlert(TM) is accurate, both in terms of sensitivity and specificity. Notably, the very low false positive rate (true negatives with a positive BreastCare(TM)/BreastAlert(TM) test) of 13.5% for the initial screening trial of BreastCare(TM)/BreastAlert(TM) actually assumes two additional circumstances: (1) that no mammographically undetectable cancers occurred; and (2) that the rate of subsequent cancers within this so-called false positive group is not statistically higher than that of the population of women as a whole. A lower true false positive rate for the BreastCare(TM)/BreastAlert(TM) can be assumed if abnormal thermal distribution is a risk marker for future disease incidences, as had frequently been suggested. In fact, several publications have documented a positive predictive value for thermographically based tests to detect future cancers. The screening study demonstrated reliability approaching that of mammography and significantly greater than distantly related thermographic techniques.

In conclusion, these studies have demonstrated the following with respect to use of the BreastCare(TM)/BreastAlert(TM): (i) the BreastCare(TM)/BreastAlert(TM) measures differences in temperature between corresponding areas of the left and right breasts, (ii) the BreastCare(TM)/BreastAlert(TM) is a safe device; no adverse reactions were observed, (iii) minimal variances were found due to clinical influences of hormones, (iv) a positive test result was found to be a strong indication that a breast abnormality exists which warrants further examination by a physician with respect to the possibility of breast cancer; and (v) it is advisable to confirm a positive test result with a repeat test. The best results were achieved upon arising in the morning, a time which is characterized by low body temperature in normal tissue (a positive result was confirmed with a retest). Although a negative test result was found to indicate a greatly reduced likelihood of cancer, it does not mean that the woman is free of breast abnormalities, including cancer. The BreastCare(TM)/BreastAlert(TM) may fail to detect the very slow growing (cold) tumors which have a relatively low rate of metabolic activity. In a study of 200 asymptomatic women, comparison of two successive tests indicated that 12 of 178 negative scores (7%) shifted to a positive level in the second test.

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In the screening study of 2,805 women at the Guttman Breast Diagnostic Institute, the observed 13.5% "false positive" index of the BreastCare(TM)/BreastAlert(TM) test on 366 women did not correlate with the Guttman clinical staff conclusion on any breast abnormality indicating the positive of cancer. The observed 13.5% "false positive" index does not mean that the BreastCare(TM)/BreastAlert(TM) yielded a positive reading in 13.5% of the women with no abnormalities of the breast. The clinical staff screens for conditions that warrant investigation regarding the possibility of breast cancer. Thus, breast abnormalities that produce elevation of temperature in one breast may result in a positive BreastCare(TM)/BreastAlert(TM) score, but may be classified as nonmalignant by the clinical staff. Furthermore, because the thermal signal will often proceed the tentative confirmation by imaging or clinical findings by trained physicians, a number of women classified as "false positive" could have cancer and would be confirmed by biopsy at a later time. Various follow-up studies using other thermology technologies have shown this to be true and unofficial 1-year follow-ups by Sloan Kettering of the false positive results were proven to be fast growing fatal cancers. The 2,805 women in the Guttman study may not be considered representative of the general population since many symptomatic women were referred to this center by other concerned physicians (In a separate home study test of 200 asymptomatic women, only 5.5% had false positive).

ADDITIONAL CLINICAL STUDIES

Through the efforts of the Company, the European Institute of Oncology, located in Milan, Italy, has performed clinical studies on the BreastCare(TM)/BreastAlert(TM). The study, which involves 250 women, was under the supervision of Dr. Virgilio Sacchini, a world-renowned surgical oncologist. The final report is forthcoming.

On June 11, 1999, at the International Mastology Meeting in Sao Paulo, Brazil, Dr. Alfred Barros, surgical oncologist and president of the Brazilian Society of Mastology, and Dr. Carlos Menke, gynecologist, professor of the University of Rio Grande Do Sul and Mastologist of the Clinical Center of Porto Alegre, presented the results of the Brazilian multi center clinical study of the Company's BreastCare(TM)/BreastAlert(TM) device. The clinical study was conducted by physician members of the Brazilian Society of Mastology using a uniform protocol to examine the capabilities of the BreastCare(TM)/BreastAlert(TM) with a screening method and diagnostic validation of cases suspicious of cancer. The BreastCare(TM)/BreastAlert(TM) was compared with corresponding mammographic (909 cases) and /or biopsy (151) results. The results were analyzed and evaluated by Dr. Alvaro Ronco, the head of Cancer Epidemiology at Pronacam (National Breast Cancer Program, Ministry of Public Health of Uruguay) and a member of the New York Academy of Sciences and of the Society for Epidemiological Research in Baltimore as follows: (i) If clinical breast examination is normal or doubtful (absence of suspicion of cancer) and the BreastCare(TM)/BreastAlert(TM) test is negative, the probability of absence of cancer confirmed by biopsy is around 95%; (ii) if clinical breast examination is suspicious of cancer and the BreastCare(TM)/BreastAlert(TM) is positive, the probability of having cancer is about 98%; and (iii) the performance of the BreastCare(TM)/BreastAlert(TM) is slightly better in women under 50 years old, who are mainly pre menopausal.

