Edgar Filing: NEOPROBE CORP

As filed with the Securities and Exchange Commission on December 2, 2003

Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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NEOPROBE CORPORATION
(Exact name of registrant as specified in its charter)

DELAWARE 2835 31-1080091
(State or other jurisdiction of (Primary standard industrial (IRS employer
incorporation or organization) classification number) identification number)

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425 Metro Place North, Suite 300
Dublin, Ohio 43017-1367
(614) 793-7500
(Address and telephone number of principal executive offices)
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425 Metro Place North, Suite 300
Dublin, Ohio 43017-1367
(Address of principal place of business)
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Brent L. Larson, Chief Financial Officer
Neoprobe Corporation
425 Metro Place North, Suite 300
Dublin, Ohio 43017-1367
(614) 793-7500
(Name, address and telephone number of agent for service)
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Copies to:

William J. Kelly, Esq.
William L. Jordan, Esq.
Porter, Wright, Morris & Arthur LLP
41 South High Street
Columbus, Ohio 43215
Telephone No. (614) 227-2000
Telecopier No. (614) 227-2100

Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this registration statement.

If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]

If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]

If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]

If this form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|

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CALCULATION OF REGISTRATION FEE
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TITLE OF EACH CLASS OF PROPOSED MAXIMUM
SECURITIES TO BE PROPOSED AMOUNT TO OFFERING PRICE PER PROPOSED MAXIMUM AMOUNT OF REGISTRATION
REGISTERED BE REGISTERED SHARE (1) OFFERING PRICE (1) FEE
--------------------------- --------------------- ------------------------- ---------------------- -------------------------

Common Stock, $.001 par
value................. 21,817,257 $0.31 $6,763,350 $548.00

(1) This price is used solely for the purposes of computing the amount of
the registration fee pursuant to Rule 457 of the Securities Act and is
estimated, based on the high and low prices of the common stock on
November 28, 2003.

The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.

SUBJECT TO COMPLETION, DATED DECEMBER 2, 2003.

THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING OFFERS TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.

PROSPECTUS

NEOPROBE CORPORATION

21,817,257 SHARES OF COMMON STOCK

This prospectus relates to the sale of up to 21,817,257 shares of our common
stock by persons who have purchased shares of our common stock or who may
purchase shares of our common stock through the conversion of debt or the
exercise of warrants as more fully described herein. The aforementioned persons
are sometimes referred to in this prospectus as the selling stockholders. The
prices at which the selling stockholders may sell the shares will be determined
by the prevailing market price for the shares or in negotiated transactions. We
will not receive proceeds from the sale of our shares by the selling
stockholders.

Our common stock is quoted on the Nasdaq Over-The-Counter Bulletin Board under
the symbol NEOP. On November 28, 2003, the last reported sale price for our
common stock as reported on the Nasdaq Over-The-Counter Bulletin Board was $0.30
per share.

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Each selling stockholder is an "underwriter" within the meaning of the
Securities Act of 1933, as amended.

THE SECURITIES OFFERED IN THIS PROSPECTUS INVOLVE A HIGH DEGREE OF RISK. YOU
SHOULD CONSIDER THE RISK FACTORS BEGINNING ON PAGE 4 BEFORE PURCHASING OUR
COMMON STOCK.

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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The date of this prospectus is December __, 2003.

TABLE OF CONTENTS

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Prospectus Summary........................................................................................ 2
Risk Factors.............................................................................................. 4
Cautionary Note Regarding Forward-Looking Statements......................................................10
Use of Proceeds...........................................................................................10
Market for Common Equity and Related Stockholder Matters..................................................11
Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................................................11
Description of Business...................................................................................19
Our Management............................................................................................34
Description of Property...................................................................................34
Security Ownership of Certain Beneficial Owners and Management............................................43
Description of Capital Stock..............................................................................46
Acquisition of Common Stock by Selling Stockholders.......................................................50
Selling Stockholders......................................................................................52
Plan of Distribution......................................................................................55
Legal Opinion.............................................................................................57
Experts...................................................................................................57
Additional Information....................................................................................57
Index to Financial Statements.............................................................................F-1

UNLESS OTHERWISE SPECIFIED, THE INFORMATION IN THIS PROSPECTUS IS SET FORTH AS
OF DECEMBER __, 2003, AND WE ANTICIPATE THAT CHANGES IN OUR AFFAIRS WILL OCCUR
AFTER SUCH DATE. WE HAVE NOT AUTHORIZED ANY PERSON TO GIVE ANY INFORMATION OR TO
MAKE ANY REPRESENTATIONS, OTHER THAN AS CONTAINED IN THIS PROSPECTUS, IN
CONNECTION WITH THE OFFER CONTAINED IN THIS PROSPECTUS. IF ANY PERSON GIVES YOU
ANY INFORMATION OR MAKES REPRESENTATIONS IN CONNECTION WITH THIS OFFER, DO NOT
RELY ON IT AS INFORMATION WE HAVE AUTHORIZED. THIS PROSPECTUS IS NOT AN OFFER TO
SELL OUR COMMON STOCK IN ANY STATE OR OTHER JURISDICTION TO ANY PERSON TO WHOM
IT IS UNLAWFUL TO MAKE SUCH OFFER.

PROSPECTUS SUMMARY

The following summary highlights selected information from this prospectus and
may not contain all the information that is important to you. To understand our
business and this offering fully, you should read this entire prospectus
carefully, including the financial statements and the related notes beginning on
page F-1. When we refer in this prospectus to the "company," "we," "us," and
"our," we mean Neoprobe Corporation, a Delaware corporation, together with our
subsidiaries. This prospectus contains forward-looking statements and
information relating to Neoprobe Corporation. See Cautionary Note Regarding
Forward Looking Statements on page 10.

OUR COMPANY

We are Neoprobe Corporation, a Delaware corporation formed in 1983. Neoprobe
Corporation (Neoprobe or we) is a biomedical technology company that provides
innovative surgical and diagnostic products that enhance patient care by meeting
the critical decision-making needs of healthcare professionals. Prior to the
acquisition of Cardiosonix Ltd. (Cardiosonix) on December 31, 2001, our
marketable products were limited to a line of gamma detection devices used in
the surgical application of intraoperative lymphatic mapping (ILM). The
acquisition of Cardiosonix significantly expanded the potential of our product
offerings. Cardiosonix is in the process of developing and commercializing a
unique line of proprietary blood flow monitoring devices for a variety of
diagnostic and surgical applications. Cardiosonix has received marketing
clearance for two of its products, QUANTIX/ND(TM) and QUANTIX/OR(TM), in Europe
and in the U.S.

Our principal executive offices are located at 425 Metro Place North, Suite 300,
Dublin, Ohio, 43017. Our telephone number is (614) 793-7500. The address of our
website is www.neoprobe.com. Information on our website is not part of this
prospectus.

THE OFFERING

During April 2003, we completed a bridge loan agreement with our President and
CEO, David Bupp. Under the terms of the agreement, Mr. Bupp advanced us
$250,000. Interest on the note accrues at the rate of 8.5% per annum, payable
monthly, and the note is due on June 30, 2004. In consideration for the loan, we
issued Mr. Bupp 375,000 warrants to purchase our common stock at an exercise
price of $0.13 per share. This prospectus covers the resale of the 375,000
shares of common stock issuable pursuant to the warrants granted to Mr. Bupp.

During April 2003, we also completed a convertible bridge loan agreement with
Donald E. Garlikov for an additional $250,000. Under the terms of the agreement,
the note bears interest at 9.5% per annum, payable monthly, and is due on June
30, 2004. In consideration for the loan, we issued Mr. Garlikov 500,000 warrants
to purchase our common stock at an exercise price of $0.13 per share. The note
is convertible, at the option of the holder, into shares of our common stock
beginning on July 1, 2003. Half of the principal amount of the loan is
convertible into shares of common stock at a 15% discount to the 20-day average
market price preceding the conversion, but in no case greater than a $0.20
ceiling conversion price or less than a $0.10 floor conversion price. The
remaining half of the principal is also convertible at a 15% discount to a
20-day average market price preceding the conversion, subject only to the $0.10
floor conversion price. This prospectus covers the resale of the shares of
common stock issuable upon conversion of the note and the 500,000 shares of
common stock issuable upon exercise of the warrants granted to Mr. Garlikov.

financing transaction. This prospectus covers the resale of these shares and the
shares of common stock issuable pursuant to the warrants. The warrants have an
exercise price of $0.28 per share.

In exchange for the services of Trautman Wasserman, we agreed to pay a retainer
of $10,000, payable in cash and stock, and to pay further compensation on
successful completion of a private placement. We issued Trautman Wasserman a
total of 27,199 shares of common stock in payment for one half of its retainer.

During October and November 2003, we executed common stock purchase agreements
with third parties introduced to us by a third investment banking firm,
Rockwood, Inc., for the purchase of 12,173,914 shares of our common stock at a
price of $0.23 per share for net proceeds of $2.5 million. In addition, we
agreed to issue the purchasers warrants to purchase 6,086,959 shares of common
stock at an exercise price of $0.28 per share and agreed to issue the placement
agents warrants to purchase 1,432,609 shares of our common stock on similar
terms. All warrants to be issued in connection with the transaction expire five
years from the date of issuance. This prospectus covers the resale of the
12,173,914 shares of common stock purchased by the purchasers and the 7,519,568
shares of common stock issuable pursuant to the warrants granted to the
purchasers and the placement agents and their assignees.

AN INVESTMENT IN OUR COMMON STOCK IS HIGHLY SPECULATIVE AND INVOLVES A HIGH
DEGREE OF RISK. SEE RISK FACTORS BEGINNING ON PAGE 4.

RISK FACTORS

An investment in our common stock is highly speculative, involves a high degree
of risk, and should be made only by investors who can afford a complete loss.
You should carefully consider the following risk factors, together with the
other information in this prospectus, including our financial statements and the
related notes, before you decide to buy our common stock. Our most significant
risks and uncertainties are described below; however, they are not the only
risks we face. If any of the following risks actually occur, our business,
financial condition, or results of operations could be materially adversely
affected, the trading of our common stock could decline, and you may lose all or
part of your investment therein.

WE HAVE SUFFERED SIGNIFICANT OPERATING LOSSES FOR SEVERAL YEARS IN OUR HISTORY
AND WE MAY NOT BE ABLE TO AGAIN ACHIEVE PROFITABILITY.

We had an accumulated deficit of approximately $121 million as of December 31,
2002. Although we were profitable in 2000 and in 2001, we incurred substantial
losses in the years prior to that and in 2002. The deficit resulted because we
expended more money in the course of researching, developing and enhancing our
technology and products and establishing our marketing and administrative
organizations than we generated in revenues. We expect to continue to incur
significant operating expenses in the foreseeable future, primarily related to
the completion of development and commercialization of the Cardiosonix product
line. As a result, we are sustaining substantial operating and net losses in
2003, and it is possible that we will never be able to sustain or develop the
revenue levels necessary to again attain profitability. As of September 30,
2003, our accumulated deficit is approximately $122 million.

OUR PRODUCTS MAY NOT ACHIEVE THE BROAD MARKET ACCEPTANCE THEY NEED IN ORDER TO
BE A COMMERCIAL SUCCESS.

Widespread use of our gamma detection devices is currently limited to a surgical
procedure (ILM) used in the treatment and diagnosis of two primary types of
cancer: melanoma and breast cancer. The success of our gamma detection devices
greatly depends on the medical community's acceptance of ILM, and on our devices
for use in ILM as a reliable, safe and cost effective alternative to current
treatments and procedures. The adoption rate for ILM appears to be leveling off
and may not meet our expectations. Although we continue to believe that ILM has
significant advantages over other currently competing procedures, broad-based
clinical adoption of ILM will likely not occur until after the completion of
ongoing international trials related to breast cancer. Even if the results of
these trials are positive, we cannot assure you that ILM will attain rapid and
widespread acceptance. Our efforts and those of our marketing and distribution
partners may not result in significant demand for our products, and the current
demand for our products may decline.

Our future success now also greatly depends on the success of the Cardiosonix
product line. Cardiosonix' products are just beginning to be marketed
commercially. The market for these products is in an early stage of development
and may never fully develop as we expect. The long-term commercial success of
the Cardiosonix product line will require widespread acceptance of our products
as safe, efficient and cost-effective. Widespread acceptance would represent a
significant change in medical practice patterns. Other cardiac monitoring
procedures, such as pulmonary artery catheterization, are generally accepted in
the medical community and have a long standard of use. It is possible that the
Cardiosonix product line will never achieve the broad market acceptance
necessary to become a commercial success.

WE RELY ON THIRD PARTIES FOR THE WORLDWIDE MARKETING AND DISTRIBUTION OF OUR
GAMMA DETECTION DEVICES, WHO MAY NOT BE SUCCESSFUL IN SELLING OUR PRODUCTS.

We currently distribute our gamma detection devices in most global markets
through two partners who are solely responsible for marketing and distributing
these products. The partners assume direct responsibility for business risks
related to credit, currency exchange, foreign tax laws or tariff and trade
regulation. While we believe that our distribution partners intend to continue
to aggressively market our products, we cannot assure you that the distribution
partners will succeed in marketing our products on a global basis. We may not be
able to maintain satisfactory arrangements with our marketing and

distribution partners, who may not devote adequate resources to selling our
gamma detection devices. If this happens, we may not be able to successfully
market our products, which would decrease our revenues.

WE DO NOT HAVE EXPERIENCE IN MARKETING BLOOD FLOW DEVICES AND WE HAVE NOT YET
ESTABLISHED STRATEGIC RELATIONSHIPS WITH POTENTIAL MARKETING PARTNERS.

We completed the Cardiosonix acquisition on December 31, 2001, and to date have
entered into arrangements to distribute the Quantix line of blood flow products
covering only twelve countries. We believe the adoption path for Cardiosonix'
products will be similar to that of our gamma detection devices, but we have no
direct experience in marketing or selling blood flow measurement devices. We may
not be successful in creating the necessary infrastructure, either internally or
through third parties, to support the successful marketing and sales of
Cardiosonix products.

WE MAY HAVE DIFFICULTY RAISING ADDITIONAL CAPITAL, WHICH COULD DEPRIVE US OF
NECESSARY RESOURCES.

We expect to continue to devote capital resources to fund research and
development and to maintain existing and secure new manufacturing capacity. In
order to support the initiatives envisioned in our business plan, we may need to
raise additional funds through the sale of assets, public or private financing,
collaborative relationships or other arrangements. Our ability to raise
additional financing depends on many factors beyond our control, including the
state of capital markets, the market price of our common stock and the
development or prospects for development of competitive technology by others.
Because our common stock is not listed on a major stock exchange, many investors
may not be willing or allowed to purchase it or may demand steep discounts.
Sufficient additional financing may not be available to us or may be available
only on terms that would result in further dilution to the current owners of our
common stock. At current market prices, the limited number of shares we have
available to sell severely limits our ability to use equity as a method of
raising capital. If we are unable to raise additional funds when we need them,
we may have to severely curtail our operations.

THE SALE OF THE SHARES OF COMMON STOCK OR WARRANTS ACQUIRED BY THE SELLING
STOCKHOLDERS COULD CAUSE THE PRICE OF OUR COMMON STOCK TO DECLINE.

The selling stockholders may sell none, some or all of the shares of common
stock acquired from us. Additionally, the selling stockholders could exercise
their warrants and or convert the convertible note, and sell the shares they
receive pursuant to this prospectus. We have no way of knowing whether the
selling stockholders will sell the shares offered by this prospectus. Depending
upon market liquidity at the time, a sale of shares under this prospectus at any
given time could cause the trading price of our common stock to decline. The
sale of a substantial number of shares of our common stock under this
prospectus, or anticipation of such sales, could make it more difficult for us
to sell equity or equity-related securities in the future at a time and at a
price that we might otherwise wish to effect sales.

WE RELY ON THIRD PARTIES TO MANUFACTURE OUR PRODUCTS AND OUR BUSINESS WILL
SUFFER IF THEY DO NOT PERFORM.

We rely on independent contract manufacturers for the manufacture of our current
line of gamma detection systems and for our Quantix line of blood flow
monitoring products. Our business will suffer if our contract manufacturers have
production delays or quality problems. Furthermore, medical device manufacturers
are subject to the QSR regulations of the U.S. FDA, international quality
standards, and other regulatory requirements. If our contractors do not operate
in accordance with regulatory requirements and quality standards, our business
will suffer. We use or rely on components and services used in our devices that
are provided by sole source suppliers. The qualification of additional or
replacement vendors is time consuming and costly. If a sole source supplier has
significant problems supplying our products, our sales and revenues will be hurt
until we find a new source of supply. In addition, our distribution agreement
with Ethicon Endo-Surgery, Inc. (EES), a Johnson and Johnson company, for gamma
devices contains failure to supply provisions, which, if triggered, could have a
significant negative impact on our business.

WE MAY LOSE OUT TO LARGER AND BETTER-ESTABLISHED COMPETITORS.

The medical device and biotechnology industries are intensely competitive. Some
of our competitors have significantly greater financial, technical,
manufacturing, marketing and distribution resources as well as greater
experience in the medical device industry than we have. The particular medical
conditions our product lines address can also be addressed by other medical
devices, procedures or drugs. Many of these alternatives are widely accepted by
physicians and have a long history of use. Physicians may use our competitors'
products and/or our products may not be competitive with other technologies. If
these things happen, our sales and revenues will decline. In addition, our
current and potential competitors may establish cooperative relationships with
large medical equipment companies to gain access to greater research and
development or marketing resources. Competition may result in price reductions,
reduced gross margins and loss of market share.

OUR PRODUCTS MAY BE DISPLACED BY NEWER TECHNOLOGY.

The medical device and biotechnology industries are undergoing rapid and
significant technological change. Third parties may succeed in developing or
marketing technologies and products that are more effective than those developed
or marketed by us, or that would make our technology and products obsolete or
non-competitive. Additionally, researchers could develop new surgical procedures
and medications that replace or reduce the importance of the procedures that use
our products. Accordingly, our success will depend, in part, on our ability to
respond quickly to medical and technological changes through the development and
introduction of new products. We may not have the resources to do this. If our
products become obsolete and our efforts to develop new products do not result
in any commercially successful products, our sales and revenues will decline.

WE ARE IN A HIGHLY REGULATED BUSINESS AND COULD FACE SEVERE PROBLEMS IF WE DO
NOT COMPLY WITH ALL REGULATORY REQUIREMENTS IN THE GLOBAL MARKETS IN WHICH OUR
PRODUCTS ARE SOLD.

The U.S. FDA regulates our products in the United States. Foreign countries also
subject our products to varying government regulations. In addition, such
regulatory authorities may impose limitations on the use of our products. U.S.
FDA enforcement policy strictly prohibits the marketing of U.S. FDA cleared
medical devices for unapproved uses. Within the European Union, our products are
required to display the CE Mark in order to be sold. We have obtained U.S. FDA
clearance to market and European certification to display the CE Mark on our
current line of gamma detection systems and on two of Cardiosonix' products, the
QUANTIX/ND and QUANTIX/OR. We may not be able to obtain certification for any
new products in a timely manner, or at all. Failure to comply with these and
other current and emerging regulatory requirements in the global markets in
which our products are sold could result in, among other things, warning
letters, fines, injunctions, civil penalties, recall or seizure of products,
total or partial suspension of production, refusal of the government to grant
pre-market clearance for devices, withdrawal of clearances, and criminal
prosecution.

OUR INTELLECTUAL PROPERTY MAY NOT HAVE OR PROVIDE SUFFICIENT LEGAL PROTECTIONS
AGAINST INFRINGEMENT OR LOSS OF TRADE SECRETS.

Our success depends, in part, on our ability to secure and maintain patent
protection, to preserve our trade secrets, and to operate without infringing on
the patents of third parties. While we seek to protect our proprietary positions
by filing United States and foreign patent applications for our important
inventions and improvements, domestic and foreign patent offices may not issue
these patents. Third parties may challenge, invalidate, or circumvent our
patents or patent applications in the future. Competitors, many of which have
significantly more resources than we have and have made substantial investments
in competing technologies, may apply for and obtain patents that will prevent,
limit, or interfere with our ability to make, use, or sell our products either
in the United States or abroad.

In the United States, patent applications are secret until patents issue, and in
foreign countries, patent applications are secret for a time after filing.
Publications of discoveries tend to significantly lag the actual discoveries and
the filing of related patent applications. Third parties may have already filed
applications

for patents for products or processes that will make our products obsolete or
will limit our patents or invalidate our patent applications.

We typically require our employees, consultants, advisers and suppliers to
execute confidentiality and assignment of invention agreements in connection
with their employment, consulting, advisory, or supply relationships with us.
They may breach these agreements and we may not obtain an adequate remedy for
breach. Further, third parties may gain access to our trade secrets or
independently develop or acquire the same or equivalent information.

Agencies of the United States government conducted some of the research
activities that led to the development of antibody technology that some of our
proposed antibody-based surgical cancer detection products use. When the United
States government participates in research activities, it retains rights that
include the right to use the technology for governmental purposes under a
royalty-free license, as well as rights to use and disclose technical data that
could preclude us from asserting trade secret rights in that data and software.

CONDITIONS IN ISRAEL MAY AFFECT THE OPERATIONS OF CARDIOSONIX AND MAY LIMIT OUR
ABILITY TO COMPLETE DEVELOPMENT OF ITS PRODUCTS.

Our Cardiosonix subsidiary is incorporated in Israel, and its offices and
research and development facilities are located there. In concert with the
transfer or manufacturing of the Quantix products to a contract manufacturer
located in the United States, we have determined that certain manufacturing and
development activities currently underway in Israel will be discontinued. While
we are reducing our activities in Israel, continued adverse political, economic
and military conditions in Israel may directly affect our operations. Since the
establishment of the State of Israel in 1948, a number of armed conflicts have
taken place between Israel and its Arab neighbors and a state of hostility,
varying in degree and intensity, has led to security and economic problems for
Israel. Despite past progress towards peace between Israel and its Arab
neighbors, the future of these peace efforts is uncertain. Any armed conflict,
political instability or continued violence in the region could have a negative
effect on the activities of Cardiosonix and the completion of development and
commercialization of our blood flow monitoring products.

THE GOVERNMENT GRANTS CARDIOSONIX HAS RECEIVED FOR RESEARCH AND DEVELOPMENT
EXPENDITURES RESTRICT OUR ABILITY TO MANUFACTURE BLOOD FLOW MONITORING PRODUCTS
AND TRANSFER TECHNOLOGIES OUTSIDE OF ISRAEL AND REQUIRE US TO SATISFY SPECIFIED
CONDITIONS. IF WE FAIL TO SATISFY THESE CONDITIONS, WE MAY BE REQUIRED TO REFUND
GRANTS PREVIOUSLY RECEIVED TOGETHER WITH INTEREST AND PENALTIES, AND MAY BE
SUBJECT TO CRIMINAL CHARGES.

Cardiosonix received grants from the government of Israel through the Office of
the Chief Scientist of the Ministry of Industry and Trade for the financing of a
portion of its research and development expenditures associated with our blood
flow monitoring products. From 1998 to 2001, Cardiosonix received grants
totaling $775,000 from the Office of the Chief Scientist ("OCS"). The terms of
the OCS grants may prohibit us from manufacturing products or transferring
technologies developed using these grants outside of Israel without special
approvals. The OCS issued a letter to Neoprobe in December 2001, prior to the
acquisition of Cardiosonix, consenting to the transfer of manufacturing as long
as Neoprobe consented to the terms of the OCS statutes under Israeli law. Even
if we receive approval to manufacture our blood flow monitoring products outside
of Israel, we may be required to pay an increased total amount of royalties,
which may be up to 300% of the grant amount, depending on the manufacturing
volume that is performed outside of Israel. This restriction may impair our
ability to outsource manufacturing or engage in similar arrangements for those
products or technologies. In addition, if we fail to comply with any of the
conditions imposed by the OCS, we may be required to refund any grants
previously received together with interest and penalties, and may be subject to
criminal charges. In recent years, the government of Israel has accelerated the
rate of repayment of OCS grants and may further accelerate them in the future.

OUR PRODUCT SALES MAY BE ADVERSELY AFFECTED BY HEALTHCARE PRICING REGULATION AND
REFORM ACTIVITIES.

The healthcare industry is undergoing fundamental changes resulting from
political, economic and regulatory influences. In the United States,
comprehensive programs have been proposed that seek to increase access to
healthcare for the uninsured, control the escalation of healthcare expenditures
within the economy and use healthcare reimbursement policies to balance the
federal budget.

We expect that Congress and state legislatures will continue to review and
assess healthcare proposals, and public debate of these issues will likely
continue. We cannot predict which, if any, of such reform proposals will be
adopted and when they might be adopted. Other countries also are considering
healthcare reform. Significant changes in healthcare systems could have a
substantial impact on the manner in which we conduct our business and could
require us to revise our strategies.

WE COULD BE DAMAGED BY PRODUCT LIABILITY CLAIMS.

Our products are used or intended to be used in various clinical or surgical
procedures. If one of our products malfunctions or a physician misuses it and
injury results to a patient or operator, the injured party could assert a
product liability claim against our company. We currently have product liability
insurance with a $10 million per occurrence limit, which, we believe, is
adequate for our current activities. However, we may not be able to continue to
obtain insurance at a reasonable cost. Furthermore, insurance may not be
sufficient to cover all of the liabilities resulting from a product liability
claim, and we might not have sufficient funds available to pay any claims over
the limits of our insurance. Because personal injury claims based on product
liability in a medical setting may be very large, an underinsured or an
uninsured claim could financially damage our company.

WE MAY HAVE TROUBLE ATTRACTING AND RETAINING QUALIFIED PERSONNEL AND OUR
BUSINESS MAY SUFFER IF WE DO NOT.

Our business has experienced developments the past two years that have resulted
in several significant changes in our strategy and business plan, including the
shifting of resources to support our current product initiatives and downsizings
to what we consider to be the minimal support structure necessary to operate a
publicly traded company. Our management will need to remain flexible to support
our business model over the next few years. However, losing members of the
Neoprobe management team or the Quantix development team could have an adverse
effect on our operations. Our success depends on our ability to attract and
retain technical and management personnel with expertise and experience in the
medical device business. The competition for qualified personnel in the medical
device industry is intense and we may not be successful in hiring or retaining
the requisite personnel. If we are unable to attract and retain qualified
technical and management personnel, we will suffer diminished chances of future
success.

UNDER THE TERMS OF OUR RECENT BRIDGE FINANCINGS, WE HAVE OR MAY BE REQUIRED TO
GRANT PARTIAL OR COMPLETE LIENS ON SUBSTANTIALLY ALL OF OUR ASSETS.

Under the terms of the bridge loan agreements we entered into with certain of
the selling shareholders, we granted each of the note holders a security
interest in certain of our assets, including our intellectual property. We
believe this is customary in the types of arrangements we have entered into;
however, the security holders could foreclose on the security interest in our
assets in the event of a default under the terms of the notes. If this were to
happen, we may be required to file a petition under Chapter 11 of the Bankruptcy
Code seeking protection, or file a petition under Chapter 7 and liquidate.

OUR COMMON STOCK IS TRADED OVER THE COUNTER, WHICH MAY DEPRIVE STOCKHOLDERS OF
THE FULL VALUE OF THEIR SHARES.

Our common stock is quoted via the National Association of Securities Dealers'
Over The Counter Bulletin Board (OTCBB). As such, our common stock may have
fewer market makers, lower trading

volumes and larger spreads between bid and asked prices than securities listed
on an exchange such as the New York Stock Exchange or the NASDAQ. These factors
may result in higher price volatility and less market liquidity for the common
stock.

A LOW MARKET PRICE MAY SEVERELY LIMIT THE POTENTIAL MARKET FOR OUR COMMON STOCK.

Our common stock is currently trading at a price substantially below $5.00 per
share, subjecting trading in the stock to certain SEC rules requiring additional
disclosures by broker-dealers. These rules generally apply to any non-NASDAQ
equity security that has a market price share of less than $5.00 per share,
subject to certain exceptions (a "penny stock"). Such rules require the
delivery, prior to any penny stock transaction, of a disclosure schedule
explaining the penny stock market and the risks associated therewith and impose
various sales practice requirements on broker-dealers who sell penny stocks to
persons other than established customers and institutional or wealthy investors.
For these types of transactions, the broker-dealer must make a special
suitability determination for the purchaser and have received the purchaser's
written consent to the transaction prior to the sale. The broker-dealer also
must disclose the commissions payable to the broker-dealer, current bid and
offer quotations for the penny stock and, if the broker-dealer is the sole
market maker, the broker-dealer must disclose this fact and the broker-dealer's
presumed control over the market. Such information must be provided to the
customer orally or in writing before or with the written confirmation of trade
sent to the customer. Monthly statements must be sent disclosing recent price
information for the penny stock held in the account and information on the
limited market in penny stocks. The additional burdens imposed upon
broker-dealers by such requirements could discourage broker-dealers from
effecting transactions in our common stock.

THE PRICE OF OUR COMMON STOCK HAS BEEN HIGHLY VOLATILE DUE TO SEVERAL FACTORS
THAT WILL CONTINUE TO AFFECT THE PRICE OF OUR STOCK.

Our common stock has traded as low as $0.10 per share and as high as $0.50 per
share in the eleven months ended November 30, 2003. Some of the factors leading
to the volatility include:

- price and volume fluctuations in the stock market at large which do
not relate to our operating performance;
- fluctuations in our operating results;
- financing arrangements we may enter that require the issuance of a
significant number of shares in relation to the number of shares
currently outstanding;
- announcements of technological innovations or new products which we or
our competitors make;
- U.S. FDA and international regulatory actions;
- developments with respect to patents or proprietary rights;
- public concern as to the safety of products that we or others develop;
and
- fluctuations in market demand for and supply of our products.

AN INVESTOR'S ABILITY TO TRADE OUR COMMON STOCK MAY BE LIMITED BY TRADING
VOLUME.

The trading volume for our common stock has been relatively limited. A
consistently active trading market for our common stock may not occur on the
OTCBB. The average daily trading volume for our common stock on the OTCBB for
the eleven-month period ended November 30, 2003 was approximately 99,934 shares.
Daily volume during that period ranged from 0 shares to 2,979,300 shares.

OUR STOCKHOLDER RIGHTS PLAN, SOME PROVISIONS OF OUR ORGANIZATIONAL AND GOVERNING
DOCUMENTS AND AN AGREEMENT WITH SELLING STOCKHOLDERS, MAY HAVE THE EFFECT OF
DETERRING THIRD PARTIES FROM MAKING TAKEOVER BIDS FOR CONTROL OF OUR COMPANY OR
MAY BE USED TO HINDER OR DELAY A TAKEOVER BID.

Our certificate of incorporation authorizes the creation and issuance of "blank
check" preferred stock. Our Board of

Directors may divide this stock into one or more series and set their rights.
The Board of Directors may, without prior stockholder approval, issue any of the
shares of "blank check" preferred stock with dividend, liquidation, conversion,
voting or other rights, which could adversely affect the relative voting power
or other rights of the common stock. Preferred stock could be used as a method
of discouraging, delaying, or preventing a take-over of our company. If we issue
"blank check" preferred stock, it could have a dilutive effect upon our common
stock. This would decrease the chance that our stockholders would realize a
premium over market price for their shares of common stock as a result of a
takeover bid.

Also, in connection with the Cardiosonix acquisition, the former stockholders of
Cardiosonix entered into an agreement with us that for a period of two years
following the acquisition, they would not participate in certain actions and
transactions that would lead to a change in control of our company, and to vote
their shares in conformity with the recommendations of our Board of Directors as
to certain matters, including the approval of transactions that would result in
a change in control. These provisions could have the effect of discouraging,
delaying or preventing a takeover of our company.

BECAUSE WE WILL NOT PAY DIVIDENDS, STOCKHOLDERS WILL ONLY BENEFIT FROM OWNING
COMMON STOCK IF IT APPRECIATES.

We have never paid dividends on our common stock and we do not intend to do so
in the foreseeable future. We intend to retain any future earnings to finance
our growth. Accordingly, any potential investor who anticipates the need for
current dividends from his investment should not purchase our common stock.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act. We have
based these forward-looking statements largely on our current expectations and
projections about future events and financial trends affecting the financial
condition of our business. These forward-looking statements are subject to a
number of risks, uncertainties and assumptions, including, among other things:

- general economic and business conditions, both nationally and in our
markets,
- our history of losses,
- our expectations and estimates concerning future financial
performance, financing plans and the impact of competition,
- our ability to implement our growth strategy,
- anticipated trends in our business,
- advances in technologies, and
- other risk factors set forth under "Risk Factors" in this prospectus.

In addition, in this prospectus, we use words such as "anticipates," "believes,"
"plans," "expects," "future," "intends," and similar expressions to identify
forward-looking statements.

We undertake no obligation to update publicly or revise any forward-looking
statements, whether as a result of new information, future events or otherwise
after the date of this prospectus. In light of these risks and uncertainties,
the forward-looking events and circumstances discussed in this prospectus may
not occur and actual results could differ materially from those anticipated or
implied in the forward-looking statements.

USE OF PROCEEDS

This prospectus relates to shares of our common stock that may be offered and
sold from time to time by the selling stockholders. We will receive no proceeds
from the sale of shares of common stock in this offering.

MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Our common stock trades on the OTCBB under the trading symbol NEOP. The prices
set forth below reflect the quarterly high, low and closing sales prices for
shares of our common stock during the last two fiscal years as reported by
Reuters Limited. These quotations reflect inter-dealer prices, without retail
markup, markdown or commission, and may not represent actual transactions.

HIGH LOW CLOSE
---- --- -----

Fiscal Year 2003
First Quarter $ 0.17 $ 0.10 $ 0.11
Second Quarter $ 0.26 $ 0.10 $ 0.17
Third Quarter $ 0.50 $ 0.14 $ 0.29
Fourth Quarter through
November 28, 2003 $ 0.43 $ 0.25 $ 0.30

Fiscal Year 2002
First Quarter $ 0.55 $ 0.35 $ 0.38
Second Quarter 0.42 0.25 0.28
Third Quarter 0.30 0.08 0.12
Fourth Quarter 0.31 0.05 0.13

Fiscal Year 2001
First Quarter $ 0.69 $ 0.41 $ 0.48
Second Quarter 1.05 0.40 0.70
Third Quarter 0.77 0.35 0.37
Fourth Quarter 0.51 0.34 0.42

As of November 1, 2003, we had approximately 827 holders of common stock of
record.