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In August 1999, the BreastCare(TM)/BreastAlert(TM), was presented by speakers via satellite at the European School of Oncology Congress in Rio de Janeiro, Brazil. The Chairmen were Professors Umberto Veronesi (Italy) and Jose A. Pinotti (Sao Paulo)

Dr. Virgilio Sacchini, Surgical Oncologist of the European Institute of Oncology Milan, Italy presented "Experience in the Clinical Application of the BreastCare(TM)/BreastAlert(TM) in Medical Practices", via satellite, which related to the European and Brazilian experience which discussed: 1) The need for a low-cost, accurate test, which provides immediate results with physical examination, and mammography; 2) A new technology called BreastCare(TM)/BreastAlert(TM), which can supply the need; 3) That there is evidence of recent clinical studies in South America and Europe that suggest the evaluation of heat on the surface of the breast, that BreastCare(TM)/BreastAlert(TM) can be an auxiliary modality in diagnosing breast cancer; 4) With the new modality, objective results are produced immediately; and, 5) That the technology is based on cellular epithelial increases in temperature when abnormal metabolic process happens, which is proliferation of atypical epithelial.

Dr. Carlos Menke, Gynecologist, professor of University of Rio Grande Do Sul and Mastologist of the Clinical Hospital of Porto Alegre also spoke on the Brazilian experience with the clinical studies. Management is very confident with the results of the studies i.e., when clinical examination is normal and BreastCare(TM)/ BreastAlert(TM) is negative, the probability of the absence of breast cancer is 95%, and if clinical examination is suspicious and BreastCare(TM)/BreastAlert(TM) is positive, the probability of the presence of cancer is 98%.

In September 1999, the BreastCare(TM)/BreastAlert(TM) was presented at its exhibition and several symposiums at the III North East Mastology Congress in Salvador-Bahia-Brazil. Dr. Ezio Novais Dias, president of the Congress, is a renowned gynecologist and mastologist at the San Rafael Hospital in Salvador-Bahia. Dr. Dias is vice president of the International Society of Mastology, President of the Brazilian Mastology School and is the new president of the Brazilian Mastology Society.

The Company's BreastCare(TM)/BreastAlert(TM) was given extensive exposure at the Congress by some of the most renowned mastologists in South America, as well as, in the world. Dr. Jose Antonio Ribeiro Filho, Gynecologist and Mastologist, and President of the Brazilian Academy of Medicine coordinated a symposium on "BreastCare(TM)/ BreastAlert(TM); A New Method of Diagnosis of Breast Cancer."

Also Dr. Alvaro Ronco, head of Cancer Epidemiology at Pronocam (National Breast Cancer Program, Ministry of Public Health of Uruguay), member of the New York Academy of Sciences (New York) and of the Society for Epidemiological Research (Baltimore) presented the "Epidemiology Aspects with BreastCare(TM)/BreastAlert(TM)."

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Dr. Alfredo Barros, Gynecologist and Mastologist at University Medical Hospital in Sao Paulo and president of the Brazilian Mastology Society gave the results of the Brazilian Mastology Society's "BreastCare(TM)/BreastAlert(TM) clinical studies." Dr. Carlos Henrique Menke, gynecologist, professor at University of Rio Grande Do Sul and Mastologist at the Clinical Center of Porto Alegre, presented "Clinical Applications of BreastCare(TM)/BreastAlert(TM)."

The Company anticipates that such studies, as well as future studies, will play a vital role for future screening projects in hospital and clinical settings.