We have not paid any dividends on our common stock and do not anticipate paying
cash dividends in the foreseeable future. We intend to retain any earnings to
finance the growth of our business. We cannot assure you that we will ever pay
cash dividends. Whether we pay cash dividends in the future will be at the
discretion of our Board of Directors and will depend upon our financial
condition, results of operations, capital requirements and any other factors
that the Board of Directors decides is relevant. See Management's Discussion and
Analysis of Financial Condition and Results of Operations below.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read together with our Financial Statements
and the Notes related to those statements, as well as the other financial
information included in the Form SB-2 Registration Statement, of which this
prospectus is a part. Some of our discussion is forward-looking and involves
risks and uncertainties. For information regarding risk factors that could have
a material adverse effect on our business, refer to the Risk Factors section of
this prospectus beginning on page 4.

THE COMPANY

Neoprobe Corporation is a biomedical technology company that provides innovative
surgical and diagnostic products that enhance patient care by meeting the
critical decision-making needs of healthcare professionals. Prior to the
acquisition of Cardiosonix on December 31, 2001, our marketable products were
limited to a line of gamma detection devices used in the surgical application of
ILM. The acquisition of Cardiosonix significantly expanded the potential of our
product offerings. Cardiosonix is in the process

of developing and commercializing a unique line of proprietary blood flow
monitoring devices for a variety of diagnostic and surgical applications.
Cardiosonix has received marketing clearance for two of its products, QUANTIX/ND
and QUANTIX/OR, in Europe and in the U.S.

YEARS ENDED DECEMBER 31, 2002 AND 2001

RESULTS OF OPERATIONS

Neoprobe reported revenues for 2002 of $4.9 million compared to $8.2 million in
the prior year. The decline in revenue in 2002 versus 2001 is the direct result
of a decline in demand from our primary distributor, EES. We attribute this
decline in demand primarily to three factors: EES was overstocked of base
NEO2000 systems for most of 2002 and finally eliminated its overstock position
by year end; a lack of success to date in placing our BLUETIP(R) products with
end users; and the timing of the reporting of results from multinational
clinical trials regarding the use of ILM in breast cancer. Exact market
penetration for our products is difficult to gauge, as there are no widely
published use statistics on this specific type of device or the application of
sentinel lymph node biopsy. We believe, based on anecdotal information, that the
application of ILM has increased steadily over the past few years, but that the
global adoption rate for lymphatic mapping may be slowing pending the outcome of
major international trials in breast care. In 2000 and 2001, EES' end-customer
device placements of our base gamma detection systems increased over the
respective prior years. In 2002, the sales rate was relatively flat compared to
the prior year. During the fourth quarter of 2002, EES experienced a return to
historical levels of placements of our gamma detection equipment.

Neoprobe's overall gross profit for fiscal year 2002 improved to 52% of gross
revenue as compared to 46% for fiscal year 2001. Our gross profit percentage
increased over the prior year primarily due to our principal distribution
partner's ability to maintain the premium pricing position of our gamma
detection products in the marketplace. In addition, increases in revenue from
extended warranty sales coupled with decreases in overhead associated with our
continuing efforts to reduce our cost structure contributed to the improvement.
Gross margins on net product sales were 30% of net sales in 2002, as compared to
35% of net product sales in 2001. The decline in gross margins was due to a
$214,000 impairment charge we recorded during the third quarter of 2002 related
to BLUETIP probe-related inventory that we did not believe had ongoing value to
the business. The impairment charge had a 7% negative effect on our gross
margins for the year. Excluding the impairment charge, our gross margins for
2002 would have increased for the year due in large part to a recovery in the
average prices EES received from end customers for gamma detection products. Our
distribution agreement with EES provides for our transfer prices to be based on
a percentage of the end-customer ASP they receive, subject to a floor transfer
price. During the first three quarters of 2002, we recorded revenue based on the
floor transfer price; however, during the fourth quarter, we negotiated final
transfer prices for our 2002 sales to EES and recorded a positive adjustment to
revenue of $193,000.

Results for 2002 also reflect the significant efforts made in the development of
Cardiosonix' Angle-independent Doppler Blood Flow (ADBF(TM)) technology.
Accordingly, our research and development costs for 2002 increased to $2.3
million compared to $948,000 in 2001. In addition, consolidated administrative
expenses increased over the prior year with the absorption of market development
and other overhead costs associated with Cardiosonix' operations.

We were able to achieve better than expected results for 2002 while continuing
our development of the Cardiosonix blood flow measurement products. The
development activities culminated with the shipment of the first Cardiosonix
blood flow demonstration units to distributors in the fourth quarter.

Our major expense categories as a percentage of sales increased from 2001 to
2002 due in large part to the decline in overall sales between the two periods.
Research and development expenses, as a percentage of sales, increased to 69% in
2002 from 14% in 2001 due also to the incremental development costs associated
with the QUANTIX line of blood flow products. Selling, general and
administrative expenses, as a percentage of sales, increased to 97% in 2002 from
34% in 2001 due largely to the decline in net sales but also due to the
amortization of intangible assets and other general and administrative charges
following our acquisition of Cardiosonix.

Net Sales and Margins. Net product sales, primarily of our gamma detection
systems, decreased $3.4 million or 50% to $3.4 million in 2002 from $6.8 million
in 2001. Gross margins on net product sales were 30% of net sales in 2002, as
compared to 35% of net product sales in 2001. However, our gross margins on net
sales for 2002 included an impairment charge of $214,000 we recorded during the
third quarter related to BLUETIP probe-related inventory that we did not believe
had ongoing value to the business. The impairment charge had a 7% negative
effect on our gross margins for the year. Excluding the impairment charge, our
gross margins for 2002 would have increased for the year due in large part to a
recovery in the average prices EES received from end customers for gamma
detection products.

The decline in net product sales was the result of lower overall demand from EES
for the base NEO2000 gamma detection system (i.e., a 14mm probe and NEO2000
control unit) during 2002 as compared to 2001. End-customer (i.e., hospital)
demand for these base systems appears to have flattened in 2002 as compared to
2001. In addition, BLUETIP probes did not achieve the end customer acceptance
originally anticipated when EES' initial stocking orders were delivered in the
first half of 2001, and as a result, EES notified us during the third quarter of
2002 of their intent to shift product sales emphasis to the 14mm probe and away
from the BLUETIP probes during 2003. The decline in demand below EES' original
expectations for NEO2000 systems and for BLUETIP probes, coupled with purchases
they were required to make under the terms of the distribution agreement,
resulted in an overstock position for probes and control units at EES at the end
of 2001 that was not corrected until the end of 2002. These factors resulted in
a net decrease in probe sales (i.e., BLUETIP probes and 14mm probes) of 71%
during 2002 as compared to 2001. Our sales of control units were also affected
by the decline in demand from EES, resulting in a net decrease of 39% in control
unit sales volumes over the two periods.

The decline in gross margins on net product sales was almost entirely due to the
obsolescence charge for $214,000 in BLUETIP probe-related materials and finished
goods inventory. The impairment charge had a 7% negative effect on our gross
margins for the year. Excluding the impairment charge, our gross margins for
2002 would have increased for the year due in large part to a recovery in the
average prices EES received from end customers for NEO2000 systems.

License and Other Revenue. License and other revenue in 2002 and 2001 included
$800,000 from the pro-rata recognition of license fees related to the
distribution agreement with EES and $520,000 and $603,000, respectively, from
the reimbursement by EES of certain product development costs. License and other
revenue in 2002 also included $218,000 from EES' waiver of certain warranty
costs due from us in exchange for a release from contractual minimum purchase
requirements.

Research and Development Expenses. Research and development expenses increased
$1.4 million or 145% to $2.3 million in 2002 from $948,000 in 2001. The increase
is primarily due to product development efforts related to the Cardiosonix line
of blood flow measurement products and $54,000 in gamma detection drug
development costs, offset by lower compensation costs resulting from headcount
reductions of gamma product line personnel in the third and fourth quarters of
2002.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $946,000 or 41% to $3.3 million in 2002 from
$2.3 million in 2001. The increase was primarily a result of the general and
administrative costs incurred in the operation and support of Cardiosonix,
$360,000 in amortization of intangible assets related to the acquisition of
Cardiosonix, increased consulting and professional services incurred related to
Cardiosonix, the transfer of manufacturing of certain components of the NEO2000
gamma detection system to a new contract manufacturer, and $138,000 in
impairment of production equipment and intellectual property that we did not
believe had ongoing value to the business. These increases were offset by
decreases in certain overhead costs, such as compensation and warranty expenses.

Acquired In-Process Research and Development. In 2001, we recorded an $885,000
expense representing the portion of the purchase price of Cardiosonix that was
allocated to in-process research and development (IPR&D) for the QUANTIX/OR
product as estimated at the date of acquisition. Our original recording of the
acquisition in 2001 also included recording the assets and liabilities acquired
along with some contingent consideration related to the future achievement of a
developmental milestone

by Cardiosonix. We recorded the contingent consideration at December 31, 2001,
based on the value of our common stock at that time. The contingent
consideration we had recorded at the end of 2001 was re-valued at the date the
milestone was achieved and the contingency satisfied. In reflecting the
satisfaction of the contingency on our books, we adjusted the final purchase
price paid for Cardiosonix according to generally accepted accounting
principles. As a result, the $885,000 IPR&D charge recorded in 2001 was
decreased by $28,000 in 2002.

Other Income. Other income decreased $341,000 or 92% to $28,000 during 2002 from
$370,000 during 2001. Other income in 2002 consisted primarily of interest
income. Our interest income decreased because we maintained a lower balance and
received a lower interest rate on our cash and investments during 2002 as
compared to 2001, consistent with marketplace activity over the two periods.

Other income during 2001 consisted primarily of a $238,000 refund of a portion
of the limited guarantee that we made related to a loan made by a bank to our
former subsidiary, Neoprobe (Israel) Ltd. (Neoprobe Israel). We had previously
put cash on deposit with the bank as security for the limited guarantee. The
full amount of the limited guarantee was written off in 1998 in conjunction with
our decision to liquidate Neoprobe Israel, as we did not expect to receive any
of the cash deposit back from the bank. In connection with the refunded cash
deposit, the bank also granted us a general release from all obligations related
to the loan.

NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002

RESULTS OF OPERATIONS

Net Sales and Margins. Net sales increased $1.7 million, or 75%, to $3.9 million
during the first nine months of 2003 from $2.2 million during the same period in
2002. Gross margins on net sales increased to 45% of net sales for the first
nine months of 2003 compared to 16% of net sales for the same period in 2002.
During the third quarter of 2002, we recorded an inventory impairment charge of
$214,000 related to our BLUETIP probe product. This charge adversely affected
our gross margins for the nine months ended September 30, 2002 by 29 percentage
points.

Approximately $1.4 million of the increase in net sales was the result of
increased revenue related to our gamma detection products with the remaining
$225,000 generated from our blood flow products. We had no revenues from blood
flow products during the same period in 2002. Of the increased revenue from
gamma detection products, approximately 35% was due to increased prices realized
on our neo2000 control unit and 14mm probes, with approximately 49% due to
increased sales volumes of these products. The remaining 16% was due to various
changes in other products and product mix. The price at which we sell our gamma
detection products to EES is based on a percentage of the global average sales
price (ASP) received by EES on sales of Neoprobe products to end customers,
subject to a minimum floor price. During the first nine months of 2002, we
recorded revenue at the floor sales prices per the distribution agreement due to
perceived weakness in the global ASP. However, beginning in the third quarter of
2002, we began to note a strengthening in global ASP. This trend in ASP, coupled
with the favorable effects of the Euro exchange rate on our sales prices to EES,
has continued through the first nine months of 2003 such that management
believed it was more appropriate to record revenue for the first nine months of
2003 at the estimated 2003 sales price calculated consistently with prior
periods per the terms of the distribution agreement. The increase in gross
margins was primarily due to the higher recorded revenue per gamma detection
system combined with lower capitalized internal manufacturing costs as a result
of headcount reductions that contributed to lower average costs.

License and Other Revenue. License and other revenue in the first nine months of
2003 and 2002 included $600,000 from the pro-rata recognition of license fees
related to the distribution agreement with EES and $146,000 and $429,000,
respectively, from the reimbursement by EES of certain product development
costs.

Research and Development Expenses. Research and development expenses decreased
$433,000, or 24%, to $1.4 million during the first nine months of 2003 from $1.8
million during the same period in 2002. The decrease was primarily due to lower
compensation costs resulting from headcount reductions of

gamma product line personnel in the third and fourth quarters of 2002, coupled
with decreased use of external design consultants and decreased prototype
expenses related to the blood flow product line. The first nine months of 2003
and 2002 also included $25,000 and $50,000, respectively, of license fees
related to the Lymphoseek targeting agent.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased $177,000, or 7%, to $2.2 million during the
first nine months of 2003 from $2.4 million during the same period in 2002. The
decrease was primarily due to $193,000 in lower compensation costs resulting
from headcount reductions of gamma product line personnel in the third and
fourth quarters of 2002, offset by increases in certain overhead costs such as
bad debts and insurance and increased selling, general and administrative
expenses incurred in the operation and support of Cardiosonix. Selling, general
and administrative expenses in the first nine months of 2003 and 2002 included
$30,000 and $125,000, respectively, in impairment expense related to production
equipment and intellectual property that we did not believe had ongoing value to
our business. Selling, general and administrative expenses in the first nine
months of 2002 also included $79,000 for the transfer of manufacturing of
certain components of the neo2000 gamma detection system to a new contract
manufacturer.

Other Income (Expenses). Other income decreased $150,000 resulting in other
expenses of $123,000 during the first nine months of 2003 compared to other
income of $26,000 during the same period in 2002. Other expenses during the
first nine months of 2003 consisted primarily of interest expense, amortized
discount on our notes payable and interest expense related to the financing of
our accounts receivable. Other income during the first nine months of 2002
consisted primarily of interest income. Our interest income decreased because we
maintained a lower balance of cash and investments during the first nine months
of 2003 as compared to the same period in 2002.

LIQUIDITY AND CAPITAL RESOURCES

Operating Activities. Cash used in operations decreased $1.6 million to $919,000
during the first nine months of 2003 from $2.5 million during the same period in
2002. Working capital decreased $1.1 million to $79,000 at September 30, 2003 as
compared to $1.1 million at December 31, 2002. The current ratio decreased to
1:1.0 at September 30, 2003 from 1:1.6 at December 31, 2002. The decrease in
working capital was primarily related to cash used to fund blood flow
development activities offset slightly by net changes in other working capital
components.

Cash balances decreased to $423,000 at September 30, 2003 from $701,000 at
December 31, 2002, primarily due to the requirements of supporting the
operations of Cardiosonix, offset by the cash generated from the sale of
accounts receivable, debt financing arrangements, sales of common stock and the
increased net sales experienced during the first nine months of 2003.

Accounts receivable increased to $1.1 million at September 30, 2003 from
$746,000 at December 31, 2002 due primarily to greater sales in September 2003
than December 2002. During the third quarter of 2003, we entered into an
accounts receivable financing facility under which certain of our U.S. accounts
receivable are factored at an advance rate of 80% and with recourse to a third
party financing company. At September 30, 2003 U.S. trade receivables of
$400,000 had been sold and remained outstanding under this facility. As such,
the accounts receivable balance we have disclosed at September 30, 2003 includes
the $400,000 in factored accounts receivable. The agreement for the sale of
accounts receivable provides for the continuation of the program on a revolving
basis and will expire under its current terms in December 2003. As collections
reduce previously sold receivables, we may replenish these with new receivables.
However, as the financing arrangement is being accounted for as a secured
financing, it does not affect the overall level of accounts receivable disclosed
on our balance sheet. As such, we expect overall receivable levels will continue
to fluctuate in 2003 depending on the timing of purchases and payments by EES.
However, on average, we expect accounts receivable balances will start to
increase commensurate with anticipated increases in sales of blood flow products
to our distributors, many of whom are foreign-domiciled entities who typically
pay at a slower rate than domestic companies. Such increases, if any, will
require the increased use of our cash resources over time.

Inventory levels remained constant at $1.2 million at September 30, 2003 and
December 31, 2002. Over the first nine months of 2003, finished goods of gamma
detection products have decreased due to greater

than originally anticipated demand from EES during the first three quarters of
2003. Gamma-related raw materials have continued to decrease due to usage of
certain long-lead gamma detection device components that were built up in prior
periods to take advantage of quantity price breaks. These decreases were offset
by the build-up of raw material and finished goods inventory related to our
blood flow products as we continue market launch preparations. We expect
inventory levels to increase slightly during the remainder of 2003.

We estimate that the additional costs to complete planned development
activities, respond to initial customer feedback, and support initial marketing
efforts for our blood flow products for the year ended December 31, 2003 will
approach $2.0 million. We expect the development efforts will continue in 2004
as we respond to additional customer feedback and as we continue to refine the
blood flow products.

Investing Activities. Cash used in investing activities decreased to $84,000
during the first nine months of 2003 from $1.8 million during the same period in
2002. During February and March 2002, we invested in $2.5 million of
available-for-sale securities. Capital expenditures during the first nine months
of 2003 were primarily purchases of production tools and equipment related to
the manufacture of our Quantix line of blood flow measurement equipment. Capital
expenditures during the first nine months of 2002 were split between purchases
of production tools and equipment and technology infrastructure. Capital needs
for 2003 are expected to remain below 2002 as we have deferred the more
significant expenditures originally anticipated related to blood flow product
production until 2004 following the transfer of primary manufacturing activities
for the blood flow products to a contract manufacturer.

Financing Activities. Financing activities provided $725,000 in cash in the
first nine months of 2003 versus $1.8 million during the same period in 2002.
Proceeds from sales of accounts receivable were $320,000 during the first nine
months of 2003. Payments of notes payable were $11,000 higher during the first
nine months of 2003 as compared to the same period in 2002 due to the increased
cost of financed insurance.

On November 19, 2001, we entered into a common stock purchase agreement with an
investment fund, Fusion Capital Fund II, LLC (Fusion) for the issuance and
purchase of our common stock. Under the stock purchase agreement, Fusion
committed to purchase up to $10 million of our common stock over a forty-month
period that commenced in May 2002. A registration statement registering for
resale up to 5 million shares of our common stock became effective on April 15,
2002. Under the terms of the agreement, we can request daily drawdowns, subject
to a daily base amount currently set at $12,500. The number of shares we are to
issue to Fusion in return for that money will be based on the lower of (a) the
closing sale price for our common stock on the day of the draw request or (b)
the average of the three lowest closing sales prices for our common stock during
a twelve day period prior to the draw request. However, no shares may be sold to
Fusion at lower than a floor price currently set at $0.30, which may be reduced
by us, but in no case below $0.20 without Fusion's prior consent. Upon execution
of the common stock purchase agreement, we issued 449,438 shares of our common
stock to Fusion as a commitment fee. During the third quarter of 2003, we sold
Fusion a total of 453,869 shares of common stock and realized proceeds of
$138,000. In addition, we issued Fusion another 6,221 shares of common stock for
commitment fees due to Fusion related to the sales of our common stock to them
during the quarter. In November, 2003, we indefinitely suspended further sales
to Fusion under the financing arrangement.

During April 2003, we completed a bridge loan agreement with our President and
CEO, David Bupp. Under the terms of the agreement, Mr. Bupp advanced us
$250,000. Interest on the note accrues at the rate of 8.5% per annum, payable
monthly, and the note is due on June 30, 2004. In consideration for the loan, we
issued Mr. Bupp 375,000 warrants to purchase shares of our common stock at an
exercise price of $0.13 per share.

conversion price or less than a $0.10 floor conversion price. The remaining half
of the principal is also convertible at a 15% discount to a 20-day average
market price preceding the conversion, subject only to the $0.10 floor
conversion price.

In exchange for the services of Trautman Wasserman, we agreed to pay a retainer
of $10,000, payable in cash and stock, and to pay further compensation on
successful completion of a private placement. We agreed to issue Trautman
Wasserman a total of 27,199 shares of common stock in payment for one half of
its retainer.

Our future liquidity and capital requirements will depend on a number of
factors, including our ability to raise additional capital in a timely manner
through additional investment, expanded market acceptance of our current
products, our ability to complete the commercialization of new products such as
our blood flow product line, our ability to monetize our investment in non-core
technologies, our ability to obtain milestone or development funds from
potential development and distribution partners, regulatory actions by the U.S.
FDA and other international regulatory bodies, and intellectual property
protection.

Throughout 2002 and the first three quarters of 2003, we made modifications to
our operating plan and reduced or delayed planned development and market-support
expenditures due primarily to our delayed ability to secure additional sources
of financing. We believe our inability to raise financing did not significantly
impact our ability to meet the operational milestones we had set for the first
half of 2003; however, we believe the effects of the delay in raising financing,
coupled with the delay in receiving 510(k) marketing clearance for the
QUANTIX/OR until September 2003, began to hamper our marketing and
commercialization efforts for blood flow products during the third quarter.
Planned resources to support marketing and post-launch development activities
were delayed until the completion of the recent financing activities. We are now
in the process of re-assessing the timing of our goals and objectives for the
remainder of 2003 and for calendar year 2004, but believe we now have adequate
capital to assure that we can properly support our business goals and objectives
over that period. Our near-term priorities are the thought leader evaluation and
launch of the QUANTIX products in the U.S. and the continued support of such
activities ongoing in other markets. In addition, we are considering ways to
re-invigorate development of other products in our pipeline. We cannot assure
you that we will be able to achieve significant product revenues from our
current or potential new products. We also cannot assure you that we will
achieve profitability again in 2004.

CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

The following table presents our contractual obligations and commercial
commitments as of September 30, 2003.

PAYMENTS DUE BY PERIOD

CONTRACTUAL CASH LESS THAN 1 - 3 4 - 5 AFTER
OBLIGATIONS TOTAL 1 YEAR YEARS YEARS 5 YEARS
----------- ----- ------ ----- ----- -------

Capital Lease Obligation $ 9,576(1) $ 9,576 $ -- $ -- $--

Operating Leases 451,087 104,793 346,294 --

Unconditional
Purchase Obligations 2,092,432(2) 1,941,732 150,700 -- --

Other Long-Term
Obligations -- -- -- -- --

Total Contractual
Cash Obligations $2,553,095 $2,056,101 $ 496,994 $ -- $ --
========== ========== ========== ===== =====

(1) In November 2003, we entered into a five-year capital lease agreement for
telephone equipment. The lease payments total approximately $8,000 per
year.

(2) This amount represents purchases under binding purchase orders for which we
are required to take delivery of the product under the terms of the
underlying supply agreements going out approximately fifteen months.

CRITICAL ACCOUNTING POLICIES

The following accounting policies are considered by us to be critical to our
results of operations and financial condition.

Revenue Recognition Related to Net Sales. We currently generate revenue
primarily from sales of our gamma detection products; however, sales of blood
flow products constituted approximately 6% of total revenues for the first nine
months of 2003 and are expected to increase in the future. We generally
recognize sales revenue related to sales of our products when the products are
shipped and the earnings process has been completed. Our customers have no right
to return products purchased in the ordinary course of business. However, in
cases where product is shipped but the earnings process is not yet completed,
revenue is deferred until it has been determined that the earnings process has
been completed. We also generate revenue from the service and repair of
out-of-warranty products. Fees charged for service and repair on products not
covered by an extended service agreement are recognized on completion of the
service process when the serviced or repaired product has been returned to the
customer. Fees charged for service or repair of products covered by an extended
warranty agreement are deferred and recognized as revenue ratably over the life
of the extended service agreement. The prices we charge our primary customer,
EES, related to sales of products are subject to retroactive annual adjustment
based on a fixed percentage of the actual sales prices achieved by EES on sales
to end customers made during each fiscal year. To the extent that we can
reasonably estimate the end-customer prices received by EES, we record sales to
EES based upon these estimates. If we are unable to reasonably estimate end
customer sales prices related to certain products sold to EES, we record revenue
related to these product sales at the minimum (i.e., floor) price provided for
under our distribution agreement with EES. During the first nine months of 2002,
we recorded revenue at the floor

sales prices per the distribution agreement due to perceived weakness in the
global ASP. However, during the second half of 2002, we began to note a
strengthening in global ASP. This trend in ASP has continued in 2003, to the
point that management believed it was more appropriate to record revenue for the
first nine months of 2003 at the estimated 2003 sales price calculated
consistently with prior periods per the terms of the distribution agreement.

Impairment or Disposal of Long-Lived Assets. We account for long-lived assets in
accordance with the provisions of SFAS No. 144. This Statement requires that
long-lived assets and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The recoverability of assets
to be held and used is measured by a comparison of the carrying amount of an
asset to future net undiscounted cash flows expected to be generated by the
asset. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets. Assets to be disposed of are reported at
the lower of the carrying amount or fair value less costs to sell. As of
September 30, 2003, the most significant long-lived assets on our balance sheet
relate to assets recorded in connection with the acquisition of Cardiosonix and
gamma detection device patents related to ILM. The recoverability of these
assets is based on the financial projections and models related to future sales
of Cardiosonix' products which have yet to begin and the continuing success of
our gamma detection product line. As such, these assets could be subject to
significant adjustment should the Cardiosonix technology not be successfully
commercialized or the sales amounts in our current projections not be realized.

OTHER ITEMS AFFECTING FINANCIAL CONDITION

At December 31, 2002, we had U.S. net operating tax loss carryforwards and tax
credit carryforwards of approximately $92.4 million and $4.3 million,
respectively, available to offset or reduce future income tax liability, if any,
through 2022. However, under Sections 382 and 383 of the Internal Revenue Code
of 1986, as amended, use of prior tax loss and credit carryforwards may be
limited after an ownership change. As a result of ownership changes as defined
by Sections 382 and 383, which have occurred at various points in our history,
we believe utilization of our tax loss carryforwards and tax credit
carryforwards may be limited.

DESCRIPTION OF BUSINESS

DEVELOPMENT OF THE BUSINESS

We are a biomedical technology company that provides innovative surgical and
diagnostic products that enhance patient care by meeting the critical
decision-making needs of healthcare professionals. We were originally
incorporated in Ohio in 1983 and reincorporated in Delaware in 1988. Our
executive offices are located at 425 Metro Place North, Suite 300, Dublin, Ohio
43017. Our telephone number is (614) 793-7500.

From our inception through the end of 2001, we devoted substantially all of our
efforts and resources to the research and clinical development of innovative
systems for the intraoperative diagnosis and treatment of cancers. Following an
evaluation of our business plan during early 2001, however, we determined that
we needed to expand our product portfolio and consider synergistic products
outside the cancer or oncology fields.

In December 2001, we acquired Biosonix Ltd., a private Israeli company limited
by shares. In February 2002, Biosonix Ltd. changed its name to Cardiosonix Ltd.
(Cardiosonix). Cardiosonix is developing and commercializing a unique line of
blood flow measurement devices for a variety of diagnostic and surgical
applications. The decision to expand beyond our product focus on oncology was
based on our belief that the technology platform underlying the Cardiosonix line
of products has tremendous market potential and has a number of commonalities
with our gamma detection device product line. We intend to take advantage of
those synergies in the development, regulation and manufacture of Cardiosonix'
devices.

We believe that the path of market adoption for the Cardiosonix devices will be
similar to the path we have experienced with our gamma detection devices.

Although we have expanded our strategic focus to include blood flow medical
devices, we intend to continue many of the strategies outlined in prior years
related to the internal development of gamma detection medical devices and to
continue promoting development of our other complementary technologies through
strategic partnerships and alliances. Our primary goals are to maximize the
market potential of Cardiosonix' blood flow products as leaders in the
measurement of blood flow in both clinical and surgical settings to supplement
our leadership position in the current intraoperative gamma detection market.

OUR TECHNOLOGY

GAMMA DETECTION DEVICES

Through 2002, substantially all of our revenue has been generated from the sale
of a line of gamma radiation detection devices and related products used by
surgeons in the diagnosis and treatment of cancer and related diseases. Our
currently-marketed line of gamma detection devices has been cleared by the U.S.
Food and Drug Administration (U.S. FDA) and other international regulatory
agencies for marketing and commercial distribution throughout most major global
commercial markets.

Our patented gamma detection devices consist of hand-held detector probes and a
control unit. The detection device in the tip of the probe is a highly
radiosensitive crystal that relays a signal through a preamplifier to the
control unit to produce both a digital readout and an audible signal. The
detector element fits into a housing approximately the size of a pocket
flashlight. The NEO2000(R) Gamma Detection System, originally released in 1998,
is the third generation of our gamma detection systems. The NEO2000 is designed
as a platform for future growth of our instrument business. The NEO2000 is
software upgradeable and is designed to support future surgical targeting probes
without the necessity of costly remanufacture. Since 1998, we have developed and
sold two major software releases for the upgrade of customer units that are
designed to improve the utility of the system and/or offer the users additional
features. A third release will be available for sale during the fourth quarter
of 2003.

Surgeons are using our gamma detection systems in a surgical application
referred to as sentinel lymph node biopsy (SLNB) or intraoperative lymphatic
mapping (lymphatic mapping or ILM). ILM helps trace the lymphatic patterns in a
cancer patient to evaluate potential tumor drainage and cancer spread in
lymphatic tissue. The technique does not detect cancer; rather it helps surgeons
identify the lymph node(s) to which a tumor is likely to drain and spread. The
lymph node(s) (sometimes referred to as the "sentinel" node(s)) may provide
critical information about the stage of a patient's disease. ILM begins when a
patient is injected at the site of the main tumor with a commercially available
radioactive tracing agent. The agent is intended to follow the same lymphatic
flow as the cancer would if it had metastasized. The surgeon may then track the
agent's path with a hand-held gamma-radiation-detection probe, thus following
the potential avenues of metastases and identifying lymph nodes to be biopsied
for evaluation and determination of cancer spread.

Numerous clinical studies, involving a total of nearly two thousand patients and
published in peer-review medical journals such as Oncology (January 1999) and
The Journal of The American College of Surgeons (December 2000), have indicated
ILM is approximately 97% accurate in predicting the presence or absence of
disease spread in melanoma or breast cancers. Consequently, it is estimated that
more than 80% of women who would otherwise have undergone full axillary lymph
node dissections (ALND), involving the removal of as many as 20 - 30 lymph
nodes, might be spared this radical surgical procedure if the sentinel node was
found to be free of cancer. Surgeons practicing ILM have found that our
gamma-detection probes are well suited to the procedure.

Lymphatic mapping has become the standard of care for treating patients with
melanoma at many institutions. For breast cancer, the technique appears to be
moving toward standard of care status at major cancer centers and is the subject
of national and international clinical trials, including studies sponsored by
the U.S. Department of Defense, the National Cancer Institute and the American
College of

Surgeons. While we believe many thought leaders in surgical oncology have
adopted lymphatic mapping, the rate of growth in the application of ILM appears
to have slowed over the past two years, thus affecting the demand for our gamma
detection devices. We believe this is due to a number of surgeons delaying
adoption of lymphatic mapping pending the outcome of these important trials. We
are also concerned that the completion of these trials may be delayed because
some patients participating in clinical trials may perceive that if they are
assigned to a particular study's control group and receive a full ALND, that
they may not be receiving the best and latest care. We continue to monitor these
trials and we continue to work with our marketing partners and thought leaders
in the surgical community to set up and support training courses internationally
for lymphatic mapping. Courses showcasing our instruments continue to be held at
many nationally and internationally renowned cancer-specializing and teaching
institutions. These courses appear to be positively impacting the adoption of
lymphatic mapping, albeit not as rapidly as we would like to see.

In addition to lymphatic mapping, surgeons are investigating the use of our
device for other gamma guided surgery applications, such as evaluating the
thyroid function, in determining the state of disease in patients with vulvar
and penile cancers, and in SLNB in gastric and non-small cell lung cancers. At
the 3rd International Conference on Lymphatic Mapping held in Japan in 2002,
over half of the presentations were related to investigations of the use of ILM
in applications other than breast cancer and melanoma.

Expanding the application of ILM beyond the current primary uses in the
treatment of breast cancer and melanoma is the primary focus of our strategy
regarding our gamma guided surgery products. To support that expansion, we
continue to work with our marketing and distribution partners to develop
software-based enhancements to the NEO2000 platform as well as probes such as
the laparoscopic probe introduced in 2002 that supports the minimally invasive
emphasis in today's practice of surgery. To that end, our primary goals for our
gamma device business for 2003 center around working with our marketing partners
to improve the market position of our laparoscopic approach and increase
awareness of independent research being done to expand the application of ILM to
other indications.

BLOOD FLOW DEVICES

Accurate blood flow measurement is required for various clinical needs,
including:

- real-time monitoring;
- intra-operative quantification;
- non-invasive diagnostics; and
- evaluation of cardiac function.

Currently, the medical community has no simple, immediate, real-time means to
quantify the adequacy of organ perfusion, that is, the direct measurement of
blood flow into the organ. Devices do exist that visually show perfusion of a
target organ. We are unaware, however, of any device that provides an accurate,
real-time measurement of blood flow in as many applications without having to
isolate target vessels or conduct other invasive procedures.

In addition, blood flow velocity measurements are often confused with volume
blood flow. These two variables, however, are normally different parameters that
respond differently to pathological conditions and provide different data. Blood
flow velocity is used primarily for determining the existence of a stenosis
(narrowing or obstruction) in the vascular surgery setting, while the
applications of blood flow volume have potential impact across a much broader
range of medical disciplines.

Cardiosonix is developing and commercializing the QUANTIX(TM) line of products
that employ a unique and proprietary Angle-independent Doppler Blood Flow
(ADBF(TM)) technology that allows for blood flow volume and velocity readings.
Most current applications of Doppler technology to blood flow measurement are
angle-dependent and therefore more prone to estimation errors and potential
inaccuracy. ADBF eliminates calculation estimation and permits real-time
measurement of volume blood flow.

The ADBF technology utilizes a special application of the Doppler method through
simultaneous projection of a combination of narrow beams with a known angle
between them. Thus, based on

trigonometric and Doppler considerations, the angle of insonation can be
obtained, resulting in accurate, angle-independent blood flow velocity
measurements that do not require the use of complicated, expensive imaging
systems. In order to obtain high-resolution velocity profiles, the QUANTIX
devices use a multi-gated pulse wave Doppler beam. With this method, specific
sample volumes along the ultrasound beam can be separately evaluated, and the
application of a flow/no flow criterion can be applied. The Cardiosonix
technology applies a special use of digital Doppler technology, which with the
digital signal processing power of the system allows hundreds of sample volumes
to be sampled and processed simultaneously, thus providing high resolution
velocity profiles for both angle and vascular diameter calculations, and
subsequently volume blood flow measurements. At present, Cardiosonix has two
products in the early stages of commercialization and one still in development
that are designed to provide blood flow measurement and cardiac output
information to physicians in cardiac/vascular surgery, neurosurgery and critical
care settings.