REGIONAL REPORT: SOUTH AMERICA

The Company has focused a substantial portion of its resources in South America. The Company's efforts, though not well funded, have provided an important proving ground for the Company's operating model, which consists of (i) regionalized production and assembly, supported by local marketing partners; (ii) the support of opinion leaders, medical societies and mastologists; (iii) public and medical awareness of the advantages of the BreastCare(TM)/BreastAlert(TM) screening; (iv) organized forums and training for doctors by region; and (v) government screening programs. The Company intends to deploy this model in other regions throughout the world. A summary of the Company's efforts in South America are as follows:

In January 1998, the Company organized a wholly owned subsidiary, Scantek Medical S.A., Inc., an Uruguayan company, to distribute the BreastCare(TM)/BreastAlert(TM)in South America.

Through its Brazilian subsidiary, the Company signed an agreement with the State of Pernambuco in December 1999. The State of Pernambuco has the second largest concentration of hospitals in Brazil offering quality care and is also the most desirable location for production, shipping, financing and tax incentive.

The State of Pernambuco and the federal government has offered various incentives including acreage, at a reduced price, to build the facility, a 75% reduction in income taxes through 2013, free shipping outside the state, and in connection with the federal programs offered in Northeast Brazil, financing programs to help fund the operations and capital improvements.

In 2002, the Company's Brazilian subsidiary received notification of a termination of its agreement with a federal program organized to develop the Northeast area of Brazil. The Company's Brazilian subsidiary was approved to receive funding but failed to fulfil certain milestones by December 31, 2001.

On June 1, 2000 Scantek Medical do Brasil Ltda signed letters of commitment with the Infantile Maternal Institute of Pernambuco ("IMIP") and Unimed Recife ("Unimed").

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IMIP will use the BreastCare(TM)/BreastAlert(TM) in a pilot-screening program for the detection of breast cancer. Scantek Medical do Brasil Ltda is supporting the pilot program by donating BreastCare(TM)/ BreastAlert(TM) units. The IMIP will reaffirm its social commitment by developing and incorporating the BreastCare(TM)/BreastAlert(TM) usage in its pilot screening program.

Unimed, a Brazilian healthcare provider, will incorporate the BreastCare(TM)/BreastAlert(TM) into the program of approved examination procedures for the detection of breast cancer. Unimed Recife is part of Unimed, a national organization that is a major health care provider for over 11 million participants in Brazil. Scantek Medical do Brasil Ltda is supporting this pioneering institution in the private sector of the medical community in Recife with the first sale to Unimed for 3,000 BreastCare(TM)/BreastAlert(TM) units.

Both IMIP and Unimed programs will be molded after the methodology used at the Gynecology and Obstetrics of the University of Medicine of Sao Paulo University.

In early July 2001 a classification number was assigned to BreastCare(TM). Thereafter, based on the State of Rio de Janeiro's classification number assigned to BreastCare(TM), any government agencies, municipalities and states in Brazil will not have to go through any preliminary process before ordering the BreastCare(TM).

At the end of July 2001, the Company's Brazilian Managers and medical representatives met with the Health Municipal Partnership for Baixada Fluminense (CISBAF) to discuss the expansion of the Women's Health Project for the Baixada Fluminense territory for an approximate $3 million order. Baixada Fluminense is a region in the northern section of the State of Rio de Janeiro composed of 13 municipalities with an aggregate population of 4 million people and 71 health centers. CISBAF is the representative for all the municipalities of the Health Ministry in Brazil. CISBAF is the most important health organization in Baixada Fluminense. The final agreement and receipt of the purchase order are anticipated before the end of June 2003.

In August/September 2001, Fiocruz, a government agency in the Ministry of Health assisted in the BreastCare(TM) educational program for the Women's Health Program for the City of Nova Iguacu.

The Company plans to ship the BreastCare(TM)/BreastAlert(TM) from the United States until a production facility in Brazil is operational.

FEDERAL PROGRAM

In October, 1999, the Company donated 2,100 BreastCare(TM)/ BreastAlert(TM) units to Fiocruz, a federal agency in Recife, Pernambuco-Brazil to be used in a pilot screening project for 2,000 women over 40 years of age. Dr. Alexandre Bezerra de Carvalho, Director of CPqam/Fiocruz, of the Ministry of Health organized the government-sponsored project specifically for validation of BreastCare(TM)/BreastAlert(TM)'s usefulness in a major breast cancer-screening program being organized in Brazil.