QUANTIX/ND(TM) is designed to allow neurosurgeons and neurologists, as well as
intensive care unit or emergency room physicians, to non-invasively measure
carotid artery blood flow in a simple and real-time manner. QUANTIX/ND consists
of a control unit and an angle-independent ultrasound probe that obtains signals
directly from the carotid artery in a non-invasive manner. QUANTIX/ND is
designed primarily for use in monitoring head trauma patients in neuro-intensive
care units and emergency rooms. Periodic blood flow measurements minimize the
risk of brain impairment. We are unaware of any measurement system on the market
today that provides real-time, bedside, non-invasive, continuous, direct and
accurate measurements of complete hemodynamic parameters including blood flow.
Other modalities that do monitor capabilities of the brain are significantly
more invasive, expose the patient to incremental risk or are inherently
complicated, offering only indirect estimation of perfusion conditions. Some
medical devices use an estimated measurement of blood flow velocity to create an
index of blood flow but do not account for instantaneous changes in vascular
cross-sectional area. In most competing devices, however, blood flow velocity is
angle-dependent and cannot be measured accurately. The QUANTIX/ND device, as
well as its predecessor device, the FLOWGUARD(TM), has received CE mark
regulatory clearance for marketing in the European Union (EU) as well as U.S.
FDA 510(k) clearance for marketing in the United States. Neoprobe has begun
commercial shipment of the QUANTIX/ND to distributors in Europe and Asia.

QUANTIX/OR(TM) is designed to permit cardiovascular surgeons and assisting
physicians to obtain intraoperative volume blood flow readings in various
targeted blood vessels within seconds. The system consists of an
angle-independent ultrasound probe and digital numerical displays of blood flow
rate. Thus, the surgeon obtains immediate, real-time and quantitative readings
while focused on the target vessel. Quantifying blood flow is crucial during
anastomostic or other bypass graft procedures to determine adequate blood flow.
While measurement is advisable whenever a blood vessel is exposed
intra-operatively, generally this is not the current practice.

Ultimately, in practice, the surgeon generally resorts to using his eyes and
fingers in a process called finger palpation to qualitatively assess vessel
flow. The QUANTIX/OR offers the surgeon immediate and simple quantitative
assessment of blood flow in multiple blood vessels and grafts. The primary
advantage of finger palpation is that it is fast and simple; the disadvantages
are that it requires a good deal of experience, it is difficult to perform in
vessels embedded in tissue, it can become difficult to interpret in large
vessels, and it permits only a very qualitative and subjective assessment. A
significant partial occlusion (or even a total occlusion) will result in a
significant vessel "inflation" and strong palpations that could mislead the
surgeon. Instead of such a subjective clinical practice that is highly
experience-dependent, the QUANTIX/OR is designed to allow the surgeon to rely on
more evidence-based medicine.

We believe that QUANTIX/OR represents a significant improvement over existing
technologies to directly measure blood flow intraoperatively. Other technologies
that attempt to measure intraoperative blood flow directly are generally more
invasive and are impractical when multiple vessel measurements are required.
They are, therefore, not used routinely in the operating room, so surgeons most
often resort to finger palpation to qualitatively, rather than quantitatively,
measure vessel perfusion. The QUANTIX/OR device has received CE mark regulatory
clearance for marketing in the EU and U.S. FDA 510(k) clearance for marketing in
the United States.

QUANTIX/TE(TM) is being designed as a transesophageal cardiac function monitor
for measuring blood flow in the descending aorta in critical care settings. The
system employs a special transesophageal catheter for quantitative assessment of
blood flow in the descending aorta for cardiac output calculations. The system
is designed for bedside use in intensive care settings. Cardiac output and
function monitoring is essential in critical care and trauma patients. The
procedure of transesophageal monitoring is a well-recognized clinical modality,
particularly for echocardiography of the heart. Only highly invasive methods of
cardiac output via thermodilution techniques are currently available, or
indirect and non-invasive methods such as bioimpedance with an unknown degree of
clinical significance. The QUANTIX/TE is not currently cleared for commercial
sale in any market.

Our strategy related to Cardiosonix products for the balance of 2003 and early
2004 has three primary objectives:

- to promote and expand the critical evaluation of the QUANTIX/ND and
QUANTIX/OR with thought leaders in the neurosurgical and cardiac
arenas;
- to secure and train additional marketing and distribution partners for
key global markets for the QUANTIX/ND and QUANTIX/OR devices; and
- to achieve commercial sales of Cardiosonix' Quantix products beyond
demonstration unit sales which would demonstrate the initial market
acceptance of the products.

We cannot assure you, however, that any of Cardiosonix' products will achieve
market acceptance. See also Risk Factors.

THE LYMPHOSEEK(TM) PROCEDURAL PRODUCT

Our gamma detection devices are primarily capital in nature; as such, they
generate revenue only on the initial sale. To complement the one-time revenue
stream related to capital products, we are working on developing recurring
revenue or "procedural" products that would generate revenue based on each
procedure in which they were used. Our primary efforts in this area involve an
exclusive worldwide license agreement with the University of California, San
Diego (UCSD) for a proprietary compound we refer to as LYMPHOSEEK. We believe
LYMPHOSEEK, if proven effective, could be used as a lymph node locating agent in
ILM procedures. Neoprobe and UCSD completed pre-clinical evaluations of
LYMPHOSEEK in 2001 and completed a Phase I trial in the treatment of breast
cancer in humans. The initial Phase I studies of LYMPHOSEEK in breast cancer
were funded through a research grant from the Susan G. Komen Breast Cancer
Research Foundation. Preliminary results from the Phase I breast trial were
presented at the Spring 2002 meeting of the Society of Nuclear Medicine.

A Phase I/II clinical trial in melanoma patients was completed during the third
quarter of 2003. The Phase II melanoma trial was funded through a research grant
from the American College of Surgeons. Our discussions held to date with
potential strategic partners to assist in the further development and
commercialization of Lymphoseek have focused on gaining a better understanding
of the regulatory approval process related to Lymphoseek. As such, we have
requested and scheduled a meeting with the Interagency Council, an organization
representing the U.S. FDA, the National Cancer Institute and the Centers for
Medicare and Medicaid Services to discuss the regulatory approval process and to
determine the objectives for the next clinical trial involving LYMPHOSEEK. We
cannot assure you, however, that this product will achieve regulatory approval,
or if approved, that it will achieve market acceptance. See also Risk Factors.

THE RIGS TECHNOLOGY

Our radioimmunoguided surgery (RIGS) system is an investigational technology
that combines our patented hand-held gamma radiation detection probe,
proprietary disease-specific radiolabeled cancer targeting agents, and a
patented surgical method to provide surgeons with real-time information to
locate tumor deposits that may not be detectable by conventional methods, and to
assist in more thorough removal of the cancer. Before surgery, a cancer patient
is injected with one of the targeting agents, which circulates throughout the
patient's body and binds specifically to cancer cell antigens or receptors.

Concentrations of the targeting agent are then located during surgery by our
gamma-detection instrument, which emits an audible tone to direct the surgeon to
targeted tissue.

We conducted several clinical trials related to the first generation drug of our
RIGS technology in past years, but were unsuccessful in gaining the necessary
regulatory approvals. Since discontinuing internal development efforts in 1998,
we have made efforts to identify a development partner to assume financial and
regulatory responsibility for the ongoing development of the RIGS technology.
From time to time, these efforts have involved the assistance of third party
investment banking firms. However, our efforts and those of the investment
banking firms have not resulted in the identification of a development partner,
purchaser or licensee to date.

In cooperation with independent third parties, we have completed a Phase I
evaluation of a second-generation RIGS antibody. In addition, we are ware of
favorable evaluations of the long term survival prognosis of patients who were
enrolled in the Phase III clinical studies conducted with RIGS. We intend to
engage the services of a clinical research organization (CRO) to review these
survival findings. In conjunction with the CRO, we intend to convene a thought
leader review panel to assess the audit findings.

We cannot assure you that any potential development partner will have a
continuing interest in developing the RIGS technology. In addition, should such
a partner ultimately decide to move forward with development of a RIGS product
and be able to reach a satisfactory agreement, we believe that it would take at
least four to five years to complete development, regulatory and
commercialization activities for a RIGS product. We cannot assure you, however,
that we will be able to complete license or sales agreements with another
development partner for the RIGS technology on terms acceptable to us, or at
all. Also, we cannot assure you that the regulatory authorities will clear our
RIGS products for marketing, or that any such products will be successfully
introduced or achieve market acceptance. See also Risk Factors.

ACTIVATED CELLULAR THERAPY

We have performed early stage research on another technology platform, activated
cellular therapy (ACT), based on work originally done in conjunction with the
RIGS technology. ACT is intended to boost the patient's own immune system by
removing lymph nodes identified during surgery and then, in a cell processing
technique, activating and expanding "helper" T-cells found in the nodes. Within
10 to 14 days, the patient's own immune cells, activated and numbering more than
20 billion, are infused into the patient in an attempt to trigger a more
effective immune response to the cancer.

During the second quarter of 2001, we announced a research collaboration with
Aastrom Biosciences (Aastrom) intended to determine whether Aastrom's
Replicell(TM) system would be able to duplicate cell expansion results
experienced in previous Phase I clinical testing of our ACT technology for
oncology. Unfortunately, we experienced delays in completing the evaluation in
2001 due to a lack of available tissue for testing purposes and since that time
have not had the funding available to move the research forward. From time to
time, we have engaged investment banking firms as we did for the RIGS technology
to assist us in identifying parties to license or purchase the ACT technology.
However, these efforts have not resulted in the identification of a development
partner, purchaser or licensee to date. We do not know if a partner will be
identified on a timely basis, on terms acceptable to us, or at all. We do not
intend to fund any significant ACT-related research and development without a
partner. We cannot assure you that any ACT products will be successfully
developed, tested or licensed, or that any such products will gain market
acceptance. See also Risk Factors.

MARKET OVERVIEWS

The medical device marketplace is a fast growing market. Medical Device &
Diagnostic Industry magazine reports an annual medical device and diagnostic
market of $75 billion in the U.S. and $169 billion internationally.

CANCER MARKET OVERVIEW

Cancer is the second leading cause of death in the U.S. and Western Europe and
is responsible for over half a million deaths annually in the U.S. alone. The
National Institutes of Health (NIH) estimate the overall annual costs for cancer
(the primary focus of our products) for the U.S. in the year 2002 at $171.6
billion: $60.9 billion for direct medical costs, $15.5 billion for indirect
morbidity, and $95.2 billion for indirect mortality. Our line of gamma detection
systems is currently used primarily in the application of ILM in breast cancer
and melanoma which, according the American Cancer Society (ACS), are expected to
account for 16% and 4%, respectively, of new cancer cases in the U.S. in 2003.

NIH has estimated that breast cancer will annually affect approximately 500,000
women in North America, Western Europe, and other major economic markets. Breast
cancer is the leading cause of death from cancer in the United States among the
30 million women between the ages of 40 and 55 and the second leading cause of
death from cancer among all women. According to the ACS, over 200,000 new cases
of invasive breast cancer are expected to be diagnosed and over 40,000 women are
expected to die from the disease during 2003 in the U.S. alone. The incidence of
breast cancer increases with age, rising from about 100 cases per 100,000 women
at age 40 to about 400 cases per 100,000 women at age 65. Thus, we believe that
the significant aging of the population, combined with improved education and
awareness of breast cancer and diagnostic methods, will lead to an increased
number of breast cancer surgical diagnostic procedures.

Approximately 80% of the patients diagnosed with breast cancer undergo a lymph
node dissection (either ALND or SLNB) to determine if the disease has spread.
While many breast cancer patients are treated in large cancer centers or
university hospitals, regional and/or community hospitals currently treat the
majority of breast cancer patients. Over 10,000 hospitals are located in the
markets targeted for our gamma detection ILM products. While we are aware of no
published statistics on the number of institutions that currently are using
gamma detection devices in ILM, we believe that approximately fifty percent of
the total potential global market for gamma detecting devices remains to be
penetrated at this time. However, if the potential of Lymphoseek as a
radioactive tracing agent is ultimately realized, it has the potential to
address not only the current breast and melanoma markets on a procedural basis,
but to also assist in the clinical evaluation and staging of solid tumor cancers
and expanding ILM to additional indications, such as gastric, non-small cell
lung and other solid tumor cancers.

BLOOD FLOW MARKET OVERVIEW

Cardiovascular disease is the number one killer of men and women in the U.S. and
in a majority of countries in the rest of the world that track such statistics.
In the U.S. alone, the Centers for Disease Control (CDC) estimated that there
were over 65 million physician office visits and over 6.8 million outpatient
department visits in 2000 with a primary diagnosis of cardiovascular disease.
The CDC registered over 5.9 million inpatient cardiovascular procedures in the
U.S. during 2000 that directly involve cardiovascular circulation. We, as well
as our competitors and other industry analysts, generally estimate the rest of
the world's incidence of such modalities at roughly twice U.S. estimates.

The American Heart Association (AHA) estimates the total cost of cardiovascular
diseases and stroke in the United States will exceed $350 billion in 2003. A
substantial portion of these expenditures is expected to be for non-invasive
image and intravascular examination. In 1999, these modalities, employed in
approximately 99 million diagnostic procedures, generated more than $2.4 billion
worldwide in product sales. Industry analysts have also estimated the worldwide
market for multi-functional patient monitoring equipment totaled $6.6 billion in
1999. This market is forecasted to grow at a compound annual rate of 11.5% over
the next five years.

We have identified three distinct markets within the hospital setting for
Cardiosonix' products:

- non-invasive diagnostics (QUANTIX/ND);
- intraoperative assessment (QUANTIX/OR); and
- critical care monitoring (QUANTIX/TE).

The American Hospital Association has estimated there are approximately 6,000
hospitals in the U.S.,

over half of which house one hundred beds or more (i.e., large hospitals). The
American Association of Operating Room Nurses has estimated there are
approximately 30,000 operating rooms in the U.S. Based on these estimates and
information obtained from industry sources and data published by our competitors
and other medical device companies, we estimate that the worldwide totals for
hospitals and operating rooms to be approximately two to two-and-a-half times
the U.S. totals.

Based on the above number of institutions, assuming the larger hospitals could
use two or more systems of each type to support their activities, and assuming
we are able to achieve market prices that are comparable to what our competitors
are achieving (currently averaging $25,000 to $30,000 per system), we believe
the worldwide market potential for blood flow measurement products, such as
those being developed by Cardiosonix, to be more than $1.5 billion. We believe
that gaining even a modest share of this market would result in significant
annual revenues for our company. We cannot assure you, however, that Cardiosonix
products will achieve market acceptance and generate the level of sales or
prices anticipated.

MARKETING AND DISTRIBUTION

GAMMA DETECTION DEVICES

We began marketing the current generation of our gamma detection systems, the
NEO2000, in October 1998. Since October of 1999, our gamma detection systems
have been marketed and distributed throughout most of the world through Ethicon
Endo-Surgery, Inc. (EES), a Johnson and Johnson company. In Japan, however, we
market our products through a pre-existing relationship with Century Medical,
Inc. (CMI).

The heart of the NEO2000 system is a control unit that is software-upgradeable,
permitting product enhancements without costly remanufacturing. Since the
original launch of the NEO2000 system, we have introduced an enhanced version of
our 14mm reusable probe optimized for lymphatic mapping procedures and a
laparoscopic probe intended for certain minimally invasive procedures. We have
also developed three major software version upgrades for the system that have
been or will soon be made available for sale to customers. We intend to continue
developing additional ILM-related probes and instrument products in cooperation
with EES to maintain our leadership position in the ILM field.

Physician training is critical to the use and adoption of ILM products by
surgeons and other medical professionals. Our company and our marketing partners
have established relationships with leaders in the ILM surgical community and
have established and supported training courses internationally for lymphatic
mapping. We intend to continue to work with our partners to expand the number of
ILM training courses available to surgeons.

We entered into our current distribution agreement with EES effective October 1,
1999 for an initial five-year term with options to extend for two successive
two-year terms. Under this agreement, we manufacture and sell our ILM products
almost exclusively to EES, who distributes the products globally (except for
Japan). EES agreed to purchase minimum quantities of our products over the first
three years of the five-year original term of the agreement and to reimburse us
for certain research and development costs during the first three years and a
portion of our warranty costs. EES' minimum purchase and reimbursement
commitments were satisfied during 2002. EES has no ongoing purchase or
reimbursement commitments to us other than the rolling four-month binding
purchase commitment for gamma detection devices as outlined in the distribution
agreement. Our agreement with EES also contains certain termination provisions
and licenses to our intellectual property that take effect only in the event we
fail to supply product, or for other reasons such as a change of control. See
also Risk Factors.

BLOOD FLOW DEVICES

During late 2002, we received regulatory approval to market QUANTIX/ND in the
U.S. and the EU and placed a small number of devices with two distributors
covering three countries for their demonstration purposes. Since the end of
2002, we have received CE Mark clearance to market the QUANTIX/OR in the

EU 510(k) clearance to market the device in the U.S. Currently, we have seven
distributors covering eight countries for the QUANTIX/ND and seven distributors
covering ten countries for the QUANTIX/OR. We are in active dialogue for
marketing and distribution rights with a number of parties, primarily
independent distributors which have territory or country-specific sales forces.
The majority of the distributors signed to date are in the EU and the Pacific
Rim. We have not yet signed a distributor for the QUANTIX/ND or QUANTIX/OR
covering the U.S.

Our goal in securing marketing and distribution partners is to first identify
parties who possess appropriate expertise in marketing medical devices,
preferably ultrasound or cardiac care devices, into our primary target markets,
the cardiac care and neurosurgical markets. We would prefer to secure partners
with broader territorial or global reach similar to the path we have followed
for our gamma detection devices. However, if such partners are not available for
a given market or if a territory-specific partner has expertise that we believe
outweighs the value of a global market reach, we will enter into
territory-specific arrangements as necessary.

We anticipate spending a significant amount of time and effort over the
remainder of 2003 and in 2004 to bring the Cardiosonix blood flow products to a
wider market. We will need to continue to train our distributors and work
through them with thought leaders in the cardiac and neurosurgical fields to
gain broader exposure to the advantages of our technology. We anticipate placing
blood flow systems with industry thought leaders to obtain critical
pre-commercialization feedback prior to widespread market launch. To date, we
have placed a small number of devices with thought leaders in the U.S. and EU to
support clinical investigations by their institutions. The market education
process we envision will likely take some time to develop in the manner we
desire. In addition, the sales cycle for capital medical devices such as our
blood flow products is typically a four to six month cycle. As such, significant
end customer sales, if they occur, will likely lag the signing of distribution
arrangements.

MANUFACTURING

GAMMA DETECTION DEVICES

We rely on independent contract manufacturers, some of which are single-source
suppliers, for the manufacture of the principal components of our current line
of gamma detection system products. See also Risk Factors. The NEO2000 system is
comprised of a software-upgradeable NEO2000 control unit, a hand-held gamma
detection probe and some accessories. We currently market a 14mm reusable probe
and a laparoscopic reusable probe.

We have devoted significant resources to develop production capability for our
gamma detection systems at qualified contract manufacturers. Production of the
NEO2000 control unit, the 14mm probe and the laparoscopic probe involve the
manufacture of components by a combination of subcontractors, including but not
limited to eV Products, a division of II-VI Corporation (eV),UMM Electronics,
Inc., a Leach Technology Group company (UMM) and TriVirix International, Inc.
(TriVirix). Currently, we have manufacturing and supply agreements with eV for
the production of crystal modules used in the detector probes and are in the
process of transferring manufacturing for the manufacture of the 14mm probe and
the NEO2000 control unit from UMM to TriVirix. We also purchase certain
accessories for our line of gamma detection systems from other qualified
manufacturers.

In December 1997, we entered into a supply agreement with eV for the supply of
certain crystals and associated electronics to be used in the manufacture of our
proprietary line of hand-held gamma detection probes. The original term of the
agreement expired on December 31, 2002, but was automatically extended through
December 31, 2005; however, the agreement is no longer exclusive for the last
three years. eV supplies 100% of the crystals used in our products. While eV is
not the only potential supplier of such crystals, any prolonged interruption of
this source could restrict the availability of our probe products, which would
adversely affect our operating results.

In October 2001, we entered into a manufacturing and supply agreement with UMM
for the exclusive manufacture of our 14mm probe and NEO2000 control unit. The
original term of the agreement was to

expire in February 2005; however, we are in the process of terminating our
relationship with UMM. In the process of evaluating contract manufacturers for
the Quantix product line, we identified a different contract manufacturer we
felt was more appropriate for the Quantix products and made the decision that it
would be more beneficial to us to have the NEO2000 and 14mm probe manufactured
at the same location as the Quantix products. Following selection of the other
contract manufacturer, we initiated discussions with UMM regarding the cessation
of manufacturing activities and are now actively involved in the process of
transferring our manufacturing for the NEO2000 and 14mm probes to TriVirix. We
are currently operating under binding purchase orders with TriVirix and intend
to finalize a supply agreement during the fourth quarter of 2003.

We cannot assure you that we will be able to maintain agreements with our
subcontractors on terms acceptable to us, or that our subcontractors will be
able to meet our production requirements on a timely basis, at the required
levels of performance and quality. In the event that any of our subcontractors
is unable or unwilling to meet our production requirements, we cannot assure you
that an alternate source of supply could be established without significant
interruption in product supply or without significant adverse impact to product
availability or cost. Any significant supply interruption or yield problems that
we or our subcontractors experience would have a material adverse effect on our
ability to manufacture our products and, therefore, a material adverse effect on
our business, financial condition, and results of operations until a new source
of supply is qualified. See also Risk Factors.

BLOOD FLOW DEVICES

Currently, the Quantix products being distributed are being manufactured at
Cardiosonix' facility in Israel. We expect this to continue through the
remainder of 2003 and into early 2004. However, consistent with our stated
objectives, we evaluated different contract manufacturers for the control unit
portion of Quantix product line during the first quarter of 2003 and solicited
competitive bids. During the second quarter, we selected TriVirix to manufacture
the control unit portion of the Quantix line. We are currently operating under
binding purchase orders for the manufacture of the control units with TriVirix
and intend to finalize a supply agreement during the fourth quarter of 2003.
Manufacture of the Quantix control units at TriVirix is expected to start during
the first quarter of 2004. The ultrasound probes distributed with the Quantix
control units, while assembled at Cardiosonix' facility, use ultrasound
transducers manufactured by Vermon S.A. (Vermon) of France. We currently
purchase the ultrasound transducer modules from Vermon under purchase orders. We
are in the process of evaluating subcontractors to manufacture the ultrasound
probes and other accessories associated with the Quantix product line.

We cannot assure you that we will be able to finalize supply and service
agreements with TriVirix, Vermon or other subcontractors for the Quantix
products, or that our subcontractors will be able to meet our production
requirements on a timely basis, at the required levels of performance and
quality. In the event that any of our subcontractors is unable or unwilling to
meet our production requirements, we cannot assure you that an alternate source
of supply could be established without significant interruption in product
supply or without significant adverse impact to product availability or cost.
Any significant supply interruption or yield problems that we or our
subcontractors experience would have a material adverse effect on our ability to
manufacture our products and, therefore, a material adverse effect on our
business, financial condition, and results of operations until a new source of
supply is qualified. See also Risk Factors.

In addition, we have determined that we will reduce employment at our
Cardiosonix subsidiary after December 31, 2003. We will continue employment and
consulting activities with certain development personnel after that date. We
expect to increase the number of development personnel who are employed at our
Dublin facilities.

COMPETITION

We face competition from medical product and biotechnology companies, as well as
from universities and other non-profit research organizations in the field of
cancer diagnostics and treatment. Many emerging medical product companies have
corporate partnership arrangements with large, established companies

to support the research, development, and commercialization of products that may
be competitive with our products. In addition, a number of large established
companies are developing proprietary technologies or have enhanced their
capabilities by entering into arrangements with or acquiring companies with
technologies applicable to the detection or treatment of cancer and the
measurement of blood flow. Many of our existing or potential competitors have
substantially greater financial, research and development, regulatory,
marketing, and production resources than we have. Other companies may develop
and introduce products and processes competitive with or superior to those of
ours. See also Risk Factors.

For our products, an important factor in competition is the timing of market
introduction of our products or those of our competitors' products. Accordingly,
the relative speed with which we can develop products, complete the regulatory
clearance processes and supply commercial quantities of the products to the
market is an important competitive factor. We expect that competition among
products cleared for marketing will be based on, among other things, product
efficacy, safety, reliability, availability, price, and patent position.

GAMMA DETECTION DEVICES

With the emergence of ILM, a number of companies have begun to market gamma
radiation detection instruments. Most of the competitive products have been
designed from an industrial or nuclear medicine perspective rather than being
developed initially for surgical use. Through 2002, the principal competitive
product in both the United States and Europe has been a gamma detection system
marketed by US Surgical Corporation, a subsidiary of Tyco International Ltd.;
however, we believe, based on competitive intelligence, that US Surgical is
retreating from the sale of gamma detection devices in the U.S. and other global
markets. We also compete with products produced by Care Wise Medical Products
Corporation, PI Medical Diagnostic Equipment B.V., Pol.Hi.Tech. Srl, Silicon
Instruments GmbH and other companies.

It is often difficult to glean accurate competitive information within the
lymphatic mapping field, primarily because most of our competitors are either
subsidiaries of a large corporation (i.e., U.S. Surgical) or privately held
corporations, whose sales revenue or volume data is, therefore, not readily
available or determinable. In addition, lymphatic mapping does not currently
have a separate reimbursement code in most healthcare systems. As such,
determining trends in the actual number of procedures being performed is
difficult. We believe, based on our understanding of EES' success rate in
competitive bid situations, that our market share has remained relatively
constant despite the increased competition over the past few years. We have
experienced some erosion in market prices, however. Additionally, as we have
discussed, we also believe that the current plateau in sales is evidence that
some prospective customers are awaiting results of important international
clinical trials. We expect the results from these trials, when announced, will
likely have a positive impact on sales volumes. We believe our intellectual
property portfolio will be a barrier to competitive products; we cannot assure
you, however, that competitive products will not be developed and be successful
in eroding our market share or the prices we receive for our gamma detection
devices. See also Risk Factors.

BLOOD FLOW DEVICES

There are several technologies on the market that measure or claim to measure
indices of blood flow. These products can be categorized as devices that measure
blood flow directly and devices that only obtain an estimation of flow
conditions.

DIRECT BLOOD FLOW MEASUREMENT DEVICES

- Transit Time Ultrasound (TT) Flowmetry is the leading modality in the
operating room today. TT systems monitor blood flow invasively, and are
restricted to isolated vessels. They require probe adaptation to the
vessel size, and do not provide additional vascular parameters. The
technology requires the operator to encircle the blood vessel with a probe
that includes two ultrasound transmitters/receivers on one side, and a
mirror reflector on the opposite side of the vessel. By

measuring the transit time of the ultrasound beam in the upstream and
downstream directions, volume blood flow estimates can be evaluated.

- Electromagnetic Flowmeters (EMF) are probably the oldest modality to
quantify blood flow (other than timed collection). These devices monitor
blood flow invasively, are impractical for multiple readings on different
vessels, require precise sizing of probes to blood vessels, and do not
provide additional hemodynamic parameters. The technology requires the
operator to encircle the blood vessel with an electromagnetic probe. The
probe generates an electromagnetic field, and the voltage measured due to
the blood flow is translated into volume flow estimates. In practice,
however, this technology is generally considered outdated.

- Doppler technology has been around for several decades, and is being widely
used in non-invasive vascular diagnostics. Duplex ultrasound systems have
the potential to measure blood flow non-invasively. Duplex systems are
designed for imaging the anatomical severity of pathology. This method is
technician-dependent, cumbersome, not accurate and does not offer
monitoring capabilities. However, plain Doppler systems provide only blood
flow velocity rather than volume flow.

INDIRECT BLOOD FLOW MEASUREMENT DEVICES

- Cardiac Output (CO) Monitors include various means to monitor CO such as
Thermal Dilution, Bio Impedance, and the Fick Method. These methods are
either invasive or indirect in their measurement. Thermal Dilution,
primarily through pulmonary artery catheterization (PAC), is the standard
of care today for cardiac output measurements. This technology is not
applicable to other intraoperative blood flow applications. The patient is
injected with cold saline at a fixed temperature, and a
temperature-sensitive transducer that is placed at the site of interest
(usually the pulmonary artery) measures the time to return to baseline
temperature, which is proportional to the blood flow rate. There are many
limitations to this technology, including the relatively large inaccuracies
of cardiac output measurements, the fact that it is not truly real-time,
and the fact that this method is highly invasive, and is being linked to
increased morbidity and mortality (JAMA, Connors et al., 1996).

- Computed Tomography, Magnetic Resonance Imaging and Single Photon Emission
Computed Tomography techniques show target organ perfusion, but lack the
ability to monitor or to provide real-time information. They are
technician-dependent, impractical for bedside usage and very expensive.

- Laser Doppler Flowmeters monitor skin blood flow non-invasively. They are
applicable only to superficial and tiny vessels and do not provide
additional hemodynamic parameters.

- Transcranial Doppler (TCD) monitors cerebral blood velocity rather than
direct blood flow. TCD is non-invasive and provides continuous measurement
of blood flow velocity in the vessels of the brain. TCD is
technician-dependent and cannot be used on every patient.

- Plethysmography indirectly measures an index of blood flow and is limited
primarily to limb assessment. Measurement depends upon many factors and
output is accordingly inaccurate.

- Jugular Bulb Saturation measures the efficiency of oxygen use by the brain.
It is invasive, and provides global results.

- NIRS is a non-invasive method utilizing near infrared spectroscopy to
provide regional perfusion in the brain.

POTENTIALLY COMPETITIVE BLOOD FLOW MEASUREMENT DEVICES

Cardiosonix products are designed to address blood flow measurement across a
variety of clinical and surgical settings, and there are a number of companies
already in the marketplace that offer products related to blood flow
measurement. However, most of these products do not directly compete with
Cardiosonix products. The companies that do offer potentially competitive
products are, for the most part, smaller, privately held companies, with which
we believe we can effectively compete. Indeed, due to our belief in the
technical superiority of our products, we believe the existence of competitors
will help to educate the marketplace regarding the importance of blood flow
measurement. As we have discussed, adoption of blood flow monitoring devices for
the measurement of hemodynamic status will likely take an involved education
process as it often involves a change in clinical or surgical management. While
there is not a clear leader in these markets, the following companies compete
most directly with Cardiosonix:

- Intraoperative applications: Carolina Medical, Inc. (EMF), and Transonic
Systems, Inc. and Medi-Stim AS (TT).

- Neurosurgery applications: HADECO, Hayashi Denki Co., Ltd. (Doppler based),
and DWL Elektronische Systeme GmbH and Nicolet Biomedical (TCD).

- Critical care monitoring: Deltex Medical Ltd. and Arrow International, Inc.
(Transesophageal Doppler), and CardioDynamics International Corp. (Bio
Impedance).

PATENTS AND PROPRIETARY RIGHTS

We regard the establishment of a strong intellectual property position in our
technology as an integral part of the development process. We attempt to protect
our proprietary technologies through patents and intellectual property
positions, in the United States as well as major foreign markets. Specifically,
twenty instrument patents that have been issued in the United Sates as well as
major foreign markets protect our ILM technology.

Cardiosonix has also applied for patent coverage for the key elements of its
ADBF technology in the EU and the U.S. The first of the two patents covering
Cardiosonix ADBF technology issued in the U.S. in January 2003 and claims for
the second patent have been allowed. These two patents have also been filed in
the EU and are in various stages of review by the relevant governing bodies.

LYMPHOSEEK is also the subject of patent applications in the United States and
certain major foreign markets. The first composition of matter patent covering
LYMPHOSEEK was issued in the U.S. in June 2002.

We continue to attempt to maintain proprietary protection for the products
related to RIGS and ACT in major global markets such as the U.S. and the EU,
which although not currently integral to our near-term business plans, may be
important to a potential RIGS or ACT development partner. Certain aspects of our
RIGS technology are claimed in the United States in U.S. Patent No. 4,782,840,
which expires in 2005, unless extended. In addition to the RIGS patent,
composition of matter patents that have been issued in the U.S. and EU cover the
antibodies used in clinical studies. In addition to the antibody patents,
patents issued in the United States cover other aspects and applications of the
RIGS methodology.

The patent position of biotechnology and medical device firms, including our
company, generally is highly uncertain and may involve complex legal and factual
questions. Potential competitors may have filed applications for, or may have
been issued patents, or may obtain additional patents and proprietary rights
relating to products or processes in the same area of technology as that used by
our company. The scope and validity of these patents and applications, the
extent to which we may be required to obtain licenses thereunder or under other
proprietary rights, and the cost and availability of licenses are uncertain. We
cannot assure you that our patent applications will result in additional patents
being issued or that any of our patents will afford protection against
competitors with similar technology; nor can we assure you that any of our
patents will not be designed around by others or that others will not obtain

patents that we would need to license or design around. See also Risk Factors.

We also rely upon unpatented trade secrets. We cannot assure you that others
will not independently develop substantially equivalent proprietary information
and techniques, or otherwise gain access to our trade secrets, or disclose such
technology, or that we can meaningfully protect our rights to our unpatented
trade secrets.

We require our employees, consultants, advisers, and suppliers to execute a
confidentiality agreement upon the commencement of an employment, consulting or
manufacturing relationship with us. The agreement provides that all confidential
information developed by or made known to the individual during the course of
the relationship will be kept confidential and not disclosed to third parties
except in specified circumstances. In the case of employees, the agreements
provide that all inventions conceived by the individual will be the exclusive
property of our company. We cannot assure you, however, that these agreements
will provide meaningful protection for our trade secrets in the event of an
unauthorized use or disclosure of such information.

GOVERNMENT REGULATION

Most aspects of our business are subject to some degree of government regulation
in the countries in which we conduct our operations. As a developer,
manufacturer and marketer of medical products, we are subject to extensive
regulation by, among other governmental entities, the U.S. FDA and the
corresponding state, local and foreign regulatory bodies in jurisdictions in
which our products are sold. These regulations govern the introduction of new
products, the observance of certain standards with respect to the manufacture,
safety, efficacy and labeling of such products, the maintenance of certain
records, the tracking of such products and other matters.

Failure to comply with applicable federal, state, local or foreign laws or
regulations could subject us to enforcement action, including product seizures,
recalls, withdrawal of marketing clearances, and civil and criminal penalties,
any one or more of which could have a material adverse effect on our business.
We believe that we are in substantial compliance with such governmental
regulations. However, federal, state, local and foreign laws and regulations
regarding the manufacture and sale of medical devices are subject to future
changes. We cannot assure you that such changes will not have a material adverse
effect on our company.

For some products, and in some countries, government regulation is significant
and, in general, there is a trend toward more stringent regulation. In recent
years, the U.S. FDA and certain foreign regulatory bodies have pursued a more
rigorous enforcement program to ensure that regulated businesses, like ours,
comply with applicable laws and regulations. We devote significant time, effort
and expense addressing the extensive governmental regulatory requirements
applicable to our business. To date, we have not received any notifications or
warning letters from the U.S. FDA or any other regulatory bodies of alleged
deficiencies in our compliance with the relevant requirements, nor have we
recalled or issued safety alerts on any of our products. However, we cannot
assure you that a warning letter, recall or safety alert, if it occurred, would
not have a material adverse effect on our company.

In the early to mid 1990s, the review time by the U.S. FDA to clear medical
products for commercial release lengthened and the number of marketing
clearances decreased. In response to public and congressional concern, the U.S.
FDA Modernization Act of 1997 (the 1997 Act) was adopted with the intent of
bringing better definition to the clearance process for new medical products.
While U.S. FDA review times have improved since passage of the 1997 Act, we
cannot assure you that the U.S. FDA review process will not continue to delay
our company's introduction of new products in the U.S. in the future. In
addition, many foreign countries have adopted more stringent regulatory
requirements that also have added to the delays and uncertainties associated
with the release of new products, as well as the clinical and regulatory costs
of supporting such releases. It is possible that delays in receipt of, or
failure to receive, any necessary clearance for our new product offerings could
have a material adverse effect on our business, financial condition or results
of operations.

While we are unable to predict the extent to which our business may be affected
by future regulatory developments, we believe that our substantial experience
dealing with governmental regulatory requirements and restrictions on our
operations throughout the world, and our development of new and improved
products, should enable us to compete effectively within this environment.

GAMMA DETECTION AND BLOOD FLOW MEDICAL DEVICES

As a manufacturer of medical devices sold in various global markets, we are
required to manufacture the devices under quality system regulations (QSR) and
maintain appropriate technical files and quality records. Our medical devices
are regulated in the United States by the U.S. FDA. Our medical devices are
regulated in the EU according to the Medical Device Directive (93/42/EEC). Under
this regulation, we must obtain CE Mark status for all products exported to the
EU.

Our initial generation gamma detection instruments received 510(k) marketing
clearance from the U.S. FDA in December 1986 with modified versions receiving
similar clearances in 1992 through 1997. In 1998, the U.S. FDA reclassified
"nuclear uptake detectors" as being exempt from the 510(k) process. We believe
the NEO2000 device is exempt from the 510(k) process because it is substantially
equivalent to previously cleared predecessor devices. We obtained the CE Mark
for the NEO2000 device in January 1999, and therefore, must continue to
manufacture the devices under a quality system compliant to the requirements of
ISO 9001/EN 46001 and maintain appropriate technical files. We maintain a
license to import our gamma devices into Canada, and therefore must continue to
manufacture the devices under a quality system compliant to the requirements of
ISO 13485 and CMDCAS.

Cardiosonix has received 510(k) and CE mark clearance to market the QUANTIX/ND
device in the U.S. and EU for non-invasive applications. The QUANTIX/OR has also
received clearance to market in the EU and 510(k) clearance in the U.S. We
intend to submit additional applications for clearance or amendments, as
appropriate, for the QUANTIX/TE in the future.

PHARMA/BIOLOGIC PRODUCTS (LYMPHOSEEK AND RIGS)

Our radiolabeled targeting agents and biologic products, if developed, would
require a regulatory license to market by the U.S. FDA and by comparable
agencies in foreign countries. The process of obtaining regulatory licenses and
approvals is costly and time consuming, and we have encountered significant
impediments and delays related to our previously proposed biologic products.

The process of completing pre-clinical and clinical testing, manufacturing
validation and submission of a marketing application to the appropriate
regulatory bodies usually takes a number of years and requires the expenditure
of substantial resources, and we cannot assure you that any approval will be
granted on a timely basis, if at all. Additionally, the length of time it takes
for the various regulatory bodies to evaluate an application for marketing
approval varies considerably, as does the amount of preclinical and clinical
data required to demonstrate the safety and efficacy of a specific product. The
regulatory bodies may require additional clinical studies that may take several
years to perform. The length of the review period may vary widely depending upon
the nature and indications of the proposed product and whether the regulatory
body has any further questions or requests any additional data. Also, the
regulatory bodies will likely require postmarketing reporting and surveillance
programs to monitor the side effects of the products. We cannot assure you that
any of our potential drug or biologic products will be approved by the
regulatory bodies or approved on a timely or accelerated basis, or that any
approvals received will not subsequently be revoked or modified.

In addition to regulations enforced by the U.S. FDA, the manufacture,
distribution, and use of radioactive targeting agents, if developed, are also
subject to regulation by the Nuclear Regulatory Commission (NRC), the Department
of Transportation and other federal, state, and local government authorities.
We, or our manufacturer of the radiolabeled antibodies, must obtain a specific
license from the NRC to manufacture and distribute radiolabeled antibodies, as
well as comply with all applicable regulations. We must also comply with
Department of Transportation regulations on the labeling and packaging
requirements for shipment of radiolabeled antibodies to licensed clinics, and
must comply with federal, state, and local governmental laws regarding the
disposal of radioactive waste. We cannot assure you

that we will be able to obtain all necessary licenses and permits and be able to
comply with all applicable laws. The failure to obtain such licenses and permits
or to comply with applicable laws would have a materially adverse effect on our
business, financial condition, and results of operations.

EMPLOYEES

As of November 1, 2003, we had 22 full-time employees, including those of our
subsidiary, Cardiosonix. We consider our relations with our employees to be
good.

DESCRIPTION OF PROPERTY

We currently lease our office at 425 Metro Place North, Dublin, Ohio. We
executed a lease agreement, commencing on September 1, 2003 and ending in August
2006, with the landlord of these facilities for approximately 9,000 square feet.
The lease provides for a monthly base rent of approximately $6,100 in 2003. We
must also pay a pro-rata portion of the operating expenses and real estate taxes
of the building. We believe these facilities are in good condition and will be
adequate for our needs for the foreseeable future. We intend to evaluate current
conditions in our local real estate market and either renew our current lease or
enter into a lease for a similar amount of office space.

Our subsidiary, Cardiosonix Ltd., currently leases its office in the Millennium
Building at 3 Ha'Tidhar Street, Ra'anana, Israel. The lease covers approximately
470 square meters of space and expires in April 2004. The lease provides for a
monthly base rent of $4,700 through the expiration of the lease.

OUR MANAGEMENT

DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS

DIRECTORS

THE FOLLOWING DIRECTORS' TERMS CONTINUE UNTIL THE 2004 ANNUAL MEETING:

REUVEN AVITAL, age 52, has served as a director of our company since January
2002. Mr. Avital is a partner and general manager of Ma'Aragim Enterprises Ltd.,
an investment company in Israel, through which he is a member of the board of
Neoprobe as well as a number of privately-held and Israeli public companies,
three of them in the medical device field. Mr. Avital was a board member of
Cardiosonix, Ltd. from April 2001 through December 31, 2001, when we acquired
the company. Previously, Mr. Avital served in the Israeli government in a
variety of middle and senior management positions. He is also chairman or board
member in several not-for-profit organizations, mainly involved in education for
the under-privileged and international peace-building. Mr. Avital has B.A.
degrees in The History of the Middle East and International Relations from the
Hebrew University of Jerusalem, and a M.P.A. from the Kennedy School of
Government at Harvard University.

DAVID C. BUPP, age 54, has served as President and a director of our company
since August 1992 and as Chief Executive Officer since February 1998. From
August 1992 to May 1993, Mr. Bupp served as our Treasurer. In addition to the
foregoing positions, from December 1991 to August 1992, he was Acting President,
Executive Vice President, Chief Operating Officer and Treasurer, and from
December 1989 to December 1991, he was Vice President, Finance and Chief
Financial Officer. From 1982 to December 1989, Mr. Bupp was Senior Vice
President, Regional Manager for AmeriTrust Company National Association, a
nationally chartered bank holding company, where he was in charge of commercial
banking operations throughout Central Ohio. Mr. Bupp has a B.A. degree in
Economics from Ohio Wesleyan University. Mr. Bupp completed a course of study at
Stonier Graduate School of Banking at Rutgers University.

JULIUS R. KREVANS, M.D., age 79, has served as a director of our company since
May 1994 and as Chairman of the Board of Directors of our company since February
1999. Dr. Krevans served as Chancellor of the University of California, San
Francisco from July 1982 until May 1993. Prior to his appointment as Chancellor,
Dr. Krevans served as a Professor of Medicine and Dean of the School of

Medicine at the University of California, San Francisco from 1971 to 1982. Dr.
Krevans is a member of the Institute of Medicine, National Academy of Sciences,
and led its committee for the National Research Agenda on Aging until 1991. He
is Chairman of the Bay Area Economic Forum, a member of the Medical Panel of
A.P. Giannini Foundation, and a member of the Board of Directors of the Bay Area
BioScience Center. Dr. Krevans has a B.S. degree and a M.D. degree, both from
New York University. Dr. Krevans also serves on the Board of Directors and the
compensation committee of the Board of Directors of Calypte Biomedical
Corporation (Calypte), a publicly held corporation, and on the Board of
Directors and nominating committee of AccuImage Diagnostics Corp., a publicly
held company.

THE FOLLOWING DIRECTORS' TERMS CONTINUE UNTIL THE 2005 ANNUAL MEETING:

NANCY E. KATZ, age 44, has served as a director of our company since January
2001. Ms. Katz is an independent health care business consultant. Ms. Katz
served as President, Chief Executive Officer and a director of Calypte until
June 2003. Ms. Katz joined Calypte in October 1999 as President, Chief Operating
Officer and Chief Financial Officer. Prior to joining Calypte, Ms. Katz served
as President of Zila Pharm Inc. From 1997 to 1998, Ms. Katz served as Vice
President of Sales & Marketing of LifeScan (the diabetes testing division of
Johnson & Johnson) and Vice President of U.S. Marketing, directing LifeScan's
marketing and customer call center departments from 1995 to 1997. During her
seven-year career at Schering-Plough Healthcare Products from 1987 to 1994, she
held numerous positions including Senior Director & General Manager, Marketing
Director for Footcare New Products, and Product Director of OTC New Products.
Ms. Katz also held various product management positions at American Home
Products from 1981 to 1987. Ms. Katz received her B.A. in Business
Administration from the University of South Florida.

FRED B. MILLER, age 64, has served as a director of our company since January
2002. Mr. Miller is the President and Chief Operating Officer of Seicon,
Limited, a privately held company that specializes in developing, applying and
licensing technology to reduce seismic and mechanically induced vibration. Mr.
Miller also serves on the boards of two other privately-held companies. Until
his retirement in 1995, Mr. Miller had been with Price Waterhouse LLP since
1962. Mr. Miller is a Certified Public Accountant, a member of the American
Institute of Certified Public Accountants (AICPA), a past member of the Council
of the AICPA and a member and past president of the Ohio Society of Certified
Public Accountants. He also has served on the boards or advisory committees of
several universities and not-for-profit organizations. Mr. Miller has a B.S.
degree in Accounting from the Ohio State University.

THE FOLLOWING DIRECTOR'S TERM CONTINUES UNTIL THE 2006 ANNUAL MEETING:

J. FRANK WHITLEY, JR., age 61, has served as a director of our company since May
1994. Mr. Whitley was Director of Mergers, Acquisitions and Licensing at The Dow
Chemical Company (Dow), a multinational chemical company, from June 1993 until
his retirement in June 1997. After joining Dow in 1965, Mr. Whitley served in a
variety of marketing, financial, and business management functions. Mr. Whitley
has a B.S. degree in Mathematics from Lamar State College of Technology.

EXECUTIVE OFFICERS

In addition to Mr. Bupp, the following individuals are executive officers of our
company and serve in the position(s) indicated below:

NAME AGE POSITION
---- --- --------

Carl M. Bosch 47 Vice President, Instrument Development

Rodger A. Brown 53 Vice President, Regulatory Affairs
and Quality Assurance

Brent L. Larson 40 Vice President, Finance; Chief Financial Officer;
Treasurer and Secretary

Richard N. Linder 52 Vice President, Sales and Marketing

CARL M. BOSCH has served as Vice President, Instrument Development of our
company since March 2000. Prior to that, Mr. Bosch served as our Director,
Instrument Development from May 1998 to March 2000. Before joining our company,
Mr. Bosch was employed by GE Medical Systems from 1994 to 1998 where he served
as Manager, Nuclear Programs. From 1977 to 1994, Mr. Bosch was employed by GE
Aerospace in several engineering and management functions. Mr. Bosch has a B.S.
degree in Electrical Engineering from Lehigh University and a M.S. degree in
Systems Engineering from the University of Pennsylvania.

RODGER A. BROWN has served as Vice President, Regulatory Affairs and Quality
Assurance of our company since November 2000. From July 1998 through November
2000, Mr. Brown served as our Director, Regulatory Affairs and Quality
Assurance. Prior to joining our company, Mr. Brown served as Director of
Operations for Biocore Medical Technologies, Inc. from April 1997 to April 1998.
From 1981 through 1996, Mr. Brown served as Director, Regulatory Affairs/Quality
Assurance for E for M Corporation, a subsidiary of Marquette Electronics, Inc.

BRENT L. LARSON has served as Vice President, Finance and Chief Financial
Officer of our company since February 1999. Prior to that, he served as our Vice
President, Finance from July 1998 to January 1999 and as Controller from July
1996 to June 1998. Before joining our company, Mr. Larson was employed by Price
Waterhouse LLP. Mr. Larson has a B.B.A. degree in Accounting from Iowa State
University of Science and Technology and is a Certified Public Accountant.

RICHARD N. LINDER has served as Vice President, Marketing and Sales of our
company since November 2003. Before joining our company, Mr. Linder was employed
by XLTEK, Ltd. where he served as Vice President of Sales, Worldwide. From 1999
- 2002, Mr. Linder was employed by Digirad Corporation as Eastern Region Sales
Director. From 1997 - 1999, Mr. Linder was employed by Chiron Diagnostics/Bayer
Diagnostics in various marketing and sales management functions. Mr. Linder was
also employed by i-Stat Corporation from 1991 - 1997 as South Central Regional
Sales Director and held various sales positions with other medical device
companies from 1978 - 1991. Mr. Linder has a B.S. Degree in Education with
endorsements in Biology and Chemistry from Memphis State University.

EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

The following table sets forth certain information concerning the annual and
long-term compensation of our Chief Executive Officer and our other three
executive officers having annual compensation in excess of $100,000 during the
last fiscal year (the Named Executives) for the last three fiscal years.

LONG TERM
COMPENSATION
AWARDS
--------------------------
SECURITIES
RESTRICTED UNDER-
ANNUAL COMPENSATION STOCK LYING
------------------- AWARDS OPTIONS ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS ($) (#) COMPENSATION
--------------------------- ---- ------ ----- --- --- ------------

Carl M. Bosch, 2002 $129,375 $ - - 50,000 $ 3,093(c)
Vice President, 2001 129,375 25,250 - 45,000 3,081(c)
Instrument Development(a) 2000 125,625 68,325 42,180(b) 45,000 1,643(c)

Rodger A. Brown, 2002 $105,417 $ - - 50,000 $ -
Vice President, Regulatory Affairs/ 2001 99,875 19,000 - 45,000 -
Quality Assurance(d) 2000 83,534 33,240 - 35,000 -

David C. Bupp, 2002 $297,083 $ - - 180,000 $ 5,738(f)
President and 2001 310,000 46,500 - 180,000 5,161(f)
Chief Executive Officer 2000 304,769 106,300 140,600(e) 180,000 3,298(f)

Brent L. Larson, 2002 $129,375 $ - - 50,000 $ 2,993(c)
Vice President, Finance and 2001 131,250 20,250 - 60,000 3,400(c)
Chief Financial Officer 2000 126,250 44,900 56,240(g) 60,000 1,313(c)

Dan Manor, 2002 $145,000 $ - - 50,000 $14,000(i)
President and Chief Executive 2001 - - - - -
Officer, Cardiosonix Ltd.(h) 2000 - - - - -

(a) Mr. Bosch began his employment with our company in May 1998 and was
promoted to Vice President in March 2000.

(b) The aggregate number of Mr. Bosch's restricted stock holdings at December
31, 2002 was 30,000 shares with an aggregate value of $3,900. Mr. Bosch has
the right to receive dividends other than dividends on or distributions of
shares of any class of stock issued by our company which dividends or
distributions will be delivered to us under the same restrictions on
transfer and possibility of forfeitures as the shares of restricted stock
from which they derive.

(c) Amounts represent matching contribution under the Neoprobe Corporation
401(k) Plan (the Plan). Eligible employees may make voluntary contributions
and we may, but are not obligated to, make matching contributions based on
40 percent of the employee's contribution, up to five percent of the
employee's salary. Employee contributions are invested in mutual funds
administered by an independent plan administrator. Company contributions,
if any, are made in the form of shares of common stock. The Plan is
intended to qualify under section 401 of the Internal Revenue Code, which
provides that employee and company contributions and income earned on
contributions are not taxable to the employee until withdrawn from the
Plan, and that we may deduct our contributions when made.

(d) Mr. Brown began his employment with our company in July 1998 and was
promoted to Vice President in November 2000.

(e) The aggregate number of Mr. Bupp's restricted stock holdings at December
31, 2002, was 210,000 shares with an aggregate value of $27,300. Mr. Bupp
has the right to receive dividends other than dividends on or distributions
of shares of any class of stock issued by our company which dividends or
distributions will be delivered to us under the same restrictions on
transfer and possibility of forfeitures as the shares of restricted stock
from which they derive.

(f) Amounts represent matching contribution under the Neoprobe Corporation
401(k) Plan (the Plan) and social luncheon club dues. Eligible employees
may make voluntary contributions and we may, but are not obligated to, make
matching contributions based on 40 percent of the employee's contribution,
up to five percent of the employee's salary. Employee contributions are
invested in mutual funds by an independent plan administrator. Company
contributions, if any, are made in the form of shares of common stock. The
Plan is intended to qualify under section 401 of the Internal Revenue Code,
which provides that employee and company contributions and income earned on
contributions are not taxable to the employee until withdrawn from the
Plan, and that we may deduct our contributions when made.

(g) The aggregate number of Mr. Larson's restricted stock holdings at December
31, 2002 was 70,000 shares with an aggregate value of $9,100. Mr. Larson
has the right to receive dividends other than dividends on or distributions
of shares of any class of stock issued by our company which dividends or
distributions will be delivered to us under the same restrictions on
transfer and possibility of forfeitures as the shares of restricted stock
from which they derive.

(h) Mr. Manor began his employment with our company on January 1, 2002, in
connection with our acquisition of Cardiosonix Ltd. (formerly Biosonix
Ltd.).

(i) Amounts represent reimbursements for a company car leased for Mr. Manor's
use.

OPTION GRANTS IN LAST FISCAL YEAR

The following table presents certain information concerning stock options
granted to the Named Executives under our Amended and Restated Stock Option and
Restricted Stock Purchase Plan during the 2002 fiscal year.

INDIVIDUAL GRANTS
-------------------------------------------------------------------------------------------------
PERCENT OF
NUMBER OF TOTAL
SECURITIES OPTIONS GRANTED
UNDERLYING OPTIONS TO EMPLOYEES IN EXERCISE PRICE EXPIRATION
NAME GRANTED (SHARES) FISCAL YEAR PER SHARE DATE
---- --------------- ----------- --------- ----

Carl M. Bosch 50,000(a) 6% $0.42(b) 1/7/12(c)

Rodger A. Brown 50,000(a) 6% $0.42(b) 1/7/12(c)

David C. Bupp 180,000(a) 20% $0.42(b) 1/7/12(c)

Brent L. Larson 50,000(a) 6% $0.42(b) 1/7/12(c)

Dan Manor 50,000(a) 6% $0.42(b) 1/7/12(c)

(a) Vests as to one-third of these shares on each of the first three
anniversaries of the date of grant.

(b) The per share weighted average fair value of these stock options during
2002 was $0.36 on the date of grant using the Black-Scholes option pricing
model with the following assumptions: an expected life of 4 years, an
average risk-free interest rate of 4.00%, volatility of 145% and no
expected dividend rate.

(c) The options terminate on the earlier of the expiration date, nine months
after death or disability, 90 days after termination of employment without
cause or by resignation or immediately upon termination of employment for
cause.

FISCAL YEAR-END OPTION NUMBERS AND VALUES

The following table sets forth certain information concerning the number and
value of unexercised options held by the Named Executives at the end of the last
fiscal year (December 31, 2001). There were no stock options exercised by the
Named Executives during the fiscal year ended December 31, 2002.

NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FISCAL YEAR-END: AT FISCAL YEAR-END:
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- ------------------------- -------------------------

Carl M. Bosch 75,000 / 95,000 0 / 0
Rodger A. Brown 72,834 / 91,666 0 / 0
David C. Bupp 230,000 / 460,000 0 / 0
Brent L. Larson 117,200 / 110,000 0 / 0
Dan Manor 0 / 50,000 0 / 0

COMPENSATION OF NON-EMPLOYEE DIRECTORS

Through September 2002, the Chairman of the Board of Directors of our company
received $2,000 per board meeting attended in person and other non-employee
directors received $1,000 each per meeting attended in person. We also paid
directors $500 each per committee meeting attended in person through September
2002. After September 2002, non-employee directors waived fees for attendance at
board or committee meetings until further notice. We did not pay directors for
telephonic participation in board or committee meetings in 2002. We also
reimbursed non-employee directors for travel expenses for meetings attended
during 2002. In addition, the Chairman and each non-employee director received
35,000 and 25,000 options, respectively, to purchase common stock as a part of
our annual stock incentive grants. Options granted to purchase common stock vest
on an annual basis over a three-year period and have an exercise price equal to
no less than the market price of common stock at the date of grant.

Directors who are also officers or employees of our company do not receive any
compensation for their services as directors.

COMPENSATION OF MR. BUPP

Employment Agreement. David C. Bupp is employed under a thirty-six month
employment agreement effective July 1, 2001. The employment agreement originally
provided for an annual base salary of $310,000 with an increase to $325,000 on
July 1, 2003. On August 1, 2002, Mr. Bupp agreed to amend the terms of his 2001
employment agreement to defer 10% of his then annual base salary until the
satisfaction of certain milestones relating to our financial condition.
Effective February 1, 2003, Mr. Bupp agreed to a new amendment his employment
agreement to reduce his annual base salary to $217,000 for the remainder of the
term of his employment agreement. In exchange for his agreement to waive the
salary deferred under the previous amendment to his employment agreement, the
Compensation Committee agreed to vest Mr. Bupp's interest in 210,000 shares of
previously restricted stock and to authorize the removal of the restrictive
legend on such shares of our common stock. In exchange for agreeing to the
amendment lowering his annual base salary, Mr. Bupp received 70,000 options to
purchase our common stock with an exercise price of $0.13 per share that vest
one third annually on the anniversary of the date of grant.

The Compensation Committee of the Board of Directors will, on an annual basis,
review the performance of our company and of Mr. Bupp and will pay a bonus to
Mr. Bupp as it deems appropriate, in its discretion. Such review and bonus will
be consistent with any bonus plan adopted by the Compensation Committee that
covers the executive officers of our company generally. No bonus was paid to Mr.
Bupp relating to fiscal year 2002.

If a change in control occurs with respect to our company and the employment of
Mr. Bupp is concurrently or subsequently terminated:

- by our company without cause (cause is defined as any willful breach
of a material duty by Mr. Bupp in the course of his employment or
willful and continued neglect of his duty as an employee);
- the term of Mr. Bupp's employment agreement expires; or
- Mr. Bupp resigns because his authority, responsibilities or
compensation have materially diminished, a material change occurs in
his working conditions or we breach the agreement;

then, Mr. Bupp will be paid a severance payment of $650,500 (less amounts paid
as Mr. Bupp's salary and benefits that continue for the remaining term of the
agreement if his employment is terminated without cause). If any such
termination occurs after the substantial completion of the liquidation of our
assets, the severance payment shall be increased by $81,250.

For purposes of Mr. Bupp's employment agreement, a change in control includes:

- the acquisition, directly or indirectly, by a person (other than our
company or an employee benefit plan established by the Board of
Directors) of beneficial ownership of 15 percent or more of our
securities with voting power in the next meeting of holders of voting
securities to elect the directors;
- a majority of the directors elected at any meeting of the holders of
our voting securities are persons who were not nominated by our then
current Board of Directors or an authorized committee thereof;
- our stockholders approve a merger or consolidation of our company with
another person, other than a merger or consolidation in which the
holders of our voting securities outstanding immediately before such
merger or consolidation continue to hold voting securities in the
surviving or resulting corporation (in the same relative proportions
to each other as existed before such event) comprising eighty percent
(80%) or more of the voting power for all purposes of the surviving or
resulting corporation; or
- our stockholders approve a transfer of substantially all of our assets
to another person other than a transfer to a transferee, eighty
percent (80%) or more of the voting power of which is owned or
controlled by us or by the holders of our voting securities
outstanding immediately before such transfer in the same relative
proportions to each other as existed before such event.

Mr. Bupp's compensation will continue for the longer of twenty-four months or
the full term of the agreement if his employment is terminated without cause.

Restricted Stock Agreements. Mr. Bupp holds 100,000, 35,000, 45,000 shares and
30,000 shares of our common stock that was originally granted as restricted
stock granted on March 22, 2000, April 30, 1999, May 20, 1998 and June 1, 1996,
respectively, pursuant to restricted stock purchase agreements of the same
dates. The original grants did not allow Mr. Bupp to transfer or sell any of the
restricted shares unless and until they vest and contained certain change of
control provisions. However, in connection with the February 1, 2003 amendment
to Mr. Bupp's employment agreement, we vested Mr. Bupp's interest in the shares
and authorized the removal of the restricted legend. We will recognize
compensation expense related to the vesting of the restricted stock in 2003
concurrent with the execution of the amendment.

COMPENSATION AGREEMENTS WITH OTHER NAMED EXECUTIVES

Carl M. Bosch

Employment Agreement. Carl Bosch is employed under an eleven-month employment
agreement effective February 1, 2003. The employment agreement provides for an
annual base salary of $135,000; however, receipt of 20% of the base amount has
been deferred until the satisfactory achievement of certain milestones relating
to our financial position or until or unless Mr. Bosch is terminated by us or we
become financially insolvent. In exchange for entering into a new agreement with
a portion of his annual base salary deferred, Mr. Bosch received 30,000 options
to purchase our common stock with an exercise price of $0.13 per share that vest
one third annually on the anniversary of the date of grant.

Mr. Bupp will, on an annual basis, review the performance of our company and of
Mr. Bosch and we will pay a bonus to Mr. Bosch as we deem appropriate, in our
discretion. Such review and bonus will be consistent with any bonus plan adopted
by the Compensation Committee that covers the executive officers of our company
generally. No bonus was paid to Mr. Bosch relating to fiscal year 2002.

If a change in control occurs with respect to our company and the employment of
Mr. Bosch is concurrently or subsequently terminated:

- without cause (cause is defined as any willful breach of a material
duty by Bosch in the course of his employment or willful and continued
neglect of his duty as an employee);
- the term of Mr. Bosch's employment agreement expires; or
- Mr. Bosch resigns because his authority, responsibilities or
compensation have materially diminished, a material change occurs in
his working conditions or we breach the agreement;

then, Mr. Bosch will be paid a severance payment of $202,500 and will continue
his benefits for the longer of six months or the remaining term of his
employment agreement.

For purposes of Mr. Bosch's employment agreement, a change in control includes:

- the acquisition, directly or indirectly, by a person (other than our
company or an employee benefit plan established by the Board of
Directors) of beneficial ownership of 30 percent or more of our
securities with voting power in the next meeting of holders of voting
securities to elect the directors;
- a majority of the directors elected at any meeting of the holders of
our voting securities are persons who were not nominated by our then
current Board of Directors or an authorized committee thereof;
- our stockholders approve a merger or consolidation of our company with
another person, other than a merger or consolidation in which the
holders of our voting securities outstanding immediately before such
merger or consolidation continue to hold voting securities in the
surviving or resulting corporation (in the same relative proportions
to each other as existed before such event) comprising eighty percent
(80%) or more of the voting power for all purposes of the surviving or
resulting corporation; or
- our stockholders approve a transfer of substantially all of the assets
of our company to another person other than a transfer to a
transferee, eighty percent (80%) or more of the voting power of which
is owned or controlled by us or by the holders of our voting
securities outstanding immediately before such transfer in the same
relative proportions to each other as existed before such event.

Mr. Bosch will be paid a severance amount of $135,000 if his employment is
terminated at the end of his employment agreement or without cause, and his
benefits will be continued for up to twelve months.

Restricted Stock Agreement. Mr. Bosch also holds 30,000 shares of our common
stock that were originally granted to him as restricted stock on March 22, 2000,
pursuant to a restricted stock purchase agreement with our company as of the
same date. Under the original terms of the underlying restricted stock purchase
agreement, Mr. Bosch could not transfer or sell any of the restricted shares
unless and until they vest. However, in connection with the execution of his new
employment agreement effective February 1, 2003 and Mr. Bosch's agreement to
waive receipt of amounts previously deferred under an August 1, 2002 amendment
to his previous employment agreement, we vested Mr. Bosch's interest in the
shares and authorized the removal of the restricted legend. We will recognize
compensation expense related to the vesting of the restricted stock in 2003
concurrent with the execution of the new employment agreement.

Rodger A. Brown

Employment Agreement. Rodger Brown is employed under an eleven-month employment
agreement effective February 1, 2003. The employment agreement provides for an
annual base salary of $115,000; however, receipt of 20% of the base amount has
been deferred until the satisfactory achievement of certain milestones relating
to our financial position or until or unless Mr. Brown is terminated by us or we
become financially insolvent. In exchange for entering into a new agreement with
a portion of his salary deferred, Mr. Brown received 30,000 options to purchase
our common stock with an exercise price of $0.13 per share that vest one third
annually on the anniversary of the date of grant. The terms of Mr. Brown's
employment agreement are substantially identical to Mr. Bosch's employment
agreement except that Mr. Brown would be paid $172,500 if terminated due to a
change of control and $115,000 if terminated at the end of his employment or
without cause.

Mr. Bupp will, on an annual basis, review the performance of our company and of
Mr. Brown and we will pay a bonus to Mr. Brown as we deem appropriate, in our
discretion. Such review and bonus will be consistent with any bonus plan adopted
by the Compensation Committee that covers the executive officers of our company
generally. No bonus was paid to Mr. Brown relating to fiscal year 2002.

Brent L. Larson

Employment Agreement. Brent Larson is employed under an eleven-month employment
agreement effective February 1, 2003. The employment agreement provides for an
annual base salary of $135,000; however, receipt of 20% of the base amount has
been deferred until the satisfactory achievement of certain milestones relating
to our financial position or until or unless Mr. Larson is terminated by us or
we become financially insolvent. In exchange for entering into a new agreement
with a portion of his annual base salary deferred, Mr. Larson received 30,000
options to purchase our common stock with an exercise price of $0.13 per share
that vest one third annually on the anniversary of the date of grant. The terms
of Mr. Larson's employment agreement are substantially identical to Mr. Bosch's
employment agreement.

Mr. Bupp will, on an annual basis, review the performance of our company and of
Mr. Larson and we will pay a bonus to Mr. Larson as we deem appropriate, in our
discretion. Such review and bonus will be consistent with any bonus plan adopted
by the Compensation Committee that covers the executive officers of our company
generally. No bonus was paid to Mr. Larson relating to fiscal year 2002.

Restricted Stock Agreement(s). Mr. Larson also holds 40,000 shares, 20,000
shares and 10,000 shares of our common stock that were originally granted to him
as restricted stock granted to him at a price of $0.001 per share on March 22,
2000, April 30, 1999 and October 23, 1998, respectively, pursuant to restricted
stock purchase agreements of the same dates. The terms of Mr. Larson's
restricted stock purchase agreement are identical to those contained in Mr.
Bosch's restricted stock purchase agreement discussed above regarding vesting,
forfeiture and rights of ownership. However, in connection with the execution of
his new employment agreement effective February 1, 2003 and Mr. Larson's
agreement to waive receipt of amounts previously deferred under an August 1,
2002 amendment to his previous employment agreement, we vested Mr. Larson's
interest in the shares and authorized the removal of the restricted legend. We
will recognize compensation expense related to the vesting of the restricted
stock in 2003 concurrent with the execution of the new employment agreement.

Dan Manor

Dan Manor is employed by our subsidiary, Cardiosonix Ltd., as its President
under a two-year employment agreement effective January 1, 2002. The employment
agreement provides for a monthly basic salary of $12,083 and automatically
renews for one-year increments unless written notice is given ninety days prior
to the end of the then term of the agreement. Dr. Manor will also receive one
third of 1% of the Net Revenues (as defined in Dr. Manor's employment agreement)
from Cardiosonix products for up to five years from the effective date of the
agreement. Cardiosonix also provides Dr. Manor with an automobile allowance not
to exceed $450 per month, and provides certain statutory benefits under the laws
of the State of Israel. Neoprobe and Dr. Manor agreed in September 2003 not to
renew his employment agreement following the expiration of its initial term.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS,
DIRECTORS, NOMINEES AND EXECUTIVE OFFICERS

The following table sets forth, as of November 15, 2003, certain information
with respect to the beneficial ownership of shares of common stock by (i) each
person known to us to be the beneficial owner of more than 5 percent of our
outstanding shares of common stock, (ii) each director or nominee for director
of our company, (iii) each of the Named Executives (see Item 10, Executive
Compensation--Summary Compensation Table), and (iv) our directors and executive
officers as a group.

NUMBER OF
SHARES
BENEFICIALLY PERCENT OF
BENEFICIAL OWNER OWNED(*) CLASS
---------------- -------- -----

Reuven Avital 2,793,457(a) 5.4%
Carl M. Bosch 184,218(b) (q)
Rodger A. Brown 116,167(c) (q)
David C. Bupp 1,132,237(d) 2.2%
Nancy E. Katz 28,334(e) (q)
Julius R. Krevans 158,667(f) (q)
Brent L. Larson 272,256(g) (q)
Richard N. Linder 21,000 (q)
Dan Manor 1,261,410 (h) 2.5%
Fred B. Miller 9,334(i) (q)
J. Frank Whitley, Jr. 89,334(j) (q)
All directors and officers as a group 6,070,745(k) 11.8%
(9 persons)

First Isratech Funds 2,568,133(l) 5.0%
Semper Fidelis Trust Company 2,567,952(m) 5.0%
Dan Purjes, et al. 3,913,044(n) 7.4%
Sands Brothers Venture Funds 3,260,870 (o) 6.2%
Alpha/Gamma Funds 3,260,870 (p) 6.2%

(*) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission which generally attribute beneficial
ownership of securities to persons who possess sole or shared voting power
and/or investment power with respect to those securities. Unless otherwise
indicated, voting and investment power are exercised solely by the person
named above or shared with members of such person's household.

(**) Percent of class is calculated on the basis of the number of shares
outstanding on November 15, 2003, plus the number of shares the person has
the right to acquire within 60 days of November 15, 2003.