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This pilot program is intended to prove the viability of the BreastCare(TM)/BreastAlert(TM) as a low-cost, accurate test to increase the indexes of early detection of breast cancer in Brazil. With the assistance of SUS (Public System of Health), the Primary Assistance Program uses Sanitary Agents (skilled health personnel) to screen indigent women for breast cancer with the BreastCare(TM)/BreastAlert(TM) test. The Company is confident of the acceptance of the use of BreastCare(TM)/BreastAlert(TM) by Agents of Health (ACS), the Ministry of Health and Secretaries of Health. BreastCare(TM)/BreastAlert(TM) has proven its value in the Fiocruz pilot cancer project. The Company is anticipating to receive confirmation from the government of Pernambuco to confirm BreastCare(TM)/BreastAlert(TM) usage in its screening program.

As is known, in developed countries, the strategy of early detection of breast cancer is based on the wide use of mammography for women over 40 years of age. In developing countries the lack of mammography equipment, trained human resources and financial resources are major constraints to use this strategy. According to Dr. Bezerra de Carvalho, Brazil would need 4,000 mammography machines to assist the population of approximately 120 million people that uses the Public System of Health of which about 14.5 million women who are over 40 years of age. This gives a good picture of the dimension of the problem in Brazil.

SAO PAULO

In December 1999, BreastCare(TM)/BreastAlert(TM) has been integrated into a very important Brazilian Breast Cancer Prevention Collaborative Project in Sao Paulo Brazil. The Collaborative Project is being coordinated by Professor Jose Aristodemo Pinotti, and is being implemented by the Gynecology Clinic of the University Medical School of Sao Paulo, with the support of the Brazilian Mastology Society, Anna Bove Foundation and "Fundacao Pro Mulher" at the Clinical Hospital of the University at Sao Paulo.

The Company's BreastCare(TM)/BreastAlert(TM) is being used in adjunct with clinical breast examination and the Gail Risk Factor (criteria used to measure ones risk for breast cancer) in a pilot breast cancer screening program at the Gynecology Clinic of the University Medical School of Sao Paulo. This pilot breast cancer-screening center is the first collaborative project to establish Breast Cancer Screening Centers and the integration of BreastCare(TM)/ BreastAlert(TM) in the detection process.

The cases detected at the Breast Cancer Screening Centers will be properly guided to diagnosis and treatment. This process of referral will be facilitated by the fact that "PRO-MULHER" (a private, non-profit institution) is linked to Gynecologic services under Dr. Pinotti at Sao Paulo University, which have substantially all the facilities for diagnosis and treatment of breast cancer, and after the program is completed in the first half of 2003 the final report will be issued.

Brazil and its various states are currently back to where it started in terms of Breast Cancer Control Programs, but are undergoing a transition to provide better screening for women.

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REGIONAL REPORT: CHILE AND SINGAPORE

On April 15, 2000, D-Lanz Development Group, Inc. ("D-Lanz") and the Company entered into an agreement to amend its previous license agreement dated April 29, 1997 and amended June 11, 1999. D-Lanz had a change in control and the License will be assigned to a new corporation, Global Agri-Med Technologies, Inc. ("Global"). The Company agreed to assign and transfer the license to Global, which includes the exclusive license in Chile and Singapore. In addition, the Company has agreed to give Global non-exclusive license extensions to Africa, Korea, and South Asia. Global must receive final clearance from the Company before any participation or distribution can proceed in any city, state, territory or country in the non-exclusive extensions as stated above. Both parties have agreed to update certain terms in the previous agreement that will be beneficial to both parties.

REGIONAL REPORT: EUROPE

Management of the Company has currently suspended the expansion into Europe due to limited availability of human and financial resources. However, strategic planning with potential European partners have been examining the model it established in South America and are designing a plan for the target markets.

On July 14, 1999, the Company granted an exclusive license to NuGard HealthCare Ltd. ("NuGard"), an Irish Company, to market the Company's BreastCare(TM)/BreastAlert(TM) in Ireland and the United Kingdom. Pursuant to this licensing agreement, NuGard will pay a non-refundable licensing fee of $350,000 in various stages, of which $59,000 was received as of June 30, 2000, and the Company received common shares equivalent to fifteen (15%) percent of NuGard's total outstanding common shares. The purchase price will range from $10 to $15 per unit - FOB US. The license agreement requires minimum purchases of 5,000 units a month and payments of licensing fees, both of which NuGard is in default. At this time, the Company has not renegotiated the license agreement.

Through the efforts of the Company, the European Institute of Oncology, located in Milan, Italy, has performed clinical studies on the BreastCare(TM)/BreastAlert(TM). The study, which involved 250 women, under the supervision of Dr. Virgilio Sacchini, a world-renowned surgical oncologist. The final report is forthcoming in 2003.

In order to sell medical devices to the new European Community, a Certification Europe ("CE") is required, which is based primarily upon documentation of a compliant Quality Control System. In August 1999, the Company received a CE for the BreastCare(TM)/BreastAlert(TM).

REGIONAL REPORT: UNITED STATES

The Company 's goals in North America for the immediate future are to review and reorganize marketing and sales, utilizing the Company's experience and approach it has used in South America. However, in order to accomplish this, additional funding will be needed to implement a new marketing and sales strategy in order to re-launch the BreastCare(TM)/BreastAlert(TM), which it anticipates will begin 10 to 12 months after major financing is completed.

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Pursuant to a License Agreement, dated March 17, 1995, as amended on July 31, 1995, October 20, 1995 and May 31, 1996, together with three extensions on February 26, 1996, March 17, 1996 and April 29,1996, the Company granted HumaScan Inc. ("HumaScan") an exclusive license to manufacture and sell the BreastCare(TM)/BreastAlert(TM) in the United States and Canada. On March 15, 1999, pursuant to a Settlement Agreement, dated as of the 11th day of March 1999, the Company regained the rights to market and sell its BreastCare(TM)/BreastAlert(TM) in the U.S. and Canada. Pursuant to the Settlement Agreement, all licensing agreements between the Company and HumaScan, which gave HumaScan the right to manufacture, market and sell the BreastCare(TM)/BreastAlert(TM), were terminated. Pursuant to the original and amended licensing agreements, HumaScan was indebted to the Company for failure to pay license fees, royalties and other sums of money. In exchange for the cancellation of $575,000 of indebtedness, due to it by HumaScan and for the payment by the Company to HumaScan of an additional $340,000, HumaScan agreed to assign certain special manufacturing equipment, furniture, raw materials, tools, materials, laboratory equipment and inventory of HumaScan for the manufacture of the BreastCare(TM)/BreastAlert(TM). In addition, the Company received 150,000 shares of HumaScan's common stock as part of the Settlement Agreement.

The Company has two complete sensor manufacturing and assembly lines for the production of the BreastCare(TM)/BreastAlert(TM) product. The value of these two manufacturing lines is estimated by the Company to be approximately $5.5 million.

On July 11, 2000 the Company was issued a new patent for its Differential Temperature Sensor Device For Use in the Detection of Breast Cancer. The patent No. 6,086,247 will expire on February 5, 2018, twenty (20) years from the date of filing. The patent was filed on the invention for improvements over the prior art.

On October 24, 2000, the U.S. Letters Patent No. 6,135,968 was issued for its Differential Temperature Measuring Device and Method for prostate examination. The device is trademarked under the name ProstAlert. The patent will remain in effect for 20 years after initial filing, expiring September 10, 2017. Preliminary testing was done in 1998 with very promising results. The Company will be unable to expand its product line unless additional funding is completed. Clinical trials need to be performed to determine the efficacy of the test with results presented to the United States Food and Drug Administration ("FDA") for marketing clearance.

REGULATIONS

The Company's development and manufacture of medical devices is controlled by the Food, Drug and Cosmetic Act (the "Act"). The Food and Drug Administration ("FDA"), which administers the Act, has promulgated a number of regulations which dictate the method by which new products are allowed to enter the United States market (Title 21, CFR Section 807, Premarket Notification), and the documentation and control of manufacturing processes (Title 21, CFR Section 820, Good manufacturing Practices for the Manufacturing, Storage and Installation of Medical Devices).

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Subject to the potential changes in regulatory status, the Company believes that it is in full compliance with the requirements of Part 807 Premarket Notification, as promulgated under Section 510(k) of the Act, and has received permission to market the BreastCare(TM)/BreastAlert(TM). On January 24, 1984, the FDA determined that the BreastCare(TM)/BreastAlert(TM) is substantially equivalent to a device marketed in interstate commerce and accordingly may be freely marketed without further FDA authorization. Also included under Part 807 is a requirement for product registration and listing, which the Company believes has been satisfied.

Management believes that the proprietary nature of the product is protected under patent rights issued in the United States and certain foreign countries.

FOREIGN REGULATION

Because the Company proposes to distribute its product in foreign countries, the Company will be required to comply with the regulations of those countries where its product is distributed by the Company through licensees. No assurances can be given that the Company and/or its licensees will be able to comply with the regulatory requirements of the foreign markets in which the BreastCare(TM)/BreastAlert(TM) will be sold.