(a) This amount consists of 2,785,123 shares of our common stock owned by N.
Assia Trusteeship Ltd, Trustee for Ma'Aragim Enterprises Ltd., an
investment fund under the management and control of Mr. Avital, and 8,334
shares issuable upon exercise of options which are exercisable within 60
days but does not include 36,666 shares issuable upon exercise of options
which are not exercisable within 60 days. Of the shares held by N. Assia
Trusteeship Ltd., 2,286,712 were acquired by Ma'Aragim in exchange for
surrendering its shares in Cardiosonix Ltd. on December 31, 2001 in
connection with our acquisition of Cardiosonix and 498,411 were acquired by
Ma'Aragim based on the satisfaction of certain developmental milestones on
December 30, 2002 associated with our acquisition of Cardiosonix.

(b) This amount includes 121,667 shares issuable upon exercise of options which
are exercisable within 60 days and 22,551 shares in Mr. Bosch's account in
the 401(k) Plan, but does not include 118,333 shares issuable upon exercise
of options which are not exercisable within 60 days. Mr. Bosch is one of
three trustees of the 401(k) Plan and may, as such, share investment power
over common stock held in such plan. The 401(k) Plan holds an aggregate
total of 205,858 shares of common stock. Mr. Bosch disclaims any beneficial
ownership of shares held by the 401(k) Plan that are not allocated to his
personal account.

(c) This amount includes 116,167 shares issuable upon exercise of options which
are exercisable within 60 days, but does not include 118,333 shares
issuable upon exercise of options which are not exercisable within 60 days

(d) This amount includes 410,000 shares issuable upon exercise of options which
are exercisable within 60 days and 30,737 shares in Mr. Bupp's account in
the 401(k) Plan, but it does not include 450,000 shares issuable upon
exercise of options which are not exercisable within 60 days. Mr. Bupp is
one of three trustees of the 401(k) Plan and may, as such, share investment
power over common stock held in such plan. The 401(k) Plan holds an
aggregate total of 205,858 shares of common stock. Mr. Bupp disclaims any
beneficial ownership of shares held by the 401(k) Plan that are not
allocated to his personal account.

(e) This amount includes 28,334 shares issuable upon exercise of options which
are exercisable within 60 days, but does not include 46,666 shares issuable
upon the exercise of options which are not exercisable within 60 days.

(f) This amount includes 156,667 shares issuable upon exercise of options which
are exercisable within 60 days, but does not include 63,333 shares issuable
upon exercise of options which are not exercisable within 60 days.

(g) This amount includes 173,867 shares issuable upon exercise of options which
are exercisable within 60 days and 22,889 shares in Mr. Larson's account in
the 401(k) Plan, but it does not include 123,333 shares issuable upon
exercise of options which are not exercisable within 60 days. Mr. Larson is
one of three trustees of the 401(k) Plan and may, as such, share investment
power over common stock held in such plan. The 401(k) Plan holds an
aggregate total of 205,858 shares of common stock. Mr. Larson disclaims any
beneficial ownership of shares held by the 401(k) Plan that are not
allocated to his personal account.

(h) This amount includes 16,667 shares issuable upon exercise of options which
are exercisable within 60 days, but does not include 73,333 shares issuable
upon exercise of options which are not exercisable within 60 days. Mr.
Manor acquired 1,021,990 of his shares in exchange for surrendering his
shares in Cardiosonix Ltd. on December 31, 2001, in connection with our
acquisition of Cardiosonix. An additional 222,753 shares were acquired by
Mr. Manor based on the satisfaction of certain developmental milestones on
December 30, 2002, associated with our acquisition of Cardiosonix.

(i) This amount includes 8,334 shares issuable upon exercise of options which
are exercisable within 60 days and 1,000 shares held by Mr. Miller's wife
for which he disclaims beneficial ownership, but does not include 36,666
shares issuable upon the exercise of options which are not exercisable
within 60 days.

(j) This amount includes 88,334 shares issuable upon exercise of options which
are exercisable within 60 days, but does not include 46,666 shares issuable
upon exercise of options which are not exercisable within 60 days.

(k) This amount includes 1,128,371 shares issuable upon exercise of options
which are exercisable within 60 days and 76,117 shares held in the 401(k)
Plan, but it does not include 1,113,329 shares issuable upon the exercise
of options which are not exercisable within 60 days. Certain executive
officers of our company are the trustees of the 401(k) Plan and may, as
such, share investment power over common stock held in such plan. Each
trustee disclaims any beneficial ownership of shares held by the 401(k)
Plan that are not allocated to his personal account. The 401(k) Plan holds
an aggregate total of 205,858 shares of common stock.

(l) This amount consists of 1,698,405 shares owned by First Isratech Fund LLC,
546,420 shares owned by First Isratech Fund LP and 323,308 shares owned by
First Isratech Fund Norway AS. First Isratech Fund LLC is the general or
managing partner of First Isratech Fund LP and First Isratech Fund Norway
AS (collectively, the First Isratech Funds). Although these shares have not
been so reported under SEC Regulation 13D, management believes they are
beneficially owned by First Isratech Fund LLC. The First Isratech Funds
acquired 2,108,555 of these shares in exchange for surrendering its shares
in Cardiosonix Ltd. on December 31, 2001 in connection with our acquisition
of Cardiosonix. The remaining 222,753 shares were acquired by the First
Isratech Funds based on the satisfaction of certain developmental
milestones on December 30, 2002 associated with our acquisition of
Cardiosonix.

(m) This amount consists of 197,549 shares owned by Greatway Commercial, Inc.,
398,097 shares owned by Uzi Zucker, 987,743 shares owned by Caremi Partners
and 987,743 shares owned by Emicar LLC (held collectively in trust by the
Semper Fidelis Trust Company). Although these shares have not been so
reported under SEC Regulation 13D, management believes they are under
common management and has therefore grouped them for purposes of reporting
our beneficial ownership. Semper Fidelis Trust Company acquired 2,108,554
of these shares in exchange for surrendering its shares in Cardiosonix Ltd.
on December 31, 2001 in connection with our acquisition of Cardiosonix. The
remaining 222,753 shares were acquired by Semper Fidelis Trust Company
based on the satisfaction of certain developmental milestones on December
30, 2002 associated with our acquisition of Cardiosonix.

(n) This amount includes 434,783 shares owned by MFW Associates (of which Mr.
Purjes is Managing Director) and 217,391 shares issuable to MFW Associates
on the exercise of warrants that are exercisable within 60 days, 869,565
shares owned by Dan and Edna Purjes and 434,783 shares issuable to Dan and
Edna Purjes on the exercise of warrants that are exercisable within 60
days, 217,391 shares owned by Y Securities Management Ltd. (of which Mr.
Purjes is Managing Director) and 108,696 shares issuable to Y Securities
Management Ltd. on the exercise of warrants that are exercisable within 60
days, 217,391 shares owned by The Purjes Foundation and 108,696 shares
issuable to The Purjes Foundation on the exercise of warrants that are
exercisable within 60 days, and 869,565 shares owned by Dan Purjes IRA and
434,783 shares issuable to Dan Purjes IRA on the exercise of warrants that
are exercisable within 60 days.

(o) This amount includes 217,391shares owned by Sands Brothers Venture Capital
I, LLC and 108,696 shares issuable to Sands Brothers Venture Capital I, LLC
on the exercise of warrants that are exercisable within 60 days,
217,391shares owned by Sands Brothers Venture Capital II, LLC and 108,696
shares issuable to Sands Brothers Venture Capital II, LLC on the exercise
of warrants that are exercisable within 60 days, 1,304,348 shares owned by
Sands Brothers Venture Capital III, LLC and 652,174 shares issuable to
Sands Brothers Venture Capital III, LLC on the exercise of warrants that
are exercisable within 60 days, and 434,783 shares owned by Sands Brothers
Venture Capital IV, LLC and 217,391 shares issuable to Sands Brothers
Venture Capital IV, LLC on the exercise of warrants that are exercisable
within 60 days.

(p) This amount includes 869,565 shares owned by Gamma Opportunity Capital
Partners, L.P. and 434,783 shares issuable to Gamma Opportunity Capital
Partners, L.P. on the exercise of warrants that are exercisable within 60
days, and 1,304,348 shares owned by Alpha Capital AG and 652,174 shares
issuable to Alpha Capital AG on the exercise of warrants that are
exercisable within 60 days.

(q) Less than one percent.

DESCRIPTION OF CAPITAL STOCK

Authorized and Issued Stock
---------------------------

Number of Shares at November 15, 2003
--------------------------------------------------------------------
Title of Class Authorized Outstanding Reserved
-------------- ---------------------- -------------------- ------------------

Common Stock, $0.001 par value per share 75,000,000 51,342,581 23,657,419

Series A Junior Participating Preferred 500,000 0 500,000
Stock, $0.001 par value per share

Preferred Stock, $0.001 par value per share 4,500,000 0 4,500,000

COMMON STOCK

DIVIDENDS

Each share of common stock is entitled to receive an equal dividend, if one is
declared, which is unlikely. We have never paid dividends on our common stock
and do not intend to do so in the foreseeable future. We intend to retain any
future earnings to finance our growth. See Risk Factors.

LIQUIDATION

If our company is liquidated, any assets that remain after the creditors are
paid and the owners of preferred stock receive any liquidation preferences will
be distributed to the owners of our common stock pro-rata.

VOTING RIGHTS

Each share of our common stock entitles the owner to one vote. There is no
cumulative voting. A simple majority can elect all of the directors at a given
meeting and the minority would not be able to elect any directors at that
meeting.

PREEMPTIVE RIGHTS

Owners of our common stock have no preemptive rights. We may sell shares of our
common stock to third parties without first offering it to current stockholders.

REDEMPTION RIGHTS

We do not have the right to buy back shares of our common stock except in
extraordinary transactions such as mergers and court approved bankruptcy
reorganizations. Owners of our common stock do not ordinarily have the right to
require us to buy their common stock. We do not have a sinking fund to provide
assets for any buy back.

CONVERSION RIGHTS

Shares of our common stock can not be converted into any other kind of stock
except in extraordinary transactions, such as mergers and court approved
bankruptcy reorganizations.

PREFERRED STOCK

Our certificate of incorporation authorizes our board of directors to issue
"blank check" preferred stock.

The board of directors may divide this stock into series and set their rights.
To date, our board of directors has created one series of preferred stock.
500,000 shares of preferred stock have been designated as Series A Junior
Participating Preferred Stock and reserved for issuance under the stockholder
rights plan described below. The board of directors had previously designated
63,000 shares of preferred stock as 5% Series B Convertible Preferred Stock, but
these shares have been redeemed and returned to the status of unissued shares.
The board of directors may, without prior stockholder approval, issue any of the
remaining 4,500,000 shares preferred stock with dividend, liquidation,
conversion, voting or other rights which could adversely affect the relative
voting power or other rights of the common stock. Preferred stock could be used
as a method of discouraging, delaying, or preventing a take-over of our company.
Although we have no present intention of issuing any shares of preferred stock,
our board of directors may do so in the future. If we do issue preferred stock
in the future, it could have a dilutive effect upon the common stock. See Risk
Factors.

STOCKHOLDER RIGHTS PLAN

We have adopted a stockholder rights plan for the purpose of protecting the
interests of our stockholders if we are confronted with coercive or unfair
takeover tactics. The goal of our stockholder rights plan is to encourage third
parties interested in acquiring our company to negotiate with our board of
directors. Under the plan, we distributed rights to purchase one hundredth of a
share of Series A Preferred Stock at an exercise price of $35 per right to the
stockholders at the rate of one right per share of common stock. The rights are
attached to the common stock and are not exercisable until after 15 percent of
the common stock has been acquired or tendered for. At that point, the rights
would be separately traded and exercisable. If a third party crosses the 15
percent threshold, the rights would flip-in (but not the rights of the 15
percent stockholder) and become rights to acquire, upon payment of the exercise
price, common stock (or, in some circumstances, other securities) with a value
of twice the exercise price of the right. If a third party were to take actions
to acquire our company, such as a merger, the rights would flip-over and entitle
the owners of the rights to acquire stock of the acquiring person with a value
of twice the exercise price. We may redeem the rights at any time before they
become exercisable for $.01 per right. The plan expires on August 28, 2005. The
number of rights per share of common stock will be adjusted in the future to
reflect future splits and combinations of, and common stock dividends on, our
common stock. The exercise price of the rights will be adjusted to reflect
changes in the Series A Preferred Stock.

SERIES A PREFERRED STOCK

REDEMPTION

We may redeem Series A Preferred Stock at a price equal to 100 times the current
per share market price of the common stock, together with accrued but unpaid
dividends. We are not required to create a sinking fund to provide assets for a
redemption.

DIVIDEND

Each owner of Series A Preferred Stock is entitled to receive a minimum
quarterly dividend of $.05 per share plus an aggregate dividend of 100 times any
dividend declared on the common stock.

ELECTION OF DIRECTORS

If dividends on Series A Preferred Stock are in arrears in an amount equal to
six quarterly payments, all owners of Preferred Stock (including holders of
Series A Preferred Stock) with dividends in arrears equal to this amount, voting
as a class, could elect two directors.

LIQUIDATION

If our company is liquidated, the holders of the Series A Preferred Stock will
receive a preferred liquidation payment of $.10 per share and, after the common
stock has received a proportionate distribution, will share in the remaining
assets on a proportionate basis with the common stock.

PRIORITY

Series A Preferred Stock is senior to common stock, but junior to all other
classes of preferred stock as to the payment of dividends and the distribution
of assets.

VOTING

Each owner of Series A Preferred Stock is entitled to 100 votes per share of
Series A Preferred Stock.

EXCHANGES

In any merger or other transaction where common stock is exchanged, each share
of Series A Preferred Stock will be entitled to receive 100 times the amount
received by the common stock.

ANTI-DILUTION

We intend that each share of Series A Preferred Stock approximate 100 shares of
common stock as they existed on the date the rights were distributed (August 28,
1995); therefore, the redemption price, dividend, liquidation price and voting
rights will be adjusted to reflect splits and combinations of, and common stock
dividends on, the common stock after that date.

ANTI-TAKEOVER EFFECTS

Our stockholder rights plan is designed to deter coercive takeover tactics and
otherwise to encourage persons interested in acquiring Neoprobe to negotiate
with our board of directors. The stockholder rights plan will confront a
potential acquirer of our company with the possibility that our stockholders
will be able to substantially dilute the acquirer's equity interest by
exercising rights to buy additional stock in Neoprobe or, in some cases, stock
in the acquirer, at a substantial discount. The plan may have the effect of
deterring third parties from making takeover bids for control of our company or
may be used to hinder or delay a takeover bid. This would decrease the chance
that our stockholders would realize a premium over market price for their shares
of common stock as a result of a takeover bid. See Risk. Our board of directors
may redeem the rights for a nominal payment if it considers the proposed
acquisition of Neoprobe to be in the best interests of our company and our
stockholders. Accordingly, the stockholder rights plan would not interfere with
any merger or other business combination which has been approved by the board of
directors. Any plan which effectively requires an acquiring company to negotiate
with our management may be characterized as increasing management's ability to
maintain its position with Neoprobe, including the negotiation of a transaction
which provides less value to the stockholders while providing benefits to
management.

ANTI-TAKEOVER CHARTER PROVISIONS AND LAWS

In addition to the stockholder rights plan and the blank check preferred stock
described above, some features of our certificate of incorporation and by-laws
and the Delaware General Corporation Law (DGCL), which are further described
below, may have the effect of deterring third parties from making takeover bids
for control of our company or may be used to hinder or delay a takeover bid.
This would decrease the chance that our stockholders would realize a premium
over market price for their shares of common stock as a result of a takeover
bid. See Risk Factors.

LIMITATIONS ON STOCKHOLDER ACTIONS

Our certificate of incorporation provides that stockholder action may only be
taken at a meeting of the stockholders. Thus, an owner of a majority of the
voting power could not take action to replace the board of directors, or any
class of directors, without a meeting of the stockholders, nor could he amend
the by-laws without presenting the amendment to a meeting of the stockholders.
Furthermore, under the provisions of the certificate of incorporation and
by-laws, only the board of directors has the power to call

a special meeting of stockholders. Therefore, a stockholder, even one who owns a
majority of the voting power, may neither replace sitting board of directors
members nor amend the by-laws before the next annual meeting of stockholders.

ADVANCE NOTICE PROVISIONS

Our by-laws establish advance notice procedures for the nomination of candidates
for election as directors by stockholders, as well as for other stockholder
proposals to be considered at annual meetings. Generally, we must receive a
notice of intent to nominate a director or raise any other matter at a
stockholder meeting not less than 120 days before the first anniversary of the
mailing of our proxy statement for the previous year's annual meeting. The
notice must contain required information concerning the person to be nominated
or the matters to be brought before the meeting and concerning the stockholder
submitting the proposal.

DELAWARE LAW

We are incorporated in Delaware, and as such are subject to Section 203 of the
DGCL, which provides that a corporation may not engage in any business
combination with an interested stockholder during the three years after he
becomes an interested stockholder unless:

- the corporation's board of directors approved in advance either the
business combination or the transaction which resulted in the
stockholder becoming an interested stockholder;

- the interested stockholder owned at least 85 percent of the
corporation's voting stock at the time the transaction commenced; or

- the business combination is approved by the corporation's board of
directors and the affirmative vote of at least two-thirds of the
voting stock which is not owned by the interested stockholder.

An interested stockholder is anyone who owns 15 percent or more of a
corporation's voting stock, or who is an affiliate or associate of the
corporation and was the owner of 15 percent or more of the corporation's voting
stock at any time within the previous three years; and the affiliates and
associates of any those persons. Section 203 of the DGCL makes it more difficult
for an interested stockholder to implement various business combinations with
our company for a three-year period, although our stockholders may vote to
exclude it from the law's restrictions.

CLASSIFIED BOARD

Our certificate of incorporation and by-laws divide our board of directors into
three classes with staggered three year terms. There are currently nine
directors, three in each class. At each annual meeting of stockholders, the
terms of one class of directors will expire and the newly nominated directors of
that class will be elected for a term of three years. The board of directors
will be able to determine the total number of directors constituting the full
board of directors and the number of directors in each class, but the total
number of directors may not exceed 17 nor may the number of directors in any
class exceed six. Subject to these rules, the classes of directors need not have
equal numbers of members. No reduction in the total number of directors or in
the number of directors in a given class will have the effect of removing a
director from office or reducing the term of any then sitting director.
Stockholders may only remove directors for cause. If the board of directors
increases the number of directors in a class, it will be able to fill the
vacancies created for the full remaining term of a director in that class even
though the term may extend beyond the next annual meeting. The directors will
also be able to fill any other vacancies for the full remaining term of the
director whose death, resignation or removal caused the vacancy.

A person who has a majority of the voting power at a given meeting will not in
any one year be able to replace a majority of the directors since only one class
of the directors will stand for election in any one year. As a result, at least
two annual meeting elections will be required to change the majority of the
directors by the requisite vote of stockholders. The purpose of classifying the
board of directors is to

provide for a continuing body, even in the face of a person who accumulates a
sufficient amount of voting power, whether by ownership or proxy or a
combination, to have a majority of the voting power at a given meeting and who
may seek to take control of our company without paying a fair premium for
control to all of the owners of our common stock. This will allow the board of
directors time to negotiate with such a person and to protect the interests of
the other stockholders who may constitute a majority of the shares not actually
owned by that person. However, it may also have the effect of deterring third
parties from making takeover bids for control of our company or may be used to
hinder or delay a takeover bid.

ACQUISITION OF COMMON STOCK BY SELLING STOCKHOLDERS

GENERAL

During April 2003, we completed a bridge loan agreement with our President and
CEO, David Bupp. Under the terms of the agreement, Mr. Bupp advanced us
$250,000. Interest on the note accrues at the rate of 8.5% per annum, payable
monthly, and the note is due on June 30, 2004. In consideration for the loan, we
issued Mr. Bupp 375,000 warrants to purchase shares of our common stock at an
exercise price of $0.13 per share. This prospectus covers the resale of the
375,000 shares of common stock issuable upon the exercise of the warrants
granted to Mr. Bupp.

During April 2003, we also completed a convertible bridge loan agreement with
Donald E. Garlikov for an additional $250,000. Under the terms of the agreement,
the note bears interest at 9.5% per annum, payable monthly, and is due on June
30, 2004. In consideration for the loan, we issued Mr. Garlikov 500,000 warrants
to purchase shares of our common stock at an exercise price of $0.13 per share.
The note is also convertible, at the option of the holder, into shares of our
common stock beginning on July 1, 2003. Half of the principal is convertible
into common stock at a 15% discount to the 20-day average market price preceding
the conversion, but in no case greater than a $0.20 ceiling conversion price or
less than a $0.10 floor conversion price. The remaining half of the principal is
also convertible at a 15% discount to a 20-day average market price preceding
the conversion, subject only to the $0.10 floor conversion price. This
prospectus covers the resale of the shares of common stock issuable upon
conversion of the note and the 500,000 shares of common stock issuable upon
exercise of the warrants granted to Mr. Garlikov.

During the second and third quarters of 2003, we engaged the services of two
investment banking firms to assist us in raising capital, Alberdale and Trautman
Wasserman. In exchange for Alberdale's services, we agreed to pay the firm a
monthly retainer of $10,000, half payable in cash and half payable in common
stock, and we agreed to pay it additional compensation upon the successful
completion of a private placement of our securities. We terminated the agreement
with Alberdale effective September 23, 2003, but agreed to issue the firm a
total of 150,943 shares of common stock in payment for one half of its retainer,
plus warrants to purchase 78,261 shares in exchange for its assistance in
arranging an accounts receivable financing transaction. The warrants have an
exercise price of $0.28 per share. This prospectus covers the resale of these
shares and the shares of common stock issuable upon exercise of the warrants.

shares of common stock issuable pursuant to the warrants granted to the
purchasers and the placement agents and their assignees.

All shares registered in this offering will be freely tradable. We have no way
of knowing whether the selling stockholders will sell the shares offered by this
prospectus. Depending upon market liquidity at the time, a sale of shares under
this prospectus at any given time could cause the trading price of our common
stock to decline. Additionally, the sale of a substantial number of shares of
our common stock under this prospectus, or anticipation of such sales, could
make it more difficult for us to sell equity or equity-related securities in the
future at a time and at a price that we might otherwise wish to effect sales.

SELLING STOCKHOLDERS

The following table presents information regarding the selling stockholders and
the shares that may be sold by them pursuant to this prospectus. See also
Security Ownership of Certain Beneficial Owners and Management.

PERCENTAGE OF
SHARES OUTSTANDING PERCENTAGE OF
OWNED SHARES OWNED SHARES TO BE OUTSTANDING
SELLING BEFORE BEFORE SOLD IN THE SHARES OWNED
STOCKHOLDERS OFFERING OFFERING (1) OFFERING AFTER OFFERING
------------ -------- ------------ -------- --------------

David C. Bupp(2) 1,132,237 2.2% 375,000 1.4%

Donald E. Garlikov(3) 1,570,633 3.0% 1,570,633 *

Alberdale Capital, LLC (4) 229,204 * 229,204 *

Trautman Wasserman & Company, 154,626 * 154,626 *
Inc. (5)

Dan & Edna Purjes(6) 1,304,348 2.5% 1,304,348 *

MFW Associates LLC(7) 652,174 1.3% 652,174 *

Bridges and PIPES, LLC(8) 2,119,566 4.0% 2,119,566 *

Sands Brothers Venture Capital I 326,087 * 326,087 *
LLC(9)

Sands Brothers Venture Capital 326,087 * 326,087 *
II LLC(10)

Sands Brothers Venture Capital 1,956,522 3.7% 1,956,522 *
III LLC(11)

Sands Brothers Venture Capital 652,174 1.3% 652,174 *
IV LLC(12)

R&R Capital Partners I, Inc.(13) 1,630,435 3.1% 1,630,435 *

Y Securities Management, Ltd.(14) 326,087 * 326,087 *

ALKI Capital Management(15) 652,174 1.3% 652,174 *

West End Convertible Fund, 163,044 * 163,044 *
L.P.(16)

WEC Partners LLC(17) 489,130 * 489,130 *

Aspatuck Holdings, Ltd.(18) 163,044 * 163,044 *

Myles F. Wittenstein(19) 326,087 * 326,087 *

Bristol Investment Fund, 1,956,522 3.7% 1,956,522 *
L.td.(20)

Dan Purjes IRA(21) 1,304,348 2.5% 1,304,348 *

Gary Gelman(22) 326,087 * 326,087 *

Gamma Opportunity Capital 1,304,348 2.5% 1,304,348 *
Partners LP(23)

Alpha Capital AG(24) 1,956,522 3.7% 1,956,522 *

The Purjes Foundation(25) 326,087 * 326,087 *

Rockwood Group, LLC(26) 550,913 1.1% 550,913 *

Ronald S. Dagar(27) 9,530 * 9,530 *

Duncan Capital, LLC(28) 391,304 * 391,304 *

David Fuchs(29) 228,261 * 228,261 *

Matthew L. Norton(30) 25,000 * 25,000 *

Sol Lax(31) 21,913 * 21,913 *

----------------------
* Represents beneficial ownership of less than 1% of our outstanding common
stock.

(1) The number of shares listed in these columns include all shares
beneficially owned and all options or warrants to purchase shares held,
whether or not deemed to be beneficially owned, by each selling
stockholder. The ownership percentages listed in these columns include only
shares beneficially owned by the listed selling stockholder. Beneficial
ownership is determined in accordance with the rules of the Securities and
Exchange Commission. In computing the percentage of shares beneficially
owned by a selling stockholder, shares of common stock subject to options
or warrants held by that selling that are exercisable now or within 60 days
after November 15, 2003 are deemed outstanding for the purpose of computing
the percentage ownership of any other person. The ownership percentages are
calculated assuming that 51,342,581 shares of common stock were
outstanding.

(2) Prior to giving effect to the offering, Mr. Bupp holds 316,500 shares of
common stock, options exercisable within 60 days after November 15, 2003
for 410,000 shares of common stock, 30,737 shares of common stock in his
account in the 401(k) plan, unvested options to purchase 450,000 shares of
common stock and exercisable warrants to purchase 375,000 shares of our
commons stock. After giving effect to the offering Mr. Bupp will hold
316,500 shares of common stock, options exercisable within 60 days after
October 31, 2003 for 410,000 shares of common stock, 30,737 shares of
common stock in his account in the 401(k) plan, unvested options to
purchase 450,000 shares of common stock and no warrants to purchase shares
of common stock.

(3) Prior to giving effect to the offering, Mr. Garlikov holds exercisable
warrants to purchase 500,000 shares of our common stock and a promissory
note convertible into 1,070,633 shares of our common stock. Following the
offering Mr. Garlikov will not hold any warrants to purchase shares of
common stock or any convertible shares of common stock.

(4) Prior to giving effect to the offering, Alberdale Capital, LLC holds
150,943 shares of our common stock and exercisable Series S warrants to
purchase 78,261 shares of our commons stock. Following the offering
Alberdale Capital, LLC will not hold any shares of common stock or warrants
to purchase shares of common stock.

(5) Prior to giving effect to the offering, Trautman Wasserman & Company, Inc.
holds 17,669 shares of our common stock and warrants to purchase 136,957
shares of common stock. Following the offering Trautman Wasserman &
Company, Inc. will not hold any shares of common stock.

(6) Prior to giving effect to the offering, the Purjes hold 869,565 shares of
common stock and exercisable Series R warrants to purchase 434,783 shares
of our common stock. Following the offering the Purjes will not hold any
shares of common stock or warrants to purchase shares of common stock.

(7) Prior to giving effect to the offering, MFW Associates LLC holds 434,783
shares of common stock and exercisable Series R warrants to purchase
217,391 shares of our common stock. Following the offering MFW Associates
LLC will not hold any shares of common stock or warrants to purchase shares
of common stock.

(8) Prior to giving effect to the offering, Bridges and PIPES, LLC holds
1,413,045 shares of common stock and exercisable Series R warrants to
purchase 706,522 shares of our common stock. Following the offering Bridges
and PIPES, LLC will not hold any shares of common stock or warrants to
purchase shares of common stock.

(9) Prior to giving effect to the offering, Sands Brothers Venture Capital I,
LLC holds 217,391 shares of common stock and exercisable Series R warrants
to purchase 108,696 shares of our common stock. Following the offering
Sands Brothers Venture Capital I, LLC will not hold any shares of common
stock or warrants to purchase shares of common stock.

(10) Prior to giving effect to the offering, Sands Brothers Venture Capital II,
LLC holds 217,391 shares of common stock and exercisable Series R warrants
to purchase 108,696 shares of our common stock. Following the offering
Sands Brothers Venture Capital I, LLC will not hold any shares of common
stock or warrants to purchase shares of common stock.

(11) Prior to giving effect to the offering, Sands Brothers Venture Capital III,
LLC holds 1,304,348 shares of common stock and exercisable Series R
warrants to purchase 652,174 shares of our common stock. Following the
offering Sands Brothers Venture Capital III, LLC will not hold any shares
of common stock or warrants to purchase shares of common stock.

(12) Prior to giving effect to the offering, Sands Brothers Venture Capital IV,
LLC holds 434,783 shares of common stock and exercisable Series R warrants
to purchase 217,391 shares of our common stock. Following the offering
Sands Brothers Venture Capital IV, LLC will not hold any shares of common
stock or warrants to purchase shares of common stock.

(13) Prior to giving effect to the offering, R & R Capital Partners I, Inc.
holds 1,086,957 shares of common stock and exercisable Series R warrants to
purchase 543,478 shares of our common stock. Following the offering R & R
Capital Partners I, Inc. will not hold any shares of common stock or
warrants to purchase shares of common stock.

(14) Prior to giving effect to the offering, Y Securities Management, Ltd. holds
217,391 shares of common stock and exercisable Series R warrants to
purchase 108,696 shares of our common stock. Following the offering Y
Securities Management, Ltd. will not hold any shares of common stock or
warrants to purchase shares of common stock.

(15) Prior to giving effect to the offering, ALKI Capital Management holds
434,783 shares of common stock and exercisable Series R warrants to
purchase 217,391 shares of our common stock. Following the offering ALKI
Capital Management will not hold any shares of common stock or warrants to
purchase shares of common stock.

(16) Prior to giving effect to the offering, West End Convertible Fund L.P.
holds 108,696 shares of common stock and exercisable Series R warrants to
purchase 54,348 shares of our common stock. Following the offering West end
Convertible Fund L.P. will not hold any shares of common stock or warrants
to purchase shares of common stock.

(17) Prior to giving effect to the offering, WEC Partners LLC holds 326,087
shares of common stock and exercisable Series R warrants to purchase
163,043 shares of our common stock. Following the offering WEC Partners LLC
will not hold any shares of common stock or warrants to purchase shares of
common stock.

(18) Prior to giving effect to the offering, Aspatuck Holdings, Ltd. holds
108,696 shares of common stock and exercisable Series R warrants to
purchase 54,348 shares of our common stock. Following the offering Aspatuck
Holdings, Ltd. will not hold any shares of common stock or warrants to
purchase shares of common stock.

(19) Prior to giving effect to the offering, Mr. Wittenstein holds 217,391
shares of common stock and exercisable Series R warrants to purchase
108,696 shares of our common stock. Following the offering Mr. Wittenstein
will not hold any shares of common stock or warrants to purchase shares of
common stock.

(20) Prior to giving effect to the offering, Bristol Investment Fund, Ltd. holds
1,304,348 shares of common stock and exercisable Series R warrants to
purchase 652,174 shares of our common stock. Following the offering Bristol

Investment Fund, Ltd. will not hold any shares of common stock or warrants
to purchase shares of common stock.

(21) Prior to giving effect to the offering, Dan Purjes IRA holds 869,565 shares
of common stock and exercisable Series R warrants to purchase 434,783
shares of our common stock. Following the offering Dan Purjes IRA will not
hold any shares of common stock or warrants to purchase shares of common
stock.

(22) Prior to giving effect to the offering, Mr. Gelman holds 217,391 shares of
common stock and exercisable Series R warrants to purchase 108,696 shares
of our common stock. Following the offering Mr. Gelman will not hold any
shares of common stock or warrants to purchase shares of common stock.

(23) Prior to giving effect to the offering, Gamma Opportunity Capital Partners
LP holds 869,565 shares of common stock and exercisable Series R warrants
to purchase 434,783 shares of our common stock. Following the offering
Gamma Opportunity Capital Partners, L.P. will not hold any shares of common
stock or warrants to purchase shares of common stock.

(24) Prior to giving effect to the offering, Alpha Capital AG holds 1,304,348
shares of common stock and exercisable Series R warrants to purchase
652,174 shares of our common stock. Following the offering Alpha Capital AG
will not hold any shares of common stock or warrants to purchase shares of
common stock.

(25) Prior to giving effect to the offering, The Purjes Foundation holds 217,391
shares of common stock and exercisable Series R warrants to purchase
108,696 shares of our common stock. Following the offering The Purjes
Foundation will not hold any shares of common stock or warrants to purchase
shares of common stock.

(26) Prior to giving effect to the offering, Rockwood Group, LLC holds
exercisable Series S warrants to purchase 1,217,391 shares of our common
stock. Following the offering Rockwood, Inc. will not hold any warrants to
purchase shares of common stock.

(27) Prior to giving effect to the offering, Ronald S. Dagar holds 9,530 shares
of our common stock. Following the offering Mr. Dagar will not hold any
shares of common stock.

(28) Prior to giving effect to the offering, Duncan Capital, LLC holds
exercisable Series S warrants to purchase 391,304 shares of our common
stock. Following the offering Duncan Capital, LLC will not hold any
warrants to purchase shares of common stock.

(29) Prior to giving effect to the offering, David Fuchs holds exercisable
Series S warrants to purchase 228,261 shares of our common stock. Following
the offering Mr. Fuchs will not hold any warrants to purchase shares of
common stock.

(30) Prior to giving effect to the offering Matthew L. Norton holds exercisable
Series S warrants to purchase 25,000 shares of our common stock. Following
the offering Mr. Norton will not hold any warrants to purchase shares of
common stock.

(31) Prior to giving effect to the offering, Sol Lax holds exercisable Series S
warrants to purchase 21,913 shares of our common stock. Following the
offering Mr. Lax will not hold any warrants to purchase shares of common
stock.

PLAN OF DISTRIBUTION

The common stock offered by this prospectus is being offered by the selling
stockholders. The common stock may be sold or distributed from time to time by a
selling stockholder directly to one or more purchasers or through brokers,
dealers, or underwriters who may act solely as agents at market prices
prevailing at the time of sale, at prices related to the prevailing market
prices, at negotiated prices, or at fixed prices, which may be changed. The sale
of the common stock offered by this prospectus may be effected in one or more of
the following methods:

- ordinary brokers' transactions;
- transactions involving cross or block trades;
- through brokers, dealers, or underwriters who may act solely as
agents;

- "at the market" into an existing market for the common stock;
- in other ways not involving market makers or established trading
markets, including direct sales to purchasers or sales effected
through agents;
- in privately negotiated transactions; or
- any combination of the foregoing.