Most countries require product registration before you can sell. In South America, the Company's subsidiary, Scantek Medical S.A. have applied for and have received product registration in Brazil, Uruguay, Argentina and Peru. Paraguay and Bolivia have no registration requirements to sell. In addition, the Company has applied for and received a Certification Europe (CE), which is required, as of June, 1998, of all products marketed in the European Union.

PATENTS

The proprietary nature of the BreastCare(TM)/BreastAlert(TM) is protected under patent rights issued in the U.S. and foreign countries. However, in general, the level of protection afforded by a patent is directly proportional to the ability of the patent owner to protect and enforce his rights under the patent. Since the financial resources of the Company are currently limited, and patent litigation can be both expensive and time consuming, there is a risk that enforcing the patents for the BreastCare(TM)/BreastAlert(TM) will have a material adverse financial effect on the Company or the Company will not have the financial resources necessary to enforce its patents. Once the Company's existing patents expire, other companies may be able to create substantially similar products. If this were to happen, the Company would not be able to avail itself of the protection afforded by the patent laws.

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U.S. patents for the BreastCare(TM)/BreastAlert(TM)include:

- - Patent No. RE 32,000, granted and issued on October 8, 1985; this patent is a reissue of Patent No, 4, 190,058 for a "Device For Use in Early Detection of Breast Cancer", which was granted and issued on February 26, 1980 and has since expired.

- - Patent No. 4,651,749, granted on March 24, 1987, entitled "Cancer Detection Patch for Early Detection of Breast Cancer; Temperature, Indicators, Flexibility, Thermoconductivity, Webs"; this patent is a partial continuation of Patent No. 4,190,058 above

- - Patent No. RE 4,624,264 granted November 24, 1986; this patent has been reinstated and expires November 25, 2003.

- - Patent No. 6,086,247 granted on July 11, 2000, for Differential Temperature Sensor Device for Use in the Detection of Breast Cancer and Breast Disease; this patent expires February 5, 2018. -- Patent No. 6,135,968 granted on October 24, 2000, for Differential Temperature Measuring Device and Method for prostate examination; this patent expires September 10, 2017.

In addition, in accordance with the Settlement Agreement between the Company and HumaScan, HumaScan has assigned all of its rights, title and interests in certain U.S. patents and U.S. and foreign trademarks, including the following patents:

- - File No. 08/854,144, filed May 14, 1997, entitled "Breast and Axilla Cancer Screening Device and Method"

SUPPLIES AND RAW MATERIALS

Supplies and raw materials for the manufacture of the BreastCare(TM)/BreastAlert(TM) are available from various sources. Historically, other than on a few rare occasions, the supplies and raw materials for producing the BreastCare(TM)/BreastAlert(TM) have been readily available and the cost of such materials has not experienced any material fluctuation. The Company has determined the inventory planning and control, as well as other production management systems, it intends to use. In addition, the Company has acquired supplies and raw materials in connection with its settlement with HumaScan.

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MARKETING AND DISTRIBUTION

The Company has created an international marketing plan for licensing and distribution to capture a significant portion of the $6 billion annual global breast cancer market with a device that alerts the physician and patient to the possibility of either proliferating thermally active breast cancer cells or certain types of thermally active breast disease.

Management believes that in emerging and developing countries, the BreastCare(TM)/BreastAlert(TM) has the potential to become an important part of the overall screening protocols used to detect breast disease. To market the BreastCare(TM)/BreastAlert(TM) abroad, the Company intends to utilize the following basic strategies:

o Foreign production: The Company intends to set up its own Regional Production Centers overseas. All sensor manufacturing will remain in the United States under the Company's control, unless manufacturing is established at the Company's subsidiary.

o Foreign Licensing: The Company intends to enter into exclusive agreements with various foreign entities, whereby the Company will either permit such entity to distribute the BreastCare(TM)/BreastAlert(TM) or give such entity the right to utilize the Company's trademark and patent in a specified geographical area.

o Joint Ventures: The Company intends to enter into agreements whereby the Company will grant one or more partners (usually partner of the host country) the right to share in the risks, cost and management of a foreign operation. The Company, however, will retain control of the manufacturing. The joint venture, if established, is anticipated to be with a major medical supply manufacturer or pharmaceutical company which could benefit from the sales and distribution of the BreastCare(TM)/BreastAlert(TM).

o Government Programs: Municipalities, State and Federal.

o BreastCare(TM)/BreastAlert(TM) Centers: The Company anticipates that it will establish breast care centers in cooperation with governments and private businesses in order to utilize the BreastCare(TM)/BreastAlert(TM) with an established protocol.