Sales undertaken by the selling stockholders in other than public sales require
compliance with applicable laws, including the Securities Act and regulations
promulgated thereunder, the delivery of an opinion of counsel reasonably
acceptable to the company to that effect, written notice of the selling
stockholder's intention to sell shares of our common stock in a non-public sale
at least ten (10) business days prior to such transfer, and the consent of the
transferee to be bound by the terms of the shareholder agreement.

In order to comply with the securities laws of certain states, if applicable,
the shares may be sold only through registered or licensed brokers or dealers.
In addition, in certain states, the shares may not be sold unless they have been
registered or qualified for sale in the state or an exemption from the
registration or qualification requirement is available and complied with.

Brokers, dealers, underwriters, or agents participating in the distribution of
the shares as agents may receive compensation in the form of commissions,
discounts, or concessions from the selling stockholder and/or purchasers of the
common stock for whom the broker-dealers may act as agent. The compensation paid
to a particular broker-dealer may be less than or in excess of customary
commissions.

The selling stockholders are "underwriters" within the meaning of the Securities
Act.

Neither we nor the selling stockholders can presently estimate the amount of
compensation that any agent will receive. We know of no existing arrangements
between the selling stockholders, any other stockholder, broker, dealer,
underwriter, or agent relating to the sale or distribution of the shares offered
by this prospectus. At the time a particular offer of shares is made, a
prospectus supplement, if required, will be distributed that will set forth the
names of any agents, underwriters, or dealers and any compensation from the
selling stockholder and any other required information.

We will pay all of the expenses incident to the registration, offering, and sale
of the shares to the public other than commissions or discounts of underwriters,
broker-dealers, or agents. We have also agreed to indemnify the selling
stockholders and related persons against specified liabilities, including
liabilities under the Securities Act.

Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to our directors, officers, and controlling persons, we have been
advised that in the opinion of the SEC this indemnification is against public
policy as expressed in the Securities Act and is therefore, unenforceable.

We have advised the selling stockholders that while they are engaged in a
distribution of the shares included in this prospectus they are required to
comply with Regulation M promulgated under the Securities Exchange Act of 1934,
as amended. With certain exceptions, Regulation M precludes the selling
stockholders, any affiliated purchasers, and any broker-dealer or other person
who participates in the distribution from bidding for or purchasing, or
attempting to induce any person to bid for or purchase any security which is the
subject of the distribution until the entire distribution is complete.
Regulation M also prohibits any bids or purchases made in order to stabilize the
price of a security in connection with the distribution of that security. All of
the foregoing may affect the marketability of the shares offered hereby this
prospectus.

This offering will terminate on the date that all shares offered by this
prospectus have been sold by the selling stockholders.

LEGAL OPINION

The validity of the shares offered hereby has been passed upon for us by Porter,
Wright, Morris & Arthur LLP, 41 South High Street, Columbus, Ohio 43215.

EXPERTS

The consolidated financial statements of Neoprobe Corporation as of December 31,
2002 and 2001, and for the years then ended, have been included herein and in
the registration statement in reliance upon the report of KPMG LLP, independent
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.

The audit report covering the December 31, 2002 consolidated financial
statements contains an explanatory paragraph that states that the Company has
suffered recurring losses from operations and needs to raise capital within the
next 12 months. These matters raise substantial doubt about the entity's
ability to continue as a going concern. The consolidated financial statements do
not include any adjustments that might result from the outcome of that
uncertainty.

ADDITIONAL INFORMATION

We are subject to the reporting requirements of the Securities Exchange Act of
1934, as amended, and file reports, proxy statements and other information with
the Securities and Exchange Commission. These reports, proxy statements and
other information may be inspected and copied at the public reference facilities
maintained by the Securities and Exchange Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the Securities and Exchange Commission's regional
offices located at the Northwestern Atrium Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661 and 233 Broadway, New York, New York 10279.
You can obtain copies of these materials from the Public Reference Section of
the Securities and Exchange Commission upon payment of fees prescribed by the
Securities and Exchange Commission. You may obtain information on the operation
of the Public Reference Room by calling the Securities and Exchange Commission
at 1-800-SEC-0330. The Securities and Exchange Commission's Web site contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Securities and Exchange
Commission. The address of that site is http://www.sec.gov.

We have filed a registration statement on Form SB-2 with the Securities and
Exchange Commission under the Securities Act with respect to the securities
offered in this prospectus. This prospectus, which is filed as part of a
registration statement, does not contain all of the information set forth in the
registration statement, some portions of which have been omitted in accordance
with the Securities and Exchange Commission's rules and regulations. Statements
made in this prospectus as to the contents of any contract, agreement or other
document referred to in this prospectus are not necessarily complete and are
qualified in their entirety by reference to each such contract, agreement or
other document which is filed as an exhibit to the registration statement. The
registration statement may be inspected without charge at the public reference
facilities maintained by the Securities and Exchange Commission, and copies of
such materials can be obtained from the Public Reference Section of the
Securities and Exchange Commission at prescribed rates.

NEOPROBE CORPORATION AND SUBSIDIARY

INDEX TO FINANCIAL STATEMENTS

Audited Consolidated Financial Statements of Neoprobe Corporation

Independent Auditors' Report F-2

Consolidated Balance Sheets as of
December 31, 2002 and December 31, 2001 F-3

Consolidated Statements of Operations for the years ended
December 31, 2002 and December 31, 2001 F-5

Consolidated Statements of Stockholders' Equity for the years ended
December 31, 2002 and December 31, 2001 F-6

Consolidated Statements of Cash Flows for the years ended
December 31, 2002 and December 31, 2001 F-7

Notes to the Consolidated Financial Statements F-8

Unaudited Consolidated Financial Statements of Neoprobe Corporation

Consolidated Balance Sheets as of
September 30, 2003 and December 31, 2002 F-24

Consolidated Statements of Operations for the quarters ended
September 30, 2003 and September 30, 2002 F-26

Consolidated Statements of Cash Flows for the quarters ended
September 30, 2003 and September 30, 2002 F-27

Notes to the Consolidated Financial Statements F-28

INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
Neoprobe Corporation

We have audited the accompanying consolidated balance sheets of Neoprobe
Corporation and subsidiary as of December 31, 2002 and 2001, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Neoprobe Corporation
and subsidiary as of December 31, 2002 and 2001, and the results of their
operations and their cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 16 to
the consolidated financial statements, the Company has suffered recurring losses
from operations and needs to raise additional capital within the next 12 months.
These matters raise substantial doubt about its ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 16. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.

/s/ KPMG LLP

Columbus, Ohio
February 7, 2003, except Notes 16 and 17 as to which
the date is March 26, 2003

F-2

NEOPROBE CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS

December 31, 2002 and 2001

ASSETS 2002 2001
----------------- ------------------

Current assets:
Cash and cash equivalents $ 700,525 $ 4,287,101
Accounts receivable, net 746,107 558,429
Inventory, net 1,191,918 1,430,908
Prepaid expenses and other 451,537 271,145
----------------- ------------------

Total current assets 3,090,087 6,547,583
----------------- ------------------

Property and equipment 2,346,445 2,171,788
Less accumulated depreciation and amortization 1,883,797 1,502,676
----------------- ------------------

462,648 669,112
----------------- ------------------

Patents and trademarks 3,129,031 3,183,639
Non-compete agreements 584,516 603,880
Acquired technology 237,271 245,131
----------------- ------------------
3,950,818 4,032,650
Less accumulated amortization 584,490 122,697
----------------- ------------------

3,366,328 3,909,953
----------------- ------------------

Other assets 160,778 202,258
----------------- ------------------

Total assets $ 7,079,841 $ 11,328,906
================= ==================

CONTINUED

F-3

NEOPROBE CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS, CONTINUED

LIABILITIES AND STOCKHOLDERS' EQUITY 2002 2001
------------------- -------------------

Current liabilities:
Notes payable to finance company $ 172,381 $ 161,865
Capital lease obligation, current 14,683 12,914
Accrued liabilities 397,161 901,654
Accounts payable 432,140 489,688
Deferred revenue, current 933,860 877,843
------------------- -------------------

Total current liabilities 1,950,225 2,443,964
------------------- -------------------

Capital lease obligation 5,328 20,011
Deferred revenue 703,625 1,431,998
Contingent consideration for acquisition 288,053 453,602
Other liabilities 172,474 75,493
------------------- -------------------

Total liabilities 3,119,705 4,425,068
------------------- -------------------

Commitments and contingencies

Stockholders' equity:
Preferred stock; $.001 par value; 5,000,000 shares authorized at
December 31, 2002 and 2001; none issued and outstanding (500,000
shares designated as Series A, $.001 par
value, at December 31, 2002 and 2001; none outstanding) - -
Common stock; $.001 par value; 50,000,000 shares
authorized; 36,502,183 shares issued and
outstanding at December 31, 2002; 36,449,067
shares issued and outstanding at December 31, 2001 36,502 36,449
Additional paid-in capital 124,601,770 124,581,800
Accumulated deficit (120,678,136) (117,714,411)
------------------- -------------------

Total stockholders' equity 3,960,136 6,903,838
------------------- -------------------

Total liabilities and stockholders' equity $ 7,079,841 $ 11,328,906
=================== ===================

See accompanying notes to consolidated financial statements.

F-4

NEOPROBE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS

YEARS ENDED DECEMBER 31,
-------------------------------------------
2002 2001
------------------- ------------------

Revenues:
Net sales $ 3,382,707 $ 6,764,320
License and other revenue 1,538,233 1,428,473
------------------- ------------------
Total revenues 4,920,940 8,192,793
------------------- ------------------

Cost of goods sold 2,351,169 4,390,722
------------------- ------------------

Gross profit 2,569,771 3,802,071
------------------- ------------------

Operating expenses:
Research and development 2,323,710 948,483
Selling, general and administrative 3,267,361 2,321,115
Acquired in-process research and development (28,368) 884,678
------------------- ------------------
Total operating expenses 5,562,703 4,154,276
------------------- ------------------

Loss from operations (2,992,932) (352,205)
------------------- ------------------

Other income (expense):
Interest income 74,257 127,657
Interest expense (31,946) (11,100)
Other (13,830) 253,217
------------------- ------------------
Total other income 28,481 369,774
------------------- ------------------

Net (loss) income before income taxes (2,964,451) 17,569

(Benefit from) provision for income taxes (726) 2,616
------------------- ------------------

Net (loss) income $ (2,963,725) $ 14,953
=================== ==================

(Loss) income per common share:
Basic $ (0.08) $ 0.00
Diluted $ (0.08) $ 0.00

Weighted average shares outstanding:
Basic 36,045,196 25,899,499
Diluted 36,045,196 26,047,485

See accompanying notes to consolidated financial statements.

F-5

NEOPROBE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

Common Stock Additional
------------------------------- Paid-in Accumulated
Shares Amount Capital Deficit Total
-------------- ------------- --------------- ---------------- -------------

Balance, December 31, 2000 26,264,103 $ 26,264 $ 120,668,639 $ (117,729,364) $ 2,965,539

Exercise of employee stock options
at $0.50 per share 1,667 2 832 - 834
Issued to 401(k) plan at $0.68 19,122 19 13,006 - 13,025
Issued warrants to investor relations
firm - - 1,311 - 1,311
Issued commitment fee in connection
with equity line of credit, net of
costs 449,438 449 (45,315) - (44,866)
Issued in connection with acquisition,
net of costs 9,714,737 9,715 3,943,327 - 3,953,042
Net income - - - 14,953 14,953
-------------- ------------- --------------- ---------------- -------------

Balance, December 31, 2001 36,449,067 36,449 124,581,800 (117,714,411) 6,903,838

Issued to 401(k) plan at $0.46 53,116 53 24,579 - 24,632
Issued warrants to investor relations
firm - - 14,018 - 14,018
Registration costs paid in connection
with equity line of credit - - (24,418) - (24,418)
Registration costs paid in connection
with acquisition of subsidiary - - 5,791 - 5,791
Net loss - - - (2,963,725) (2,963,725)
-------------- ------------- --------------- ---------------- -------------
Balance, December 31, 2002 36,502,183 $ 36,502 $ 124,601,770 $ (120,678,136) $ 3,960,136
============== ============= =============== ================ =============

See accompanying notes to consolidated financial statements.

F-6

NEOPROBE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31,
-------------------------------------
2002 2001
----------------- ----------------

Cash flows from operating activities:
Net (loss) income $ (2,963,725) $ 14,953
Adjustments to reconcile net (loss) income to net cash
used in operating activities:
Depreciation of property and equipment 402,878 399,241
Amortization of intangible assets 393,953 23,876
Provision for bad debts 28,751 13,313
Net loss on disposal and abandonment of assets 130,380 83,192
Acquired in-process research and development (28,368) 884,678
Other 64,123 (33,630)
Change in operating assets and liabilities:
Accounts receivable (216,429) (127,687)
Inventory 213,948 (570,558)
Prepaid expenses and other assets 65,628 9,550
Accrued liabilities and other liabilities (377,512) 121,905
Accounts payable (57,548) (295,834)
Deferred revenue (672,356) (800,000)
----------------- ----------------

Net cash used in operating activities (3,016,277) (277,001)
----------------- ----------------

Cash flows from investing activities:
Purchases of available-for-sale securities (2,491,361) -
Proceeds from sales of available-for-sale securities 1,687,305 -
Proceeds from maturities of available-for-sale securities 805,000 -
Purchases of property and equipment (263,012) (72,028)
Proceeds from sales of property and equipment 618 2,175
Patent and trademark costs (29,256) (16,985)
Subsidiary acquisition costs (24,028) -
Net cash acquired through acquisition of subsidiary - 195,426
----------------- ----------------

Net cash (used in) provided by investing activities (314,734) 108,588
----------------- ----------------

Cash flows from financing activities:
Proceeds from issuance of common stock - 834
Payment of offering costs (48,627) (44,866)
Proceeds from line of credit 2,000,000 -
Payments under line of credit (2,000,000) -
Payment of notes payable (194,024) (132,442)
Payments under capital leases (12,914) (11,359)
----------------- ----------------

Net cash used in financing activities (255,565) (187,833)
----------------- ----------------

Net decrease in cash and cash equivalents (3,586,576) (356,246)

Cash and cash equivalents, beginning of year 4,287,101 4,643,347
----------------- ----------------

Cash and cash equivalents, end of year $ 700,525 $4,287,101
================= ================

See accompanying notes to consolidated financial statements.

F-7

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

a. ORGANIZATION AND NATURE OF OPERATIONS: Neoprobe Corporation (Neoprobe
or we), a Delaware corporation, is engaged in the development and
commercialization of innovative surgical and diagnostic products that
enhance patient care by meeting the critical decision making needs of
healthcare professionals. We currently manufacture two lines of
medical devices: the first is a line of gamma radiation detection
equipment used in the application of intraoperative lymphatic mapping
(ILM), and the second is a line of blood flow monitoring devices for a
variety of diagnostic and surgical applications.

Our ILM products are marketed throughout most of the world through a
distribution arrangement with Ethicon Endo-Surgery, Inc. (EES), a
Johnson and Johnson company. For the years ended December 31, 2002 and
2001, 91% and 96% of net sales, respectively, were made to EES. The
loss of this customer would have a significant adverse effect on our
operating results.

Our second product line, blood flow measurement devices, is in the
early stages of commercialization. Our activity with this product line
was initiated with our acquisition of Cardiosonix Ltd. (Cardiosonix,
formerly Biosonix Ltd.), located in Ra'anana, Israel, on December 31,
2001.

b. PRINCIPLES OF CONSOLIDATION: Our consolidated financial statements
include the accounts of our company and our wholly owned subsidiary
beginning December 31, 2001 (See Note 10(b).). All significant
inter-company accounts were eliminated in consolidation for 2002 and
2001.

c. FAIR VALUE OF FINANCIAL INSTRUMENTS: The following methods and
assumptions were used to estimate the fair value of each class of
financial instruments:

(1) Cash and cash equivalents, accounts receivable, accounts payable,
and accrued liabilities: The carrying amounts approximate fair
value because of the short maturity of these instruments.

(2) Notes payable to finance company: The fair value of our debt is
estimated by discounting the future cash flows at rates currently
offered to us for similar debt instruments of comparable
maturities by banks or finance companies. At December 31, 2002
and 2001, the carrying values of these instruments approximate
fair value.

d. CASH AND CASH EQUIVALENTS: There were no cash equivalents at December
31, 2002 or 2001. None of the cash presented in the December 31, 2002
and 2001 balance sheets is pledged or restricted in any way.

e. INVENTORY: All components of inventory are valued at the lower of cost
(first-in, first-out) or market. We adjust inventory to market value
when the net realizable value is lower than the carrying cost of the
inventory. Market value is determined based on recent sales activity
and margins achieved.

The components of net inventory at December 31, 2002 and 2001, are as
follows:

2002 2001
---------------- ---------------

Materials and component parts $ 760,540 $ 807,393
Work in process 59,888 -
Finished goods 371,490 623,515
---------------- ---------------
$1,191,918 $1,430,908
================ ===============

During 2002, we wrote off $214,000 of BlueTip(R) probe-related
inventory that we did not believe had ongoing value to the business.

f. PROPERTY AND EQUIPMENT: Property and equipment are stated at cost.
Property and equipment under capital leases are stated at the present
value of minimum lease payments. Depreciation is computed using the
straight-line method over the estimated useful lives of the
depreciable assets

F-8

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

ranging from 2 to 7 years, and includes amortization related to
equipment under capital leases. Maintenance and repairs are charged to
expense as incurred, while renewals and improvements are capitalized.
Property and equipment includes $51,000 of equipment under capital
leases with accumulated amortization of $30,000 and $19,000 at
December 31, 2002 and 2001, respectively. During 2002 and 2001, we
recorded losses of $2,000 and $13,000, respectively, on the disposal
of property and equipment. During 2002, we recorded general and
administrative expenses of $71,000 related to the impairment of
BlueTip probe production equipment that we did not believe had ongoing
value to the business.

The major classes of property and equipment are as follows:

2002 2001
------------------ -----------------

Production machinery and equipment $ 981,355 $ 818,047
Other machinery and equipment, primarily
computers and research equipment 761,698 790,888
Furniture and fixtures 358,155 357,131
Leasehold improvements 121,808 105,166
Software 123,429 100,556
------------------ -----------------
$ 2,346,445 $ 2,171,788
================== =================

g. INTANGIBLE ASSETS: Intangible assets consist primarily of patents and
other acquired intangible assets. Intangible assets are stated at
cost, less accumulated amortization. Patent costs are amortized using
the straight-line method over the estimated useful lives of the
patents of 15 to 20 years. Patent application costs are deferred
pending the outcome of patent applications. Costs associated with
unsuccessful patent applications and abandoned intellectual property
are expensed when determined to have no recoverable value. Non-compete
agreements and acquired technology are amortized using the
straight-line method over their estimated useful lives of four years
and seven years, respectively. We evaluate the potential alternative
uses of all intangible assets, as well as the recoverability of the
carrying values of intangible assets on a recurring basis. (See also
Note 10(b) regarding purchase price adjustments made in 2002 affecting
intangible assets acquired as a part of our acquisition of
Cardiosonix.)

The major classes of intangible assets are as follows:

DECEMBER 31, 2002 DECEMBER 31, 2001
--------------------------------------- -------------------------------------
GROSS CARRYING ACCUMULATED GROSS CARRYING AMOUNT
AMOUNT AMORTIZATION ACCUMULATED AMORTIZATION
----------------- ----------------- ---------------- -----------------

Patents and trademarks $ 3,129,031 $ 398,501 $ 3,183,639 $ 122,697
Non-compete agreements 584,516 150,970 603,880 -
Acquired technology 237,271 35,019 245,131 -
----------------- ----------------- ---------------- -----------------

Total $ 3,950,818 $ 584,490 $ 4,032,650 $ 122,697
================= ================= ================ =================

During 2002 and 2001, we recorded general and administrative expenses
of $462,000 and $94,000, respectively, of intangible asset
amortization expense. Of those amounts, $68,000 and $70,000,
respectively, related to the abandonment of gamma detection patents
and patent applications that were deemed no longer recoverable or part
of our ongoing business.

F-9

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

The estimated future amortization expenses for the next five fiscal
years are as follows:

ESTIMATED
AMORTIZATION EXPENSE
---------------------

For the year ended 12/31/2003 454,180
For the year ended 12/31/2004 424,169
For the year ended 12/31/2005 420,144
For the year ended 12/31/2006 264,180
For the year ended 12/31/2007 232,852

h. REVENUE RECOGNITION

(1) PRODUCT SALES: We derive revenues primarily from sales of our medical
devices. We recognize sales revenue when the products are shipped and
the earnings process has been completed. Our customers have no right
to return products purchased in the ordinary course of business.

Sales prices on gamma detection products sold to EES are subject to
retroactive annual adjustment based on a fixed percentage of the
actual sales prices achieved by EES on sales to end customers made
during each fiscal year, subject to a minimum (i.e., floor) price. To
the extent that we can reasonably estimate the end customer prices
received by EES, we record sales to EES based upon these estimates. To
the extent that we are not able to reasonably estimate end customer
sales prices related to certain products sold to EES, we record
revenue related to these product sales at the floor price provided for
under our distribution agreement with EES.

We recognize revenue related to the sales of products to be used for
demonstration units when products are shipped and the earnings process
has been completed. Our distribution agreements do not permit return
of demonstration units in the ordinary course of business nor do we
have any performance obligations other than normal product warranty
obligations. To the extent that the earnings process has not been
completed, revenue is deferred.

(2) EXTENDED WARRANTY REVENUE: We derive revenues from the sale of
extended warranties covering our medical devices over periods of one
to four years. We recognize revenue from extended warranty sales on a
pro-rata basis over the period covered by the extended warranty.
Expenses related to the extended warranty are recorded when incurred.

(3) SERVICE REVENUE: We derive revenues from the repair and service of our
medical devices that are in use beyond the term of the original
twelve-month warranty and that are not covered by an extended
warranty. We recognize revenue from repair and service activities once
the activities are complete and the repaired or serviced device has
been returned to the customer.

(4) LICENSE REVENUE: We recognize license revenue in connection with our
distribution agreement with EES on a straight-line basis over the
five-year initial term of the agreement based on our obligations to
provide ongoing support for the intellectual property being licensed
such as patent maintenance and regulatory filings. As the license
relates to intellectual property held or in-licensed by us, we incur
no significant cost associated with the recognition of this revenue.

i. RESEARCH AND DEVELOPMENT COSTS: All costs related to research and
development are expensed as incurred.

j. INCOME TAXES: Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities, and their
respective tax bases and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred
tax assets and

F-10

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date.

k. STOCK OPTION PLANS: At December 31, 2002, we have three stock-based
employee compensation plans (See Note 8(a).). We apply the intrinsic
value-based method of accounting prescribed by Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related
Interpretations, in accounting for our stock options. As such, compensation
expense is recorded on the date of grant and amortized over the period of
service only if the current market price of the underlying stock exceeds
the exercise price. No stock-based employee compensation cost is reflected
in net income (loss), as all options granted under those plans had an
exercise price equal to the market value of the underlying common stock on
the date of grant.

The following table illustrates the effect on net income (loss) and
earnings (loss) per share if compensation cost for our stock-based
compensation plans had been determined based on the fair value at the grant
dates for awards under those plans consistent with Statement of Financial
Accounting Standards (SFAS) No. 123, Accounting for Stock-Based
Compensation:

YEARS ENDED DECEMBER 31,
-------------------------------------
2002 2001
---------------- ----------------

Net (loss) income, as reported $ (2,963,725) $ 14,953

Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards, net of
related tax effects (279,161) (299,820)
---------------- ----------------

Pro forma net loss $ (3,242,886) $ (284,867)
================ ================

(Loss) income per common share:
As reported (basic and diluted) $ (0.08) $ 0.00

Pro forma (basic and diluted) $ (0.09) $ (0.01)

l. EQUITY ISSUED TO NON-EMPLOYEES: We account for equity instruments granted
to non-employees in accordance with the provisions of SFAS No. 123 and
Emerging Issues Task Force Issue No. 96-18, Accounting for Equity
Instruments that are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services. All transactions in which
goods or services are the consideration received for the issuance of equity
instruments are accounted for based on the fair value of the consideration
received or the equity instrument issued, whichever is more reliably
measurable. The measurement date of the fair value of the equity instrument
issued is the earlier of the date on which the counterpart's performance is
complete or the date on which it is probable that performance will occur.

m. USE OF ESTIMATES: The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.

n. COMPREHENSIVE INCOME (LOSS): We had no accumulated other comprehensive
income (loss) activity during the years ended December 31, 2002 and 2001.

o. IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS: We account for long-lived
assets in accordance with the provisions of SFAS No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets. This Statement requires
that long-lived assets and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying
amount of an asset to future net undiscounted cash flows expected to be

F-11

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

generated by the asset. If such assets are considered to be impaired, the
impairment recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair value
less costs to sell.

p. RECLASSIFICATION: Certain prior years' amounts have been reclassified
to conform to the 2002 presentation.

2. EARNINGS PER SHARE:

Basic earnings (loss) per share is calculated using the weighted average
number of common shares outstanding during the periods. Diluted earnings
(loss) per share is calculated using the weighted average number of common
shares outstanding during the periods, adjusted for the effects of
convertible securities, options and warrants, if dilutive.

YEAR ENDED YEAR ENDED
DECEMBER 31, 2002 DECEMBER 31, 2001
----------------------------------- ------------------------------------
BASIC DILUTED BASIC DILUTED
EARNINGS EARNINGS EARNINGS EARNINGS
PER SHARE PER SHARE PER SHARE PER SHARE
--------------- --------------- ---------------- ----------------

Outstanding shares 36,502,183 36,502,183 36,449,067 36,449,067
Effect of weighting changes
in outstanding shares (16,987) (16,987) (10,109,568) (10,109,568)
Contingently issuable shares (440,000) (440,000) (440,000) (440,000)
Stock options - - - 147,986
--------------- --------------- ---------------- ----------------

Adjusted shares 36,045,196 36,045,196 25,899,499 26,047,485
=============== =============== ================ ================

There is no difference in basic and diluted loss per share related to 2002.
Basic and diluted loss per share for this period include 2,085,826 common
shares that became issuable to Cardiosonix upon satisfaction of a certain
developmental milestone event on December 30, 2002 (See Note 10(b).). The
net loss per common share for 2002 excludes the number of common shares
issuable upon exercise of outstanding stock options and warrants into our
common stock since such inclusion would be anti-dilutive.

The following table summarizes options to purchase our common stock which
were outstanding during the year ended December 31, 2001, but which were
not included in the computation of diluted income per share because their
effect was anti-dilutive.

YEAR ENDED
DECEMBER 31, 2001
-----------------------------------------------
EXERCISE OPTIONS
PRICE OUTSTANDING
------------------------ ------------------
$ 0.60 - $ 1.25 393,169
$ 1.50 - $ 2.50 227,443
$ 3.25 - $ 6.00 145,871
$13.38 - $15.75 47,137
------------------

813,620
==================

F-12

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

3. ACCOUNTS RECEIVABLE AND CONCENTRATIONS OF CREDIT RISK:

Accounts receivable at December 31, 2002 and 2001, net of allowance for
doubtful accounts of $29,095 and $39,670, respectively, consist of the
following:

2002 2001
---------------- ---------------

Trade $ 623,213 $ 226,925
Other 122,894 334,204
---------------- ---------------
$ 746,107 $ 561,129
================ ===============

At December 31, 2002 and 2001, approximately 86% and 57%, respectively, of
net accounts receivable are due from EES. We do not believe we are exposed
to significant credit risk related to EES based on the overall financial
strength and credit worthiness of the customer and its parent company. We
believe that we have adequately addressed other credit risks in estimating
the allowance for doubtful accounts.

We estimate an allowance for doubtful accounts based on a review and
assessment of specific accounts receivable and write off accounts when
deemed uncollectible. The activity in the allowance for doubtful accounts
for the years ended December 31, 2002 and 2001 is as follows:

2002 2001
--------------- ---------------

Allowance for doubtful accounts at beginning of year $ 39,670 $ 26,357
Provision for bad debts 28,751 13,313
Write-offs charged against the allowance (39,326) -
--------------- ---------------
Allowance for doubtful accounts at end of year $ 29,095 $ 39,670
=============== ===============

4. ACCRUED LIABILITIES AND ACCOUNTS PAYABLE:

Accrued liabilities at December 31, 2002 and 2001 consist of the following:

2002 2001
----------------- -----------------

Contracted services and other $ 164,634 $ 494,416
Compensation 177,991 306,216
Warranty reserve 35,000 90,000
Inventory purchases 19,536 11,022
----------------- -----------------
$ 397,161 $ 901,654
================= =================

Accounts payable at December 31, 2002 and 2001 consist of the following:

2002 2001
------------------ ----------------

Trade $ 391,858 $ 359,608
Other 40,282 130,080
------------------ ----------------
$ 432,140 $ 489,688
================== ================

5. PRODUCT WARRANTY:

We warrant our products against defects in design, materials, and
workmanship generally for a period of one year from the date of sale to the
end customer. Our accrual for warranty expenses is adjusted periodically to
reflect actual experience. EES also reimburses us for a portion of warranty
expense incurred based on end customer sales they make during a given
fiscal year.

F-13

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

The activity in the warranty reserve account for the year ended December
31, 2002 is as follows:

2002
---------------

Warranty reserve at beginning of year $ 90,000
Provision for warranty claims and
changes in reserve for warranties 31,043
Payments charged against the reserve (86,043)
---------------
Warranty reserve at end of year $ 35,000
===============

6. LINE OF CREDIT:

During February 2002, we entered into a line of credit facility with an
investment management company. The facility provided for a maximum line of
credit of $2.0 million and was fully collateralized by pledged cash and
investments on deposit with the investment management company. Availability
under the facility was based on advance rates varying from 80% to 92% of
the underlying available collateral. Outstanding amounts under the facility
bore interest at LIBOR plus 175 basis points. The line of credit was fully
paid off and the agreement was terminated in October 2002.

7. INCOME TAXES:

As of December 31, 2002, our net deferred tax assets in the U.S. were
approximately $36.6 million. Approximately $31.4 million of the deferred
tax assets relate principally to net operating loss carryforwards of
approximately $92.4 million available to offset future taxable income, if
any, through 2022. An additional $4.3 million relates to tax credit
carryforwards (principally research and development) available to reduce
future income tax liability after utilization of tax loss carryforwards, if
any, through 2022. The remaining $860,000 relates to temporary differences
between the carrying amount of assets and liabilities and their tax bases.
Due to the uncertainty surrounding the realization of these favorable tax
attributes in future tax returns, all of the net deferred tax assets have
been fully offset by a valuation allowance at December 31, 2002.

As of December 31, 2002, Cardiosonix had net deferred tax assets in Israel
of approximately $1.3 million, primarily related to net operating loss
carryforwards of approximately $3.6 million available to offset future
taxable income, if any. Under current Israeli tax law, net operating loss
carryforwards do not expire. Due to the uncertainty surrounding the
realization of these favorable tax attributes in future tax returns, all of
the net deferred tax assets have been fully offset by a valuation allowance
at December 31, 2002. Since a valuation allowance was recognized for the
deferred tax asset for Cardiosonix' deductible temporary differences and
operating loss carryforwards at the acquisition date, the tax benefits for
those items that are first recognized (that is, by elimination of the
valuation allowance) in financial statements after the acquisition date
shall be applied (a) first to reduce to zero other noncurrent intangible
assets related to the acquisition and (b) second to reduce income tax
expense.

Under Sections 382 and 383 of the Internal Revenue Code (IRC) of 1986, as
amended, the utilization of U.S. net operating loss and tax credit
carryforwards may be limited under the change in stock ownership rules of
the IRC. As a result of ownership changes as defined by Sections 382 and
383, which have occurred at various points in our history, we believe
utilization of our net operating loss carryfowards and tax credit
carryforwards may be limited under certain circumstances.

8. EQUITY:

a. STOCK OPTIONS: At December 31, 2002, we have three stock-based
compensation plans. Under the Amended and Restated Stock Option and
Restricted Stock Purchase Plan (the Amended Plan), the 1996 Stock
Incentive Plan (the 1996 Plan), and the 2002 Stock Incentive Plan (the
2002 Plan), we may grant incentive stock options, nonqualified stock
options, and restricted stock awards to full-time employees, and
nonqualified stock options and restricted awards may be granted to our
consultants and agents. Total shares authorized under each plan are 2
million shares, 1.5 million shares and 3

F-14

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

million shares, respectively. Under all three plans, the exercise price
of each option is greater than or equal to the closing market price of
our common stock on the day prior to the date of the grant.

Options granted under the Amended Plan, the 1996 Plan and the 2002 Plan
generally vest on an annual basis over three years. Outstanding options
under the plans, if not exercised, generally expire ten years from
their date of grant or 90 days from the date of an optionee's
separation from employment with us.

The fair value of each option grant was estimated on the date of the
grant using the Black-Scholes option-pricing model with the following
assumptions for 2002 and 2001, respectively: average risk-free interest
rates of 4.0% and 4.9%; expected average lives of three to four years
for each of the years presented; no dividend rate for any year; and
volatility of 145% for 2002 and 148% for 2001. The weighted average
fair value of options granted in 2002 and 2001 was $0.36.

A summary of the status of stock options under our stock option plans
as of December 31, 2002 and 2001, and changes during the years ended on
those dates is presented below:

2002 2001
---------------------------------- ----------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE
--------------- --------------- -------------- ----------------

Outstanding at
beginning of year 1,862,123 $ 0.81 1,635,273 $ 2.54
Granted 905,000 $ 0.42 715,000 $ 0.42
Forfeited (449,398) $ 0.57 (486,483) $ 6.06
Exercised - - (1,667) $ 0.50
--------------- --------------
Outstanding at
end of year 2,317,725 $ 0.70 1,862,123 $ 0.81
=============== ==============

On July 5, 2001, the directors voluntarily forfeited 337,500 options,
all of which were priced above $3.00 per share. Included in
outstanding options as of December 31, 2002, are 100,000 options
exercisable at an exercise price of $2.50 per share that vest on the
meeting of certain company achievements.