The Company intends to manufacture the BreastCare(TM)/BreastAlert(TM) for sale to partners pursuant to distribution agreements or intends to control the manufacturing if a joint venture is established. With respect to pursuing the International market for distribution of the BreastCare(TM)/BreastAlert(TM), the Company intends to enter into new markets by establishing Regional Production centers to manufacture and distribute within each target market. Management believes that partnerships with companies which either have working relationships with distributors throughout the world or have a distribution network established in the medical communities of the target markets, will be an excellent marketing vehicle for the Company. Each agreement will be exclusive and tailored to maximize the penetration of each market. Initially the Company intends to establish regional production centers and distribution networks in the U.S., Brazil, Hungary, Ireland, United Kingdom and China.

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The Company, as it has done in the past, intends to conduct a premarket investigation of the market before marketing is commenced and prior to finalizing any agreements. A market profile for each market will be completed to analyze the target markets. The profile will establish the strongest distributors and the buying decision-makers (i.e., physicians, hospitals, clinics, government agencies and over the counter customers). Management believes that a standard market profile will permit comparisons between markets at a later date and provide profiles of the types of markets that provide the best results. In addition, the Company will expand communications with the Ministries of Health, Department of Health and Clinical Services to investigate the statutory controls regulating the sale of medical devices.

The Company has focused on developing partnerships with various international companies who have relationships with distributors throughout the world and who have connections in the medical communities of the target markets. Recently, the Company has been negotiating with distributors who have direct contact with the distribution of medical product to government agencies, i.e., Brazil and will be the distributors for BreastCare(TM).

Strategically, the Company intends to centralize manufacturing and decentralize marketing in each geographical region. Specific markets within that region shall be covered by individual agreements which provide for the promotion and distribution of the BreastCare(TM)/BreastAlert(TM). Accordingly, the Company intends to utilize centralization for control and decentralization for market penetration. Management believes that the Company's expansion of several regional centers for the manufacturing locations will give the Company good access to shipping, tax considerations and low manufacturing cost, and to police the crossover among distributors' areas where distribution is segmented.

South America Marketing

The Company intends to open a production center in Brazil. In South America, the development of distributorships with selling partners has been and are further being developed to approach private hospitals, clinics, physicians and governments. The Company is introducing the BreastCare(TM) program, which has been developed at the Sao Paulo University Hospital, for use in municipality, state, and federal screening programs.

A carefully structured program of publications and professional meetings between such revered specialists and the rest of the physician population has been underway throughout 1998, 1999 and 2000 and it is anticipated that such will be expanded in ensuing years. This marketing approach will be directed by the International Medical Advisory Board of the Company, consisting of some of the top specialists in the world in the diagnosis and treatment of breast disease. State and Federal governments are also helping to create screening programs in accordance with the above activities.

On October 1, 2002 the Company signed an exclusive distribution agreement with Compat Comercio Exterior Ltda, a Brazilian commercial company located in Rio De Janerro, Brazil, for a long-term marketing and sales agreement for the BreastCare(TM) product. Pursuant to the Compat Comercio agreement, Compat Comercio has agreed to a minimum purchase of the BreastCare(TM) product of 100,000 units during the first six months of the term of the agreement and 400,000 units during the second six months. The second year minimum purchase order is 1,000,000 units. Management believes that the timely fulfillment of the Compat Comercio agreement will result in net profits in excess of $2,000,000 for the first year of the Compat Comercio agreement, subject to Compat Comercio meeting its minimum purchase obligations to the Company. Pursuant to such agreement which has a term of five years with a renewal term of an additional five years, subsequent to the initial two year term of the agreement, the Company has the right to terminate the agreement if the parties cannot agree upon the minimum number of units. There can be no assurance that Compat Comercio will meet the minimum purchase requirement, or that the Company will recover any damages that may result from such failure.

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Europe Marketing

The Company has been introducing the BreastCare(TM)/BreastAlert(TM) in Europe at educational forums which were covered by the press and television. Also, the Company will be exhibiting the BreastCare(TM)/BreastAlert(TM) at medical congresses to introduce the device to the physician market in the very near future.

The Company intends to utilize government contracts to mass market the BreastCare(TM)/BreastAlert(TM). Countries, such as Ireland and Spain lend themselves to this approach, as well as do larger independent Eastern European countries, including but not limited to, Romania, Bulgaria, Ukraine, Russia, Greece and Turkey.