The following table summarizes information about our stock options
outstanding at December 31, 2002:

OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------- ---------------------------------

NUMBER WEIGHTED NUMBER
OUTSTANDING AS AVERAGE WEIGHTED EXERCISABLE AS WEIGHTED
RANGE OF EXERCISE OF REMAINING AVERAGE OF AVERAGE
PRICES DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
2002 LIFE PRICE 2002 PRICE
------------------- ----------------- -------------- ------------ ----------------- ------------

$ 0.25 - $ 0.41 553,334 8 years $ 0.41 178,335 $ 0.41
$ 0.42 720,000 9 years $ 0.42 - -
$ 0.50 501,668 7 years $ 0.50 340,004 $ 0.50
$ 0.60 - $ 1.50 370,523 7 years $ 1.04 330,524 $ 1.09
$ 2.50 - $ 5.63 172,200 2 years $ 2.67 72,200 $ 2.92
----------------- -----------------
2,317,725 7 years $ 0.70 921,063 $ 0.88
================= =================

b. RESTRICTED STOCK: At December 31, 2002, we have 440,000 restricted
shares issued and outstanding. All of the restricted shares granted
vest on a change of control of our company as defined in the specific
grant agreements. As a result, we have not recorded any deferred
compensation due to the inability to assess the probability of the
vesting event. Of the shares issued and outstanding, 75,000 also vest
under certain conditions of termination separate from a change of
control as defined in an officer's employment agreement (See Note
11(d) and Note 16.).

F-15

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

c. STOCK WARRANTS: At December 31, 2002, there are 3.2 million warrants
outstanding to purchase our common stock. The warrants are exercisable
at prices ranging from $0.30 to $5.00 per share with a weighted
average exercise price per share of $0.80. Three million of the
warrants expire in January 2003, 50,000 expire in February 2004,
50,000 expire in June 2005, 25,000 expire in November 2005, and 25,000
expire in November 2006.

d. COMMON STOCK RESERVED: Shares of authorized common stock have been
reserved for the exercise of all options and warrants outstanding.

e. COMMON STOCK PURCHASE AGREEMENT: On November 19, 2001, we entered into
a common stock purchase agreement with Fusion Capital Fund II, LLC,
(Fusion) pursuant to which Fusion agreed to purchase up to $10 million
of our common stock over a forty (40) month period that commenced in
May 2002 and expires in October 2005.

Subject to the limitations and termination rights described below, we
may require Fusion to purchase up to the daily base amount of $12,500
of our common stock at a purchase price based on the market price for
our common stock. The obligation of Fusion to purchase each month is
subject to customary conditions, all of which are outside the control
of Fusion, as is our right to suspend purchases as described below.

The selling price per share is equal to the lowest of (a) the lowest
sale price of our common stock on the day of submission of a purchase
notice by Fusion; or (b) the average of the three lowest closing sale
prices of our common stock during the 12 consecutive trading days
prior to the date of submission of a purchase notice by Fusion. The
selling price will be adjusted for any reorganization,
recapitalization, non-cash dividend, stock split or other similar
transaction occurring during the 15 trading days in which the closing
sale price is used to compute the purchase price.

If the closing sale price of our common stock is below the floor price
of $0.30, Fusion shall not have the right or obligation to purchase
shares. We may increase or decrease the floor price, but in no case
may the floor price be set below $0.20 without Fusion's consent. We
may, at any time, suspend purchases upon one day's written notice to
Fusion.

Notwithstanding the foregoing, Fusion may not purchase shares of
common stock under the stock purchase agreement if Fusion or its
affiliates would beneficially own more than 4.9% of our then aggregate
outstanding common stock immediately after the proposed purchases,
unless increased to 9.9% based on our written agreement.

Under the terms of the stock purchase agreement, Fusion received
449,438 shares of our common stock representing half of the total
commitment fee for the equity line. The remaining commitment shares
are to be issued on a pro-rata basis if, and when, we draw on the
equity line of credit. Market conditions (i.e., our low share price)
have effectively prohibited us from drawing funds under the Fusion
facility during 2002, and in the absence of a change in those
conditions, the Fusion facility is unlikely to be drawn on in the
foreseeable future.

9. SHAREHOLDER RIGHTS PLAN:

During July 1995, our board of directors adopted a shareholder rights plan.
Under the plan, one "Right" is to be distributed for each share of common
stock held by shareholders on the close of business on August 28, 1995. The
Rights are exercisable only if a person and its affiliate commences a
tender offer or exchange offer for 15% or more of our common stock, or if
there is a public announcement that a person and its affiliate has acquired
beneficial ownership of 15% or more of the common stock, and if we do not
redeem the Rights during the specified redemption period. Initially, each
Right, upon becoming exercisable, would entitle the holder to purchase from
us one unit consisting of 1/100th of a share of Series A Junior
Participating preferred stock at an exercise price of $35 (which is subject
to adjustment). Once the Rights become exercisable, if any person,
including its affiliate, acquires 15% or more of our common stock, each
Right other than the Rights held by the acquiring person and its affiliate
becomes a right to acquire common stock having a value equal to two times
the exercise price of the Right. We are entitled

F-16

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

to redeem the Rights for $0.01 per Right at any time prior to the
expiration of the redemption period. The shareholder rights plan and the
Rights will expire on August 28, 2005. The board of directors may amend the
shareholder rights plan, from time to time, as considered necessary.

10. SEGMENTS AND SUBSIDIARY INFORMATION:

a. SEGMENTS: We own or have rights to intellectual property involving two
primary types of medical device products, including gamma detection
instruments currently used primarily in the application of ILM, and
blood flow measurement devices.

The information in the following table is derived directly from each
segments' internal financial reporting used for corporate management
purposes. Selling, general and administrative costs and other income,
including amortization, interest and other costs that relate primarily
to corporate activity, are not currently allocated to the operating
segments for financial reporting purposes.

($ AMOUNTS IN THOUSANDS) GAMMA BLOOD
2002 DETECTION FLOW UNALLOCATED TOTAL
---- --------- ---- ----------- -----

Net sales:
United States(1) $ 3,234 $ -- $ -- $ 3,234
International 90 59 -- 149
License and other revenue 1,538 -- -- 1,538
Research and development expenses (974) (1,350) -- (2,324)
Selling, general and administrative
expenses -- -- (3,267) (3,267)
Acquired in-process research and
development -- 28 -- 28
Income (loss) from operations(2) 1,554 (1,280) (3,267) (2,993)
Other income -- -- 28 28
Total assets, net of depreciation and
amortization:
United States 2,010 6 1,221 3,237
Cardiosonix Ltd. -- 3,843 -- 3,843
Capital expenditures 61 119 83 263

2001
---------------------------------------
Net sales
United States(1) $ 6,543 $ -- $ -- $ 6,543
International 221 -- -- 221
License and other revenue 1,428 -- -- 1,428
Research and development expenses (948) -- -- (948)
Selling, general and administrative
expenses -- -- (2,321) (2,321)
Acquired in-process research and
development -- (885) -- (885)
Income (loss) from operations(2) 2,854 (885) (2,321) (352)
Other income -- -- 370 370
Total assets, net of depreciation and
amortization:
United States 2,661 -- 4,662 7,323
Cardiosonix Ltd. -- 4,006 -- 4,006
Capital expenditures 18 -- 54 72

(1) All sales to EES are made in the United States. EES distributes
the product globally through its international affiliates.
(2) Income (loss) from operations does not reflect the allocation of
selling, general and administrative costs to the operating
segments.

b. SUBSIDIARY: On December 31, 2001, we acquired 100 percent of the
outstanding common shares of Cardiosonix, an Israeli company, for $4.5
million. We accounted for the acquisition under SFAS No. 141, Business
Combinations, and certain provisions of SFAS No. 142, Goodwill and
Other Intangible Assets. The results of Cardiosonix' operations have
been included in our consolidated results

F-17

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

from the date of acquisition. Cardiosonix is involved in the
development and commercialization of blood flow measurement
technology. Cardiosonix currently has two products in the early stages
of commercialization and another product in development.

The aggregate purchase price included common stock valued at
$4,271,095; payment of vested options of Cardiosonix employees in the
amount of $17,966; and acquisition costs of $167,348. The value of the
9,714,737 common shares issued on December 31, 2001 was determined
based on the average market price of our common shares over the
five-day period before and after the terms of the acquisition were
agreed to and announced. A contingent payment of 2,085,826 common
shares was also due upon the satisfaction of a certain developmental
milestone event. In accordance with SFAS No. 141, we recorded the
contingent liability as if it were a liability in the amount of
$453,602 at the date of acquisition.

As a result of the decline in the trading price of our common stock
during 2002, the contingent payment was re-valued at $288,053 upon
satisfaction of the milestone event on December 30, 2002. The value of
the contingent consideration was determined based on the market price
of our common shares.

The re-valuation of the contingent shares and additional acquisition
costs of $24,000 required us to adjust the final purchase price,
resulting in the pro-rata adjustment of certain assets acquired in the
acquisition as well as the charge recorded related to in-process
research and development (IPR&D). As a result of the adjustment, the
balances recorded at December 31, 2001 for patents and trademarks,
non-compete agreements, acquired technology, IPR&D and property and
equipment were decreased by $84,000, $19,000, $8,000, $28,000 and
$2,000, respectively.

As a part of the acquisition, we entered into a royalty agreement with
the three founders of Cardiosonix. Under the terms of the royalty
agreement, which expires December 31, 2006, we are obligated to pay
the founders an aggregate one percent royalty on the first $120
million in net revenue generated by the sale of Cardiosonix blood flow
products.

11. AGREEMENTS:

a. SUPPLY AGREEMENTS: In December 1997, we entered into an exclusive
supply agreement with eV Products (eV), a division of II-VI
Incorporated, for the supply of certain crystals and associated
electronics to be used in the manufacture of our proprietary line of
hand-held gamma detection instruments. The original term of the
agreement expired on December 31, 2002 and was automatically extended
during 2002 through December 31, 2005; however, the agreement is no
longer exclusive for the final three years. During 2001, we built up
our stock of crystal modules in order to take advantage of significant
quantity price breaks. As a result, total purchases under the supply
agreement were $82,000 and $1.3 million for the years ended December
31, 2002 and 2001, respectively.

In May 1999, we entered into a supply agreement with The MedTech
Group, Inc. (MedTech) for the supply of BlueTip probes and related
accessories. The original term of the agreement expires on December
31, 2003, but may be automatically extended for an additional three
years. The agreement calls for us to deliver annual product forecasts
to MedTech and for us to purchase at least 75% of forecasted product
demand on a quarterly basis. Total purchases under the supply
agreement were $2,000 and $412,000 for the years ended December 31,
2002 and 2001, respectively. The agreement may be terminated by us
upon twelve months notice or in the event of failure to supply or by
either party due to material breach or by insolvency of the other.

In October 2001, we entered into a manufacturing and supply agreement
with UMM Electronics, Inc. (UMM), a Leach Technology Group company,
for the exclusive manufacture of the neo2000(R) control unit and 14mm
probe. The original term of the agreement expires in February 2005 but
will be automatically extended for additional one-year periods unless
either party provides written notice of non-renewal at least six
months prior to the end of the then-current term. Either party has the
right to terminate the agreement at any time on six months written
notice, or may immediately terminate the agreement upon a breach by
the other. UMM may also terminate the

F-18

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

agreement if our orders for a given product fall below certain minimum
quarterly amounts for two successive quarters. Total purchases under
the manufacturing and supply agreement were $1.2 million for the year
ended December 31, 2002. We made no purchases under this agreement in
2001. We have issued purchase orders for $743,000 of neo2000 control
units, 14mm probes and laparoscopic probes for delivery of product
through June 2003.

During 2001, we terminated our agreement with Plexus Corporation
(Plexus) for the manufacture of the neo2000 control unit and 14mm
probe. As a part of the termination, we were required to purchase
$92,000 in residual materials that were not used by Plexus, a portion
of which have been used in production at UMM. Total purchases under
the agreement were $2.4 million for the year ended December 31, 2001.

b. MARKETING AND DISTRIBUTION AGREEMENTS: During 1999, we entered into a
distribution agreement with EES covering our gamma detection devices
used in ILM. The initial five-year term expires September 20, 2004,
with options to extend for two successive two-year terms. Under the
agreement, we manufacture and sell our current line of ILM products
exclusively to EES, who distributes the products globally. EES agreed
to purchase minimum quantities of our products over the first three
years of the term of the agreement and to reimburse us for certain
research and development costs and a portion of our warranty costs.
EES satisfied both its minimum purchase and reimbursement requirements
during 2002. We are obligated to continue certain product maintenance
activities and to provide ongoing regulatory support for the products.

EES may terminate the agreement if we fail to supply products for
specified periods, commit a material breach of the agreement, suffer a
change of control to a competitor of EES, or become insolvent. If
termination is due to failure to supply or a material breach by us,
EES would have the right to use our intellectual property and
regulatory information to manufacture and sell the products
exclusively on a global basis for the remaining term of the agreement
with no additional financial obligation to us. If termination is due
to insolvency or a change of control that does not affect supply of
the products, EES has the right to continue to sell the products on an
exclusive global basis for a period of six months or require us to
repurchase any unsold products in its inventory.

Under the agreement, EES received a non-exclusive worldwide license to
our ILM intellectual property to make and sell other products that may
be developed using our ILM intellectual property. The term of the
license is the same as that of the agreement. EES paid us a
non-refundable license fee of $4 million. We are recognizing the
license fee as revenue on a straight-line basis over the five-year
initial term of the agreement. If we terminate the agreement as a
result of a material breach by EES, EES would be required to pay us a
royalty on all products developed and sold by EES using our ILM
intellectual property. In addition, we are entitled to a royalty on
any ILM product commercialized by EES that does not infringe any of
our existing intellectual property.

During 2002, we also entered into two distribution agreements for
Cardiosonix' products covering three countries in Europe.

c. RESEARCH AND DEVELOPMENT AGREEMENTS: Cardiosonix' research and
development efforts have been partially financed through grants from
the Office of the Chief Scientist of the Israeli Ministry of Industry
and Trade (the OCS). In return for the OCS's participation,
Cardiosonix is committed to pay royalties to the Israeli Government at
a rate of 3% to 5% of the sales if its products, up to 100% of the
amount of the grants received (for grants received under programs
approved subsequent to January 1, 1999 - 100% plus interest at LIBOR).
Cardiosonix is entitled to the grants only upon incurring research and
development expenditures. Cardiosonix is not obligated to repay any
amount received from the OCS if the research effort is unsuccessful or
if no products are sold. There are no future performance obligations
related to the grants received from the OCS. However, under certain
limited circumstances, the OCS may withdraw its approval of a research
program or amend the terms of its approval. Upon withdrawal of
approval, the grant recipient may be required to refund the grant, in
whole or in part, with or without interest, as the OCS determines.
Cardiosonix' total obligation for

F-19

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

royalties, based on royalty-bearing government participation, totaled
approximately $775,000 as of December 31, 2002.

During January 2002, we completed a license agreement with the
University of California, San Diego (UCSD) for a proprietary compound
that we believe could be used as a lymph node locating agent in ILM
procedures. The license agreement is effective until the later of the
expiration date of the longest-lived underlying patent or January 30,
2023. Under the terms of the license agreement, UCSD has granted us
the exclusive rights to make, use, sell, offer for sale and import
licensed products as defined in the agreement and to practice the
defined licensed methods during the term of the agreement. We may also
sublicense the patent rights, subject to the approval of certain
sublicense terms by UCSD. In consideration for the license rights, we
agreed to pay UCSD a license issue fee of $25,000 and license
maintenance fees of $25,000 per year. We also agreed to pay UCSD
milestone payments related to successful regulatory clearance for
marketing of the licensed products, a royalty on net sales of licensed
products subject to a $25,000 minimum annual royalty, fifty percent of
all sublicense fees and fifty percent of sublicense royalties. We also
agreed to reimburse UCSD for all patent-related costs. Patent-related
costs totaled $29,000 and $8,000 in 2002 and 2001, respectively, and
were recorded in research and development expenses.

UCSD has the right to terminate the agreement or change the nature of
the agreement to a non-exclusive agreement if it is determined that we
have not been diligent in developing and commercializing the covered
products, marketing the products within six months of receiving
regulatory approval, reasonably filling market demand or obtaining all
the necessary government approvals.

d. EMPLOYMENT AGREEMENTS: We maintain employment agreements with four of
our officers. The employment agreements contain change in control
provisions that would entitle each of the officers to two times their
current annual salaries, vest outstanding restricted stock and options
to purchase common stock, and continue certain benefits if there is a
change in control of our company (as defined) and their employment
terminates. Our maximum contingent liability under these agreements in
such an event is approximately $1.5 million. The employment agreements
also provide for severance, disability and death benefits (See Note
16.).

Cardiosonix also maintains employment agreements with three key
employees. The employment agreements contain provisions that would
entitle the employees to the greater of one year's salary or the
amount due under Israeli law if the employee is terminated without
cause. The agreements also provide for royalty payments to the
employees (See Note 10(b).). The maximum contingent liability under
the agreements, excluding the potential royalty, is approximately
$400,000.

12. LEASES:

We lease certain office equipment under a capital lease which expires in
2004. In December 1996, we entered into an operating lease agreement for
office space, expiring in August 2003. In April 2002, Cardiosonix entered
into an operating sublease agreement for office and parking space, expiring
in April 2004. In addition, Cardiosonix leases six automobiles under
three-year operating leases.

F-20

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

The future minimum lease payments, net of sublease rentals, for the years ending
December 31 are as follows:

CAPITAL OPERATING
LEASE LEASES
----------------- -----------------

2003 $ 16,417 $ 205,954
2004 5,471 108,040
2005 - 83,049
----------------- -----------------
21,888 $ 397,043
=================
Less amount representing interest 1,877
-----------------
Present value of net minimum
lease payments 20,011
Less current portion 14,683
-----------------
Capital lease obligations,
excluding current portion $ 5,328
=================

We expect rental income from subleases of $82,000 in 2003, based on three
subleases executed in December 1998, February 1999, and April 2000. Total
rental expense, net of sublease rental income, was $213,000 and $105,000
for the years ended December 31, 2002 and 2001, respectively.

13. EMPLOYEE BENEFIT PLAN:

We maintain an employee benefit plan under Section 401(k) of the Internal
Revenue Code. The plan allows employees to make contributions and we may,
but are not obligated to, match a portion of the employee's contribution
with our common stock, up to a defined maximum. We accrued expenses of
$26,000 and $25,000 during 2002 and 2001, respectively, related to common
stock to be subsequently contributed to the plan.

14. SUPPLEMENTAL DISCLOSURE FOR STATEMENTS OF CASH FLOWS:

We paid interest aggregating $32,000 and $11,000 for the years ended
December 31, 2002 and 2001, respectively. During 2002, we received a net
refund of $700 related to overpayment of estimated 2001 income taxes.

During 2002 and 2001, we transferred $25,000 and $81,000, respectively, in
inventory to fixed assets related to the creation of a pool of service
loaner equipment. Also during 2002 and 2001, we prepaid $205,000 and
$189,000, respectively, in insurance through the issuance of notes payable
with weighted average interest rates of 6% and 5%, respectively. On
December 31, 2001, we issued common stock to acquire the net assets of
Cardiosonix (See Note 10(b).).

15. CONTINGENCIES:

During the third quarter of 2001, we received a general release from a bank
in Israel that was a creditor of our previous Israeli subsidiary that is in
liquidation and was deconsolidated as of December 31, 1999. As a part of
the general release, the bank also refunded $238,000 as a partial return of
a limited guarantee that we had previously written off as a part of
deconsolidation. The cash refund was recognized in other income when it was
received in the third quarter of 2001. Due to the receipt of the general
release from the primary creditor and receiver of the subsidiary, we
believe the possibility is remote that we will be liable for any further
amounts related to the subsidiary.

We are also subject to legal proceedings and claims that arise in the
ordinary course of business. In our opinion, the amount of ultimate
liability, if any, with respect to these actions will not materially affect
our financial position.

F-21

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

16. LIQUIDITY:

As of December 31, 2002, our cash on-hand was $701,000. We believe our
currently available financing will be adequate to sustain operations
through the end of 2003. However, we must ultimately achieve profitability
from our blood flow product line for our business model to succeed. In the
absence of significant revenue, we believe that we will need to arrange
financing of at least $1.5 million by the end of 2003 in order to sustain
our operations through 2004. In the absence of such financing, we would
likely have to make significant changes to our business plan during the
third or fourth quarter of 2003. Such changes would likely delay the
successful launch of our blood flow product line or force us to
significantly curtail our blood flow operations thus jeopardizing our
future.

We continue to assess our business plan and capital requirements. We are
actively engaged in seeking additional financing in a variety of venues
and formats and we continue to impose actions designed to minimize our
operating losses. We cannot assure you that additional capital will be
available to us on acceptable terms, or at all. Although during March 2003
we entered into bridge financing loans for a total of $500,000
($250,000 of which will be obtained from our President and CEO) (See Note
17(b).), we do not know if we will succeed in raising additional funds
through further offerings of debt or equity. If additional financing is not
available when required or is not available on acceptable terms, or we are
unable to arrange a suitable strategic opportunity, we will be in
significant financial jeopardy and we may be unable to continue our
operations at current levels, or at all. We cannot assure you that
subsequent additional capital infusions will be made available to us on a
timely basis or that the additional capital that we require will be
available on acceptable terms, if at all. The terms of a subsequent
financing may involve a change of control and/or require stockholder
approval.

The strengthening of our gamma business portfolio coupled with the
introduction of the Cardiosonix blood flow products should position
Neoprobe to achieve long-term profitable operating performance beginning in
late 2003 or early 2004. However, as we have previously stated, we are in
critical need of additional capital in order to give us greater assurance
that we will be able fund the remaining research and market development
activities associated with our blood flow line and to allow us to meet our
business objectives in the timeframe we have set out in our business plan.
Our future liquidity and capital requirements will depend on numerous
factors, including stockholder approval of an increase in the number of
authorized shares of our common stock, the ability to raise additional
capital in a timely manner through additional investment, a potential
merger, or similar transaction, as well as expanded market acceptance of
our current products, improvements in the costs and efficiency of our
manufacturing processes, our ability to develop and commercialize new
products, regulatory actions by the U.S. FDA and other international
regulatory bodies, and intellectual property protection.

17. SUBSEQUENT EVENTS:

a. EMPLOYMENT AGREEMENTS: Effective February 1, 2003, we amended the
employment agreement with our President and CEO and entered into new
employment agreements with our three other officers. The amended
agreement and the new agreements have substantially similar terms to
the previous agreements, however the amendment and new agreements
effectively decreased and/or deferred significant portions of the
officers' salaries until such time as our financial condition has
improved to certain agreed-upon levels. The maximum contingent
liability under these agreements in the event of termination is $1.3
million.

b. BRIDGE FINANCING: During March 2003, we entered into a bridge loan
agreement with our President and CEO, David Bupp. Under the terms of
the agreement, Mr. Bupp will advance us $250,000. Interest
will be payable on the note at 8.5%, payable monthly, and the note
will be due on June 30, 2004. In consideration for the loan, we will
issue Mr. Bupp 375,000 warrants to purchase our common stock at an
exercise price of $0.13 per share. The fair value of the warrants will
be recorded as a debt discount and amortized as interest expense over
the life of the note.

During March 2003, we also entered into a bridge loan agreement with
an outside investor for an additional $250,000. Under the terms of the
agreement, interest will be payable

F-22

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

at 9.5%, payable monthly, and the note will be due on June 30, 2004.
In consideration for the loan, we will issue the investor 500,000
warrants to purchase our common stock at an exercise price of $0.13
per share. The notes will also be convertible into our common stock,
beginning on July 1, 2003. Half of the principal will be convertible
into common stock at a 15% discount to the 20-day average market price
preceding the conversion, but in no case greater than a $0.20 ceiling
conversion price or less than a $0.10 floor conversion price. The
remaining half of the principal will be convertible at a 15% discount
to a 20-day average market price preceding the conversion, subject
only to the $0.10 floor conversion price. The fair value of the
warrants and the beneficial conversion feature of the note will be
recorded as a debt discount and amortized as interest expense over the
life of the note.

18. SUPPLEMENTAL INFORMATION (UNAUDITED):

The following summary financial data are derived from our consolidated
financial statements that have been audited by our independent public
accountants. These data are qualified in their entirety by, and should be
read in conjunction with, our Consolidated Financial Statements and Notes
thereto included herein.

(Amounts in thousands, except per share data) YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------
2002 2001 2000 1999 1998
------------- ------------- ------------- ------------ ------------

Statement of Operations Data:
Net sales $ 3,383 $ 6,764 $ 8,835 $ 9,246 $ 5,833
License and other revenue 1,538 1,428 1,395 325 -
Gross profit 2,570 3,802 5,240 5,063 4,429
Research and development expenses 2,324 948 993 1,513 14,364
Selling, general and administrative
expenses 3,267 2,321 2,911 8,131 11,357
Acquired in-process research and
development (28) 885 - - -
Losses related to subsidiaries in
liquidation - - - 475 7,176
----------- ------------ ------------ ----------- -----------
(Loss) income from operations (2,993) (352) 1,336 (5,057) (28,468)

Other income 28 370 504 883 436
----------- ------------ ------------ ----------- -----------

Net income (loss) $ (2,964) $ 15 $ 1,840 $ (4,174) $(28,033)
----------- ------------ ------------ ----------- -----------
Income (loss) attributable to common
stockholders $ (2,964) $ 15 $ 1,075 $ (7,895) $(28,033)
=========== ============ ============ =========== ===========

Income (loss) per common share:
Basic $ (0.08) 0.00 $ 0.04 $ (0.34) $ (1.23)
Diluted $ (0.08) $ 0.00 $ 0.04 $ (0.34) $ (1.23)

Shares used in computing income (loss) per
common share: (1)
Basic 36,045 25,899 25,710 23,003 22,842
Diluted 36,045 26,047 26,440 23,003 22,842

AS OF DECEMBER 31,
---------------------------------------------------------------------

2002 2001 2000 1999 1998
------------ ------------- ------------- ------------ ------------
Balance Sheet Data:
Total assets $ 7,080 $ 11,329 $ 7,573 $ 10,323 $ 11,994
Long-term obligations 1,169 1,981 2,233 4,314 156
Accumulated deficit (120,678) (117,714) (117,729) (119,569) (115,395)

(1) Basic earnings (loss) per share is calculated using the weighted
average number of common shares outstanding during the periods.
Diluted earnings (loss) per share is calculated using the weighted
average number of common shares outstanding during the periods,
adjusted for the effects of convertible securities, options and
warrants, if dilutive.

F-23

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

NEOPROBE CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS

ASSETS SEPTEMBER 30, DECEMBER 31,
2003 2002
(UNAUDITED)
---------- ----------

Current assets:
Cash and cash equivalents $ 422,561 $ 700,525
Accounts receivable, net 1,133,553 746,107
Inventory 1,166,987 1,191,918
Prepaid expenses and other 266,981 451,537
---------- ----------

Total current assets 2,990,082 3,090,087
---------- ----------

Property and equipment 2,412,003 2,346,445
Less accumulated depreciation and amortization 2,074,648 1,883,797
---------- ----------

337,355 462,648
---------- ----------

Patents and trademarks 3,144,100 3,129,031
Non-compete agreements 584,516 584,516
Acquired technology 237,271 237,271
---------- ----------
3,965,887 3,950,818
Less accumulated amortization 935,065 584,490
---------- ----------

3,030,822 3,366,328
---------- ----------

Other assets 214,752 160,778
---------- ----------

Total assets $6,573,011 $7,079,841
========== ==========

CONTINUED

F-24

NEOPROBE CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS, CONTINUED

LIABILITIES AND STOCKHOLDERS' EQUITY SEPTEMBER 30, DECEMBER 31,
2003 2002
(UNAUDITED)
------------- -------------

Current liabilities:
Note payable to CEO, net of discount $ 230,948 $ --
Other notes payable, net of discount 201,256 172,381
Secured liabilities 319,853 --
Accrued liabilities and other 519,714 411,844
Accounts payable 551,771 432,140
Deferred revenue, current 1,087,265 933,860
------------- -------------

Total current liabilities 2,910,807 1,950,225
------------- -------------

Deferred revenue 81,665 703,625
Contingent consideration for acquisition -- 288,053
Other liabilities 207,092 177,802
------------- -------------

Total liabilities 3,199,564 3,119,705
------------- -------------

Commitments and contingencies

Stockholders' equity:
Preferred stock; $.001 par value; 5,000,000 shares
authorized at September 30, 2003 and December 31, 2002;
none issued and outstanding (500,000 shares designated
as Series A, $.001 par value, at September 30, 2003 and
and December 31, 2002; none outstanding) -- --
Common stock; $.001 par value; 75,000,000 shares
authorized; 39,148,426 shares issued and outstanding
at September 30, 2003; 36,502,183 shares issued and
outstanding at December 31, 2002 39,148 36,502
Additional paid-in capital 125,229,489 124,601,770
Accumulated deficit (121,895,190) (120,678,136)
------------- -------------

Total stockholders' equity 3,373,447 3,960,136
------------- -------------

Total liabilities and stockholders' equity $ 6,573,011 $ 7,079,841
============= =============

See accompanying notes to the consolidated financial statements

F-25

NEOPROBE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------------- -----------------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------

Revenues:
Net sales $ 927,949 $ 575,138 $ 3,868,655 $ 2,216,383
License and other revenue 257,588 344,623 745,633 1,029,065
------------ ------------ ------------ ------------
Total revenues 1,185,537 919,761 4,614,288 3,245,448
------------ ------------ ------------ ------------

Cost of goods sold 497,458 620,086 2,112,247 1,864,914
------------ ------------ ------------ ------------

Gross profit 688,079 299,675 2,502,041 1,380,534
------------ ------------ ------------ ------------

Operating expenses:
Research and development 508,693 561,330 1,365,277 1,798,517
Selling, general and administrative 755,104 832,232 2,230,693 2,407,496
------------ ------------ ------------ ------------
Total operating expenses 1,263,797 1,393,562 3,595,970 4,206,013
------------ ------------ ------------ ------------

Loss from operations (575,718) (1,093,887) (1,093,929) (2,825,479)
------------ ------------ ------------ ------------

Other income (expenses):
Interest income 19,695 26,092 24,834 63,430
Interest expense (99,520) (11,734) (140,182) (19,786)
Other (3,571) (3,213) (7,777) (17,192)
------------ ------------ ------------ ------------
Total other (expenses) income (83,396) 11,145 (123,125) 26,452
------------ ------------ ------------ ------------

Net loss $ (659,114) $ (1,082,742) $ (1,217,054) $ (2,799,027)
============ ============ ============ ============

Net loss per common share:
Basic $ (0.02) $ (0.03) $ (0.03) $ (0.08)
Diluted $ (0.02) $ (0.03) $ (0.03) $ (0.08)

Weighted average shares outstanding:
Basic 38,555,261 36,062,183 38,454,446 36,031,831
Diluted 38,555,261 36,062,183 38,454,446 36,031,831

See accompanying notes to the consolidated financial statements.

F-26

NEOPROBE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------------
2003 2002
----------- -----------

Cash flows from operating activities:
Net loss $(1,217,054) $(2,799,027)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 555,388 740,749
Amortization of debt discount and offering costs 61,818 --
Change in operating assets and liabilities:
Accounts receivable (387,446) 155,971
Inventory 10,474 140,017
Accrued and other liabilities 138,036 (203,260)
Accounts payable 119,631 (325,625)
Deferred revenue (468,555) (466,683)
Other assets and liabilities 160,733 174,707
Other 107,599 45,678
----------- -----------

Net cash used in operating activities (919,376) (2,537,473)
----------- -----------

Cash flows from investing activities:
Purchases of available-for-sale securities -- (2,491,361)
Sales of available-for-sale securities -- 200,000
Maturities of available-for-sale securities -- 805,000
Purchases of property and equipment (63,195) (240,638)
Patent and trademark costs (20,783) (19,336)
Subsidiary acquisition costs -- (24,028)
----------- -----------

Net cash used in investing activities (83,978) (1,770,363)
----------- -----------

Cash flows from financing activities:
Proceeds from issuance of common stock 138,430 --
Payment of common stock offering costs (7,972) (47,456)
Proceeds from line of credit -- 2,000,000
Proceeds from notes payable, net of offering costs 458,334 --
Payment of notes payable (172,381) (161,865)
Proceeds from secured financing 319,813 --
Payments under capital lease (10,834) (9,529)
----------- -----------

Net cash provided by financing activities 725,390 1,781,150
----------- -----------

Net decrease in cash and cash equivalents (277,964) (2,526,686)

Cash and cash equivalents, beginning of period 700,525 4,287,101
----------- -----------

Cash and cash equivalents, end of period $ 422,561 $ 1,760,415
=========== ===========

See accompanying notes to the consolidated financial statements.

F-27

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

The information as of September 30, 2003 and 2002 and for the periods then
ended is unaudited, but includes all adjustments (which consist only of
normal recurring adjustments) that the management of Neoprobe Corporation
(Neoprobe or we) believes to be necessary for the fair presentation of
results for the periods presented. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to the rules and regulations of the U.S.
Securities and Exchange Commission. The results for the interim period are
not necessarily indicative of results to be expected for the year. The
financial statements should be read in conjunction with Neoprobe's audited
financial statements for the year ended December 31, 2002, which were
included as part of our Annual Report on Form 10-KSB. Certain 2002 amounts
have been reclassified to conform to the 2003 presentation.

Our consolidated financial statements include the accounts of Neoprobe and
our wholly-owned subsidiary, Cardiosonix Ltd. (Cardiosonix). All
significant intercompany accounts were eliminated in consolidation.

2. COMPREHENSIVE INCOME (LOSS)

We had no accumulated other comprehensive income (loss) activity during the
three-month and nine-month periods ended September 30, 2003.

Due to our net operating loss position, there are no income tax effects on
comprehensive income (loss) components for the three-month and nine-month
periods ended September 30, 2002.

THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, 2002 SEPTEMBER 30, 2002
------------------ ------------------

Net loss $ (1,082,742) $ (2,799,027)
Unrealized gains on securities 3,926 17,387
------------- -------------

Other comprehensive loss $ (1,078,816) $ (2,781,640)
============= =============

3. EARNINGS PER SHARE

THREE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, 2003 SEPTEMBER 30, 2002
--------------------------------- ---------------------------------
BASIC DILUTED BASIC DILUTED
EARNINGS EARNINGS EARNINGS EARNINGS
PER SHARE PER SHARE PER SHARE PER SHARE
----------- ----------- ----------- -----------

Outstanding shares 39,148,426 39,148,426 36,502,183 36,502,183
Effect of weighting changes
in outstanding shares (463,165) (463,165) -- --
Contingently issuable shares (130,000) (130,000) (440,000) (440,000)
----------- ----------- ----------- -----------

Adjusted shares 38,555,261 38,555,261 36,062,183 36,062,183
=========== =========== =========== ===========

F-28

NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2003 SEPTEMBER 30, 2002
--------------------------------- ---------------------------------
BASIC DILUTED BASIC DILUTED
EARNINGS EARNINGS EARNINGS EARNINGS
PER SHARE PER SHARE PER SHARE PER SHARE
----------- ----------- ----------- -----------

Outstanding shares 39,148,426 39,148,426 36,502,183 36,502,183
Effect of weighting changes
in outstanding shares (563,980) (563,980) (30,352) (30,352)
Contingently issuable shares (130,000) (130,000) (440,000) (440,000)
----------- ----------- ----------- -----------

Adjusted shares 38,454,446 38,454,446 36,031,831 36,031,831
=========== =========== =========== ===========

There is no difference in basic and diluted loss per share related to the
three-month and nine-month periods ended September 30, 2003 and 2002. The
net loss per common share for these periods excludes the number of common
shares issuable upon exercise of outstanding stock options and warrants
into our common stock since such inclusion would be anti-dilutive.