United States and Canada Marketing

The Company's first introduction of the BreastCare(TM)/BreastAlert(TM) product was by its former United States and Canadian licensee, HumaScan which launched the product in December 1997. Before relaunching the BreastCare(TM)/BreastAlert(TM) the Company plans to take a carefully constructed approach to the marketplace in the United Sates and Canada. The Company intends to spend between nine to twelve months reviewing and analyzing the best marketing and sales approaches focused toward the physician user and managed care insurers. The Company intends to mirror the approach used in South America with respect to advisement and leadership from renowned breast disease specialists.

FUTURE MARKETS

The Company intends to concentrate its efforts to market and sell the BreastCare(TM)/ BreastAlert(TM) through 2003 in South America, primarily in Brazil. Thereafter, the Company also intends to commence its marketing efforts for the BreastCare(TM)/BreastAlert(TM) in Europe and the United States and investigate and develop the marketplace in Asia, the Middle East and the African continent. Ultimately, the Company intends to expand its marketing efforts worldwide.

COMPETITION

The Company believes that the BreastCare(TM)/BreastAlert(TM), which provides digital quantitative recordings of underlying tissue temperature, represents a significant improvement over thermographic technology products because such other products are subject to the inherent problems of subjective evaluation of heat patterns. Based upon these differences, the Company believes that the prospects for the BreastCare(TM)/BreastAlert(TM) as a supplement to currently existing screening tests are very good.

The Company believes it is in a unique position because there are no known competing low cost screening devices on the market which would compete directly with the BreastCare(TM)/BreastAlert(TM) for use by primary care physicians. As a result, the Company believes that the BreastCare(TM)/BreastAlert(TM) will augment other existing forms of screening and technology.

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Some of the Company's future competitors may be large, well-financed, and established companies which have greater resources for research and development, manufacturing, and marketing than the Company has and, therefore, may be better able than the Company to compete for a share of the market, even in areas in which the Company may have superior technology. There can be no assurance that the Company can continue to produce a product which is commercially acceptable, or, that if continued to be produced, such a product will be competitive with existing or future products. It is also possible that there will be technological changes or developments by competitors which will render the Company's products noncompetitive or obsolete.

FUTURE PRODUCTS

The Company believes that the BreastCare(TM)/BreastAlert(TM) may have applicability as a screening device for other abnormalities, including measuring ovulation cycles for infertile couples, measuring changes in the cardiovascular system to screen for potential stroke victims, and detecting abnormalities in the kidneys, prostate and testicles. Although some testing was performed during the BreastCare(TM)/BreastAlert(TM) development stage, these initial tests were preliminary only, and in order to obtain FDA approval, which would be required in order to market a future product. The Company intends to further explore its initial findings and perhaps, introduce products in furtherance of these findings.

On October 24, 2000, patent #6,135,968 was granted for its Differential Temperature Measuring Device and Method for prostate examination. This device is trade marked under the name, ProstAlert(TM).

EMPLOYEES

The Company employs a total of 8 employees. Two of these employees are employed in the U.S. as President and Chief Executive Officer and Vice President/ Corporate Secretary. Additional personnel and consultants are utilized, as required, on a contractual basis. Additionally, manufacturing personnel have been targeted to be utilized when the purchase order from Brazil has been received.

The remaining employees are employed in South America by the Company's two South American subsidiaries, as follows: a General Manager, a Medical Director, two (2) other Senior employees, and two (2) support staff employees.

None of the Company's employees are covered by a collective bargaining agreement with a union. The Company considers its relationship with its employees to be good.

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RISKS AND UNCERTAINTIES

The Company's business is subject to a number of risks and uncertainties, including, but not limited to; (a) the risk that it may be unable to raise enough capital to fund the Company's operations, (b) the risk that the BreastCare(TM)/BreastAlert(TM) will not be accepted commercially, (c) the Company's reliance on certain customers, and (d) the highly competitive nature of the Company's industry and the impact that competitors' new products and pricing may have upon the Company. Such factors, as well as shortfalls in the Company's results of operations as compared with analyst's expectations, capital market conditions and general economic conditions, may also cause substantial volatility in the market price of the Company's Common Stock.

PUBLIC INFORMATION

The Company electronically files with the Securities and Exchange Commission (the "SEC") all its reports, including, but not limited to, its annual and quarterly reports. The SEC maintains an Internet site which contains all such reports and other information with respect to the Company on its website, http://www.sec.gov. Additional information on the Company may be obtained from the Company's web site, http://www.scantekmedical.com.