4. ACCOUNTS RECEIVABLE

During the third quarter of 2003, we entered into an accounts receivable
financing facility under which certain of our U.S. accounts receivable are
factored at an advance rate of 80% and with recourse to a third party
financing company. We account for the sales of receivables in accordance
with the requirements of Statement of Financial Accounting Standards (SFAS)
No. 140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities. Due to the financing company's ability to
require us to repurchase accounts sold to them in the event the account is
deemed uncollectible under the terms of the facility, we have classified
the amount advanced to us by the financing company as secured liabilities
in the balance sheet. At September 30, 2003 a total of $400,000 in U.S.
trade receivables had been factored and remained outstanding under this
facility. The agreement for the sale of accounts receivable provides for
the continuation of the program on a revolving basis and will expire under
its current terms during December 2003. As collections reduce previously
sold receivables, we may replenish these with new receivables. The risk we
bear from bad debt losses on U.S. trade receivables sold is retained by us
since we hold a retained interest in the sold receivables. We have
addressed this risk in our allowance for doubtful accounts. However, we do
not believe we will incur any financial loss for receivables sold under
this facility. Net discounts recognized on sales of receivables are
calculated at one percentage point per fifteen day period the factored
invoices are outstanding with the financing company and are included in
interest expense in the consolidated statements of operations. Such
discounts totaled $2,500 for the three months ended September 30, 2003.

5. INVENTORY

The components of net inventory are as follows:

SEPTEMBER 30, DECEMBER 31,
2003 2002
(UNAUDITED)
----------- -----------

Materials and component parts $ 677,450 $ 760,540
Work in process - 59,888
Finished goods 489,537 371,490
----------- -----------

$ 1,166,987 $ 1,191,918
=========== ===========

F-29

6. INTANGIBLE ASSETS

The major classes of intangible assets are as follows:

SEPTEMBER 30, 2003 DECEMBER 31, 2002
(UNAUDITED)
------------------------------- -------------------------------
GROSS GROSS
CARRYING ACCUMULATED CARRYING ACCUMULATED
AMOUNT AMORTIZATION AMOUNT AMORTIZATION
---------- ------------ ---------- ------------

Patents and trademarks $3,144,100 $ 615,408 $3,129,031 $ 398,501
Non-compete agreements 584,516 259,357 584,516 150,970
Acquired technology 237,271 60,300 237,271 35,019
---------- ---------- ---------- ----------

Total $3,965,887 $ 935,065 $3,950,818 $ 584,490
========== ========== ========== ==========

The estimated future amortization expenses for the next five fiscal years
are as follows:

ESTIMATED
AMORTIZATION
EXPENSE
------------

For the year ended 12/31/2004 $ 420,072
For the year ended 12/31/2005 416,432
For the year ended 12/31/2006 262,108
For the year ended 12/31/2007 230,928
For the year ended 12/31/2008 203,150

7. DEBT FINANCING

During April 2003, we completed a loan agreement with our President and
CEO, David Bupp. Under the terms of the agreement, Mr. Bupp advanced us
$250,000. Interest accrues on the note at 8.5% per annum, payable monthly,
and repayment of the note is due on June 30, 2004. In consideration for the
loan, we issued Mr. Bupp 375,000 warrants to purchase our common stock at
an exercise price of $0.13 per share. The warrants were recorded at their
estimated relative fair value of $32,000 along with a corresponding
discount to the face amount of the note. The discount is being amortized
into interest expense over the 15-month term of the note.

Also during April 2003, we completed a convertible loan agreement with an
outside investor for an additional $250,000. Under the terms of the
agreement, interest accrues on the note at 9.5% per annum, payable monthly,
and repayment of the note is due on June 30, 2004. In consideration for the
loan, we issued the investor 500,000 warrants to purchase our common stock
at an exercise price of $0.13 per share. Also, the outside investor's note
is convertible, at the option of the investor, into our common stock
beginning on July 1, 2003. Half of the principal is convertible into common
stock at a 15% discount to the 20-day average market price preceding the
conversion, but in no case greater than a $0.20 ceiling conversion price or
less than a $0.10 floor conversion price. The remaining half of the
principal is also convertible at a 15% discount to a 20-day average market
price preceding the conversion, subject only to the $0.10 floor conversion
price. The warrants were recorded at their estimated relative fair value of
$41,000 along with a corresponding discount to the face amount of the note.
In addition, the beneficial conversion feature of the note was recorded at
its estimated fair value of $41,000 along with an additional corresponding
discount to the face value of the note. The discounts are being amortized
into interest expense over the 15-month term of the note.

F-30

8. PRODUCT WARRANTY

We generally warrant our gamma detection products against defects in
design, materials, and workmanship for a period of one year from the date
of sale to the end customer. Our accrual for warranty expenses is adjusted
periodically to reflect actual experience. The primary marketing partner of
our gamma detection devices, Ethicon Endo-Surgery, Inc. (EES), a Johnson
and Johnson company, also reimburses us for a portion of warranty expense
incurred based on end customer sales they make during a given fiscal year.
We generally warrant our blood flow products, with the exception of
ultrasound probes, for one year from the date of sale to the end customer.

The activity in the warranty reserve account for the three-month and
nine-month periods ended September 30, 2003 and 2002 are as follows:

THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- -----------------------------
2003 2002 2003 2002
--------- --------- --------- ---------

Warranty reserve at
beginning of period $ 58,000 $ 70,000 $ 35,000 $ 90,000
Provision for warranty claims and
changes in reserve for
warranties (4,914) (8,669) 31,615 53,045
Costs charged against the
reserve, net (86) (21,331) (13,615) (103,045)
--------- --------- --------- ---------

Warranty reserve at end of period $ 53,000 $ 40,000 $ 53,000 $ 40,000
========= ========= ========= =========

9. EQUITY

A. STOCK OPTIONS AND RESTRICTED STOCK. During the first nine months of
2003, the Board of Directors granted options to employees and certain
non-employee directors to purchase 780,000 shares of common stock,
exercisable at an average price of $0.15 per share, vesting over three
years. As of September 30, 2003, we have 2.8 million options
outstanding under three stock option plans. Of the outstanding options,
1.4 million options have vested as of September 30, 2003, at an average
exercise price of $0.71 per share.

The following table illustrates the effect on net loss and net loss per
share if compensation cost for our stock-based compensation plans had
been determined based on the fair value at the grant dates for awards
under those plans consistent with SFAS No. 123, Accounting for
Stock-Based Compensation:

THREE MONTHS ENDED
SEPTEMBER 30,
---------------------------------
2003 2002
----------- -----------

Net loss, as reported $ (659,114) $(1,082,742)
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards (39,997) (63,750)
----------- -----------

Pro forma net loss $ (699,111) $(1,146,492)
=========== ===========

Net loss per common share:
As reported (basic and diluted) $ (0.02) $ (0.03)
Pro forma (basic and diluted) $ (0.02) $ (0.03)

F-31

NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------------
2003 2002
----------- -----------

Net loss, as reported $(1,217,054) $(2,799,027)
Add: Total stock-based employee
compensation expense included in
reported net loss 39,990 --
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards (164,970) (215,972)
----------- -----------

Pro forma net loss $(1,342,034) $(3,014,999)
=========== ===========

Net loss per common share:
As reported (basic and diluted) $ (0.03) $ (0.08)
Pro forma (basic and diluted) $ (0.03) $ (0.08)

During the first quarter of 2003, we vested 310,000 shares of
previously restricted stock related to new or amended employment
agreements of three of our officers. We recognized $39,990 of
compensation expense related to this in the first quarter of 2003.

B. SALES OF COMMON STOCK. In November of 2001, we entered into a common
stock purchase agreement with Fusion Capital Fund II, LLC (Fusion)
under which we may require Fusion to purchase common stock up to a
daily base amount of $12,500, subject to the sale and floor pricing
terms outlined in the agreement. During the third quarter, we sold
Fusion a total of 453,869 shares of common stock and realized proceeds
of $138,000. In addition, we issued Fusion another 6,221 shares of
common stock for commitment fees due to Fusion related to the sales of
our common stock to them during the third quarter.

10. SEGMENT AND SUBSIDIARY INFORMATION

We own or have rights to intellectual property involving two primary types
of medical device products, including gamma detection instruments currently
used primarily in the application of intraoperative lymphatic mapping
(ILM), and blood flow measurement devices.

F-32

The information in the following table is derived directly from each
segment's internal financial reporting used for corporate management
purposes. Selling, general and administrative costs and other income,
including amortization, interest and other costs that relate primarily to
corporate activity, are not currently allocated to the operating segments
for financial reporting purposes.

($ AMOUNTS IN THOUSANDS) GAMMA BLOOD
THREE MONTHS ENDED SEPTEMBER 30, 2003 DETECTION FLOW UNALLOCATED TOTAL
------------------------------------- --------- --------- ----------- -----

Net sales:
United States(1) $ 900 $ -- $ -- $ 900
International 4 24 -- 28
License and other revenue 258 -- -- 258
Research and development expenses 199 310 -- 509
Selling, general and administrative
expenses -- -- 755 755
Income (loss) from operations(2) 476 (297) (755) (576)
Other income -- -- (83) (83)

THREE MONTHS ENDED SEPTEMBER 30, 2002
-------------------------------------
Net sales:
United States(1) $ 573 $ -- $ -- $ 573
International 2 -- -- 2
License and other revenue 345 -- -- 345
Research and development expenses 248 313 -- 561
Selling, general and administrative
expenses -- -- 832 832
Income (loss) from operations(2) 51 (313) (832) (1,094)
Other income -- -- 11 11

($ AMOUNTS IN THOUSANDS) GAMMA BLOOD
NINE MONTHS ENDED SEPTEMBER 30, 2003 DETECTION FLOW UNALLOCATED TOTAL
------------------------------------- --------- --------- ----------- -----

Net sales:
United States(1) $ 3,636 $ -- $ -- $ 3,636
International 8 225 -- 233
License and other revenue 746 -- -- 746
Research and development expenses 469 896 -- 1,365
Selling, general and administrative
expenses -- -- 2,231 2,231
Income (loss) from operations(2) 1,892 (755) (2,231) (1,094)
Other income -- -- (123) (123)

NINE MONTHS ENDED SEPTEMBER 30, 2002
------------------------------------
Net sales:
United States(1) $ 2,154 $ -- $ -- $ 2,154
International 62 -- -- 62
License and other revenue 1,029 -- -- 1,029
Research and development expenses 744 1,055 -- 1,799
Selling, general and administrative
Expenses -- -- 2,407 2,407
Income (loss) from operations(2) 637 (1,055) (2,407) (2,825)
Other income -- -- 26 26

(1) All sales to EES are made in the United States. EES distributes the
product globally through its international affiliates.

(2) Income (loss) from operations does not reflect the allocation of
selling, general and administrative costs to the operating segments.

F-33

11. SUBSEQUENT EVENTS

Subsequent to September 30, 2003, we executed common stock purchase
agreements with third parties for the purchase of 12.2 million shares of
our common stock at a price of $0.23 per share for net proceeds of $2.5
million. In addition, we agreed to issue the purchasers warrants to
purchase 6.1 million shares of common stock at an exercise price of $0.28
per share and agreed to issue the placement agents warrants to purchase
1.6 million shares of our common stock at similar terms. All warrants
to be issued in connection with the transaction expire five years from
the date of issuance.

12. NEW ACCOUNTING PRONOUNCEMENTS

In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 143, Accounting for Asset Retirement Obligations. SFAS 143 requires us
to record the fair value of an asset retirement obligation as a liability
in the period in which we incur a legal obligation associated with the
retirement of tangible long-lived assets that result from the acquisition,
construction, development, and/or normal use of the assets. We are also
required to record a corresponding asset that is depreciated over the life
of the asset. Subsequent to the initial measurement of the asset retirement
obligation, the obligation will be adjusted at the end of each period to
reflect the passage of time and changes in the estimated future cash flows
underlying the obligation. We adopted SFAS 143 on January 1, 2003. The
adoption of SFAS 143 did not have a material effect on our financial
statements.

In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. SFAS 146 requires us to disclose
information about our exit and disposal activities, the related costs, and
changes in those costs in the notes to the interim and annual financial
statements that include the period in which an exit or disposal activity is
initiated. SFAS 146 requires us to disclose, for each reportable segment,
the exit or disposal activity costs incurred in the period and the
cumulative amount incurred, net of any changes in the liability, with an
explanation of the reasons for the changes. SFAS 146 also requires us to
disclose the total amount of costs expected to be incurred in connection
with the exit or disposal activity. The new requirements are effective
prospectively for exit and disposal activities initiated after December 31,
2002. The adoption of SFAS 146 did not have a material impact on our
financial statements.

In November 2002, the FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others, an interpretation of FASB Statement
Nos. 5, 57 and 107 and a rescission of FASB Interpretation No. 34. This
Interpretation elaborates on the disclosures to be made by a guarantor in
its interim and annual financial statements about its obligations under
guarantees issued. The Interpretation also clarifies that a guarantor is
required to recognize, at inception of a guarantee, a liability for the
fair value of the obligation undertaken. The initial recognition and
measurement provisions of the Interpretation are applicable to guarantees
issued or modified after December 31, 2002, and did not have a material
effect on our financial statements. The disclosure requirements are
effective for financial statements of interim and annual periods ending
after December 15, 2002.

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity. The
Statement requires issuers to classify as liabilities (or assets in some
circumstances) three classes of freestanding financial instruments that
embody obligations for the issuer. Generally, the Statement is effective
for financial instruments entered into or modified after May 31, 2003 and
is otherwise effective at the beginning of the first interim period
beginning after June 15, 2003. We adopted the provisions of the Statement
on July 1, 2003. The adoption of SFAS No. 150 did not have a material
effect on our financial statements.

F-34

PART II - INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

Section 145 of the General Corporation Law of the State of Delaware (Section
145) provides that directors and officers of Delaware corporations may, under
certain circumstances, be indemnified against expenses (including attorneys'
fees) and other liabilities actually and reasonably incurred by them as a result
of any suit brought against them in their capacity as a director or officer, if
they acted in good faith and in a manner they reasonably believed to be in or
not opposed to the best interests of the corporation, and, with respect to any
criminal action or proceeding, if they had no reasonable cause to believe their
conduct was unlawful. Section 145 also provides that directors and officers may
also be indemnified against expenses (including attorneys' fees) incurred by
them in connection with a derivative suit if they acted in good faith and in a
manner they reasonably believed to be in or not opposed to the best interests of
the corporation, except that no indemnification may be made without court
approval if such person was adjudged liable to the corporation.

Article V of our company's by-laws has provisions requiring us to indemnify our
officers, directors, employees and agents that are in substantially the same
language as Section 145.

Article Nine, section (b), of our company's certificate of incorporation further
provides that no director will be personally liable to us or our stockholders
for monetary damages or for any breach of fiduciary duty except for breach of
the director's duty of loyalty to us or our stockholders, for acts or omissions
not in good faith or involving intentional misconduct or a knowing violation of
law, pursuant to Section 174 of the Delaware General Corporation Law (which
imposes liability in connection with the payment of certain unlawful dividends,
stock purchases or redemptions), or any amendment or successor provision
thereto, or for any transaction from which the director derived an improper
personal benefit.

ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The following table sets forth the expenses (other than the underwriting
discounts and commissions and the Underwriter's Non-Accountable Expense
Allowance) expected to be incurred in connection with the issuance and
distribution of the securities being registered.

SEC Registration.................................... $548
Legal Fees and Expenses*............................ $15,000
Accounting Fees*.................................... $10,000
Miscellaneous*...................................... $452
Total............................................... $26,000
------------------
* Estimated

II-1

ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES

The following sets forth certain information regarding the sale of equity
securities of our company during the period covered by this report that were not
registered under the Securities Act of 1933 (the Securities Act).

In March 2003, March 2002 and March 2001, our Board of Directors authorized the
issuance of 100,327, 53,116 and 19,122 shares of common stock, respectively, to
the trustees of our 401(k) employee benefit plan (the Plan) without
registration. Such issuance is exempt from registration under the Securities Act
under Section 3(a)(2). The Plan is a pension, profit sharing or stock bonus plan
that is qualified under Section 401 of the Internal Revenue Code. The assets of
the Plan are held in a single trust fund for the benefit of our employees, which
does not hold assets for the benefit of the employees of any other employer. All
of the contributions to the Plan from our employees have been invested in assets
other than our common stock. We have contributed all of the Neoprobe common
stock held by the Plan as a matching contribution that has been less in value at
the time it was contributed to the Plan than the employee contributions that it
matches.

On November 19, 2001, we entered into a common stock purchase agreement with an
investment fund, Fusion Capital Fund II, LLC (Fusion) for the issuance and
purchase of our common stock. Under the stock purchase agreement, Fusion
committed to purchase up to $10 million of our common stock over a forty-month
period that commenced in May 2002. A registration statement registering for
resale up to 5 million shares of our common stock was declared effective by the
Securities and Exchange Commission (the SEC) on April 15, 2002. Under the terms
of the agreement, we can request daily drawdowns, subject to a daily base amount
(currently set at $12,500) and subject to certain floor prices as discussed
below. The number of shares we will issue to Fusion in return for that money is
based on the lower of (a) the closing sale price for our common stock on the day
of the draw request or (b) the average of the three lowest closing sales prices
of our common stock during a twelve-day period prior to the draw request. No
shares may be sold to Fusion at lower than a floor price currently set at $0.30,
but in no case below $0.20 without Fusion's prior consent. Upon execution of the
common stock purchase agreement, we issued 449,438 shares of our common stock to
Fusion as a commitment fee. During the third quarter of 2003, we sold Fusion a
total of 453,869 shares of common stock and realized proceeds of $138,000. In
addition, we issued Fusion another 6,221 shares of common stock for commitment
fees due to Fusion related to the sales of our common stock to them during the
quarter. In November 2003, we indefinitely suspended further sales to Fusion
under the financing arrangement. The issuances of the shares of common stock to
Fusion pursuant to the common stock purchase agreement was exempt from
registration under Sections 4(2) and 4(6)of the Securities Act and Regulation D.

On December 31, 2001, we purchased all of the outstanding shares of capital
stock of Cardiosonix, Ltd., an Israeli company limited by shares, formerly known
as Biosonix, Ltd. ("Cardiosonix"), from the Cardiosonix selling stockholders
pursuant to the terms of a Stock Purchase Agreement dated November 29, 2001 (the
"Stock Purchase Agreement"). Under the terms of the Stock Purchase Agreement, at
closing we issued to the selling stockholders 9,714,737 shares of shares of our
common stock, $.001 par value. In addition, on December 30, 2002, we issued an
additional 2,085,826 shares of common stock to the selling stockholders due to
the achievement of a milestone involving Cardiosonix product development
activity. The issuance of the shares of common stock to the selling stockholders
was exempt from registration under Section 4(2) of the Securities Act and
Regulation D.

During April 2003, we completed a bridge loan agreement with our President and
CEO, David Bupp. Under the terms of the agreement, Mr. Bupp advanced us
$250,000. Interest on the note accrues at the rate of 8.5% per annum, payable
monthly, and the note is due on June 30, 2004. In consideration for the loan, we
issued Mr. Bupp 375,000 warrants to purchase shares of our common stock at an
exercise price of $0.13 per share. The issuances of the note and warrants to Mr.
Bupp was exempt from registration under Sections 4(2) and 4(6) of the Securities
Act and Regulation D.

II-2

During April 2003, we also completed a convertible bridge loan agreement with
Donald E. Garlikov for an additional $250,000. Under the terms of the agreement,
the note bears interest at 9.5% per annum, payable monthly, and is due on June
30, 2004. In consideration for the loan, we issued Mr. Garlikov 500,000 warrants
to purchase shares of our common stock at an exercise price of $0.13 per share.
The note is convertible, at the option of the holder, into shares of our common
stock beginning on July 1, 2003. Half of the principal amount of the loan is
convertible into common stock at a 15% discount to the 20-day average market
price preceding the conversion, but in no case greater than a $0.20 ceiling
conversion price or less than a $0.10 floor conversion price. The remaining half
of the principal is also convertible at a 15% discount to a 20-day average
market price preceding the conversion, subject only to the $0.10 floor
conversion price. The issuances of the convertible note and warrants to Mr.
Garlikov was exempt from registration under Sections 4(2) and 4(6) of the
Securities Act and Regulation D.

During the second and third quarters of 2003, we engaged the services of two
investment banking firms to assist us in raising capital, Alberdale Capital, LLC
(Alberdale) and Trautman Wasserman & Company, Incorporated (Trautman Wasserman).
In exchange for Alberdale's services, we agreed to pay it a monthly retainer of
$10,000, half payable in cash and half payable in common stock, and we agreed to
pay it additional compensation upon the successful completion of a private
placement of our securities. We terminated the agreement with Alberdale
effective September 23, 2003, but agreed to issue the firm a total of 150,943
shares of common stock in payment for one half of their retainer, plus warrants
to purchase 78,261 shares in exchange for their assistance in arranging an
accounts receivable financing transaction. The warrants have an exercise price
of $0.28 per share. In exchange for the services of Trautman Wasserman, we
agreed to pay a retainer of $10,000, payable in cash and stock, and to pay
further compensation on successful completion of a private placement. We agreed
to issue Trautman Wasserman a total of 27,199 shares of common stock in payment
for one half of its retainer. The issuances of the shares and warrants to
Alberdale and Trautman Wasserman were exempt from registration under Sections
4(2) and 4(6) of the Securities Act and Regulation D.

During October and November 2003, we executed common stock purchase agreements
with third parties introduced to us by a third investment banking firm,
Rockwood, Inc., for the purchase of 12,173,914 shares of our common stock at a
price of $0.23 per share for net proceeds of $2.5 million. In addition, we
agreed to issue the purchasers warrants to purchase 6,086,959 shares of common
stock at an exercise price of $0.28 per share and agreed to issue the placement
agents warrants to purchase 1,432,609 shares of our common stock on similar
terms. All warrants to be issued in connection with the transaction expire five
years from the date of issuance. The issuances of the shares and warrants to the
purchasers and the placement agent were exempt from registration under Sections
4(2) and 4(6) of the Securities Act and Regulation D.

ITEM 27. EXHIBITS.

Exhibit
Number Exhibit Description
------ -------------------

2.1 Stock Purchase Agreement, dated as of November 29, 2001,
by and among Neoprobe Corporation, Biosonix, Ltd., and the
shareholders of Biosonix, Ltd. Named therein (filed as
Exhibit 99(b) to the Company's Current Report on Form 8-K
dated November 29, 2001, and incorporated herein by
reference).

3.1 Amended and Restated Certificate of Incorporation of
Neoprobe Corporation (incorporated by reference to Exhibit
3.1 to the Company's September 30, 2001 Form 10-QSB).

3.2 Amended and Restated By-Laws dated July 21, 1993, as
amended July 18, 1995 and May 30, 1996 (filed as Exhibit
99.4 to the Company's Current Report on Form 8-K dated
June 20, 1996, and incorporated herein by reference).

II-3

5.1 Opinion of Porter, Wright, Morris & Arthur LLP.*

10.1 Rights Agreement between the Company and Continental Stock
Transfer & Trust Company dated as of July 18, 1995
(incorporated by reference to Exhibit 1 to the
Registration Statement of Form 8-A, Commission file No.
0-26520).

10.2 Amendment Number 1 to the Rights Agreement between the
Company and Continental Stock Transfer & Trust Company
dated February 16, 1999 (incorporated by reference to
Exhibit 4.4 to the Company's April 1, 1999 Form 10-K).

10.3 Common Stock Purchase Agreement between the Company and
Fusion Capital Fund II, LLC dated November 19, 2001
(incorporated by reference to Exhibit 99(b) of the
Company's December 3, 2001 Form 8-K).

10.4 Shareholder Agreement, dated as of December 31, 2001, by
and among Neoprobe Corporation and the shareholders of
Biosonix, Ltd. named therein (incorporated by reference to
Exhibit 99(c) to the Company's Current Report on Form 8-K
dated November 29, 2001).

10.5 Amended and Restated Stock Option and Restricted Stock
Purchase Plan dated March 3, 1994 (incorporated by
reference to Exhibit 10.2.26 to the Company's December 31,
1993 Form 10-K).

10.6 Restricted Stock Purchase Agreement dated June 5, 1996
between the Company and David C. Bupp (incorporated by
reference to Exhibit 10.2.35 to the Company's December 31,
1997 Form 10-K).

10.7 1996 Stock Incentive Plan dated January 18, 1996 as
amended March 13, 1997 (incorporated by reference to
Exhibit 10.2.37 to the Company's December 31, 1997 Form
10-K).

10.8 Restricted Stock Purchase Agreement between the Company
and David C. Bupp dated May 20, 1998 (incorporated by
reference to Exhibit 10.2.45 to the Company's June 30,
1998 Form 10-Q).

10.9 Restricted Stock Agreement dated October 23, 1998 between
the Company and Brent L. Larson (incorporated by reference
to Exhibit 10.2.48 to the Company's December 31, 1998 Form
10-K/A).

10.10 Restricted Stock Agreement dated April 30, 1999 between
the Company and David C. Bupp. This Agreement is one of
three substantially identical agreements and is
accompanied by a schedule identifying the other agreements
omitted and setting forth the material details in which
such agreements differ from the one that is filed herewith
(incorporated by reference to Exhibit 10.2.50 to the
Company's June 30, 1999 Form 10-Q).

10.11 Restricted Stock Agreement dated March 22, 2000 between
the Company and David C. Bupp. This Agreement is one of
three substantially identical agreements and is
accompanied by a schedule identifying the other agreements
omitted and setting forth the material details in which
such agreements differ from the one that is filed herewith
(incorporated by reference to Exhibit 10.2.54 of the
Company's March 31, 2000 Form 10-Q).

10.12 Employment Agreement between the Company and David C.
Bupp, dated July 1, 2001 (incorporated by reference to
Exhibit 10.2.59 to the Company's September 30, 2001 Form
10-QSB).

II-4

10.13 Amendment to Employment Agreement between the Company and
David C. Bupp, dated February 1, 2003. (incorporated by
reference to Exhibit 10.2.62 to the Company's March 31,
2003 Form 10-KSB).

10.14 Employment Agreement between the Company and Carl M.
Bosch, dated February 1, 2003. This Agreement is one of
three substantially identical agreements and is
accompanied by a schedule identifying the other agreements
omitted and setting forth the material details in which
such agreements differ from the one that is filed herewith
(incorporated by reference to Exhibit 10.2.63 to the
Company's March 31, 2003 Form 10-KSB).

10.15 Employment Agreement between Cardiosonix Ltd. (formerly
Biosonix Ltd.) and Dan Manor, dated January 1, 2002
(incorporated by reference to Exhibit 10.2.61 to the
Company's December 31, 2001 Form 10-KSB).

10.16 Technology Transfer Agreement dated July 29, 1992 between
the Company and The Dow Chemical Corporation (portions of
this Exhibit have been omitted pursuant to a request for
confidential treatment and have been filed separately with
the Commission), (incorporated by reference to Exhibit
10.10 to the Company's Form S-1).

10.17 Cooperative Research and Development Agreement between the
Company and the National Cancer Institute (incorporated by
reference to Exhibit 10.3.31 to the Company's September
30, 1995 Form 10-QSB).

10.18 License dated May 1, 1996 between the Company and The Dow
Chemical Company (incorporated by reference to Exhibit
10.3.45 to the Company's June 30, 1996 Form 10-QSB).

10.19 License Agreement dated May 1, 1996 between the Company
and The Dow Chemical Company (portions of this Exhibit
have been omitted pursuant to a request for confidential
treatment and have been filed separately with the
Commission), (incorporated by reference to Exhibit 10.3.46
to the Company's June 30, 1996 Form 10-QSB).

10.20 Share Purchase Agreement between the Company and
Biomedical Investments (1997) Ltd. dated January 19, 2000
(incorporated by reference to Exhibit 10.3.50 to the
Company's March 31, 2000 Form 10-Q).

10.21 Supply Agreement between the Company and eV Products dated
December 8, 1997 (portions of this Exhibit have been
omitted pursuant to a request for confidential treatment
and have been filed separately with the Commission),
(incorporated by reference to Exhibit 10.4.32 to Amendment
2 to the Company's December 31, 1997 Form 10-K).

10.22 Distribution Agreement between the Company and Ethicon
Endo-Surgery, Inc. dated October 1, 1999 (portions of this
Exhibit have been omitted pursuant to a request for
confidential treatment and have been filed separately with
the Commission), (incorporated by reference to Exhibit
10.4.39 to the Company's September 30, 1999 Form 10-Q).

10.23 Product Supply Agreement between the Company and UMM
Electronics, Inc., dated October 25, 2001 (portions of
this Exhibit have been omitted pursuant to a request for
confidential treatment and have been filed separately with
the Commission), (incorporated by reference to Exhibit
10.4.49 to the Company's December 31, 2001 Form 10-KSB).

II-5

10.24 Senior Secured Note Purchase Agreement dated March 26,
2003 between the Company and David C. Bupp. (Incorporated
by reference to Exhibit 99(b) to the Company's Current
Report on Form 8-K filed April 2, 2003).

10.25 8.5% Senior Note dated April 2, 2003 between the Company
and David C. Bupp (Incorporated by reference to Exhibit
99(c) to the Company's Current Report on Form 8-K filed
April 2, 2003).

10.26 Convertible Preferred Note Purchase Agreement dated March
26, 2003 between the Company and Donald E. Garlikov
(Incorporated by reference to Exhibit 99(d) to the
Company's Current Report on Form 8-K filed April 2, 2003).

10.27 9.5% Convertible Secured Note dated April 2, 2003 between
the Company and Donald E. Garlikov (Incorporated by
reference to Exhibit 99(e) to the Company's Current Report
on Form 8-K filed April 2, 2003).

10.28 Warrant to Purchase Common Stock of Neoprobe Corporation
dated April 2, 2003 between the Company and David C. Bupp
(Incorporated by reference to Exhibit 99(f) to the
Company's Current Report on Form 8-K filed April 2, 2003).

10.29 Warrant to Purchase Common Stock of Neoprobe Corporation
dated April 2, 2003 between the Company and Donald E.
Garlikov (Incorporated by reference to Exhibit 99(g) to
the Company's Current Report on Form 8-K filed April 2,
2003).

10.30 Security Agreement dated April 2, 2003 between the
Company, David C. Bupp and Donald E. Garlikov
(Incorporated by reference to Exhibit 99(h) to the
Company's Current Report on Form 8-K filed April 2, 2003).

10.31 Registration Rights Agreement dated April 2, 2003 between
the Company, David C. Bupp and Donald E. Garlikov
(Incorporated by reference to Exhibit 99(i) to the
Company's Current Report on Form 8-K filed April 2, 2003).

10.32 Stock Purchase Agreement dated October 22, 2003 between
the Company and Bridges & Pipes, LLC. This agreement is
one of 21 substantially identical agreements and is
accompanied by a schedule identifying the other agreements
omitted and setting forth the material details in which
such documents differ from the one that is filed
herewith.*

10.33 Registration Rights Agreement dated October 22, 2003
between the Company and Bridges & Pipes, LLC. This
agreement is one of 21 substantially identical agreements
and is accompanied by a schedule identifying the other
agreements omitted and setting forth the material details
in which such documents differ from the one that is filed
herewith.*

10.34 Series R Warrant Agreement dated October 22, 2003 between
the Company and Bridges & Pipes, LLC. This agreement is
one of 21 substantially identical agreements and the
material differences in which such documents differ from
the one that is filed herewith are identified on the
schedule to Exhibit 10.33.*

10.35 Series S Warrant Agreement dated November 21, 2003
between the Company and Alberdale Capital, LLC. This
agreement is one of 7 substantially identical agreements
and is accompanied by a schedule identifying the other
agreements omitted and setting forth the material details
in which such documents differ from the one that is filed
herewith.*

23.1 Consent of KPMG LLP.*

II-6

23.2 Consent of Porter, Wright, Morris & Arthur LLP (included
in Exhibit 5.1 herein).

24.1 Powers of Attorney.*
* Filed herewith.

ITEM 28. UNDERTAKINGS.

The undersigned hereby undertakes:

(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:

(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;

(ii) To reflect in the prospectus any facts or events which, individually
or in the aggregate, represent a fundamental change in the
information set forth in the registration statement. Notwithstanding
the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low or
high end of the estimated maximum offering range may be reflected in
the form of prospectus filed with the Commission pursuant to Rule
424(b) if, in the aggregate, the changes in volume and price
represent no more than a 20% change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee"
table in the effective registration statement; and

(iii) To include any additional or changed material information on the
plan of distribution.

(2) That, for the purpose of determining any liability under the Securities Act
of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.

(3) To file a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.

Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to the registrant's directors, officers, and controlling
persons pursuant to the foregoing provisions, or otherwise, the registrant has
been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a directors, officers or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer, or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.

II-7

SIGNATURES

In accordance with the requirements of the Securities Act of 1933, as amended,
the registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements of filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned in the City of Columbus,
Ohio, on November 25, 2003.
NEOPROBE CORPORATION

By: /s/ David C. Bupp
------------------------------------------
David C. Bupp, President and Chief
Executive Officer

In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates indicated:

SIGNATURE TITLE DATE
--------- ----- ----

/s/ David C. Bupp President, Chief Executive Officer November 25, 2003
------------------------------------ and Director
David C. Bupp (principal executive officer)

/s/ Brent L. Larson* Vice President, Finance and Chief November 25, 2003
------------------------------------ Financial Officer
Brent L. Larson (principal financial officer and
principal accounting officer)

Chairman of the Board of
------------------------------------ Directors
Julius R. Krevans

/s/ Reuven Avital* Director November 25, 2003
------------------------------------
Reuven Avital

/s/ Nancy E. Katz* Director November 25, 2003
------------------------------------
Nancy E. Katz

/s/ Fred B. Miller* Director November 25, 2003
------------------------------------
Fred B. Miller

/s/ Frank Whitley, Jr.* Director November 25, 2003
------------------------------------
J. Frank Whitley, Jr.

*By: /s/ David C. Bupp
----------------------------------------
David C. Bupp, Attorney-in fact

II-8