Edgar Filing: NEOPROBE CORP

As filed with the Securities and Exchange Commission on December 27, 2004

Registration No. 333-
================================================================================

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------

NEOPROBE CORPORATION
(Exact name of registrant as specified in its charter)

DELAWARE 2835 31-1080091
(State or other jurisdiction (Primary standard (IRS employer
of incorporation industrial Identification No.)
or organization) classification number)

--------------------
425 Metro Place North, Suite 300
Dublin, Ohio 43017-1367
(614) 793-7500
(Address and telephone number of principal executive offices)
--------------------
425 Metro Place North, Suite 300
Dublin, Ohio 43017-1367
(Address of principal place of business)
--------------------
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)
--------------------

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. |_|

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

Common Stock,
$.001 par value 32,350,000 $0.54 $17,469,000 $2,056.11
====================================================================================================================================

(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
December 23, 2004.

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 27, 2004.

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

32,350,000 SHARES OF COMMON STOCK

This prospectus relates to the sale of up to 32,350,000 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 December 20, 2004, the last reported sale price for our
common stock as reported on the Nasdaq Over-The-Counter Bulletin Board was $0.59
per share.

--------------------

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.
--------------------

The date of this prospectus is [_______ __, 2004.]

TABLE OF CONTENTS

------------------------

Prospectus Summary............................................................ 2
Risk Factors.................................................................. 4
Cautionary Note Regarding Forward-Looking Statements..........................14
Use of Proceeds...............................................................14
Market for Common Equity and Related Stockholder Matters......................15
Management's Discussion and Analysis of Financial Condition
and Results of Operations...............................................15
Description of Business.......................................................22
Description of Property.......................................................40
Our Management................................................................40
Security Ownership of Certain Beneficial Owners and Management................51
Certain Relationships and Related Transactions................................53
Description of Capital Stock..................................................54
Acquisition of Common Stock by Selling Stockholders...........................58
Selling Stockholders..........................................................59
Plan of Distribution..........................................................60
Legal Opinion.................................................................61
Experts.......................................................................61
Additional Information........................................................61
Index to Financial Statements................................................F-1

UNLESS OTHERWISE SPECIFIED, THE INFORMATION IN THIS PROSPECTUS IS SET FORTH AS
OF DECEMBER 27, 2004, 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
subsidiary. This prospectus contains forward-looking statements and information
relating to Neoprobe Corporation. See Cautionary Note Regarding Forward Looking
Statements on page 14.

OUR COMPANY

We are a biomedical technology company providing 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. The address of our website is
www.neoprobe.com. Information on our website is not part of this prospectus.

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 Cardiosonix products would diversify our customer
base through a product line we believe has great market potential and a path of
market adoption similar to our gamma detection devices, but one that also has
significant operational synergies in the development, regulation and manufacture
to that of our existing gamma devices.

Although we have expanded our strategic focus to include blood flow medical
devices, we intend to continue to execute many of the strategies outlined in
prior years related to the internal development of gamma detection medical
devices and to continue supporting development of our other complementary
procedural-based technologies. Based upon information that we have recently
become aware of, we are considering reactivating development activities
concerning radioimmuguided surgery (RIGS(R)). In addition, we are preparing to
begin the pivotal stage in the development of our proprietary lymphatic tracing
agent, LYMPHOSEEK(TM).

Our business 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. We believe our core device business lines
will provide us with a strong operating foundation and enable us to judiciously
evaluate and develop complementary procedural products with a recurring revenue
stream. To that end, we intend to continue to pursue the development of
LYMPHOSEEK and to evaluate an appropriate development plan for RIGS.

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. In consideration for the loan, we issued Mr. Bupp warrants, expiring
in April 2008, to purchase 375,000 shares of our common stock at an exercise
price of $0.13 per share. Interest accrued on the note at the rate of 8.5% per
annum, payable monthly, and the note was due on June 30, 2004. On March 8, 2004,
the due date of the note to Mr. Bupp was extended to June 30, 2005. In exchange
for extending the due date of the note, we issued Mr. Bupp an additional
warrant, expiring in March 2009, to purchase 375,000 shares of our common stock
at an exercise price of $0.50 per share. The shares covered by this prospectus
include the 375,000 shares of common stock issuable pursuant to the warrants
granted to Mr. Bupp in March 2004.

On December, 13, 2004, we completed a Securities Purchase Agreement for the
purchase of convertible promissory notes in an aggregate principal amount of
$8.1 million dollars with Biomedical Value Fund, L.P., Biomedical Offshore Value
Fund, Ltd. and Mr. Bupp. Biomedical Value Fund, L.P. and Biomedical Offshore
Value Fund, Ltd. are funds managed by Great Point Partners, LLC. The notes will
bear interest at 8% per annum and are freely convertible into shares of our
common stock at a price of $0.40 per share. In addition to the notes, we also
issued five-year warrants to Biomedical Value Fund, L.P., Biomedical Offshore
Value Fund, Ltd. and Mr. Bupp to purchase an aggregate 10,125,000 shares of our
common stock at an exercise price of $0.46. The shares covered by this
prospectus include 20,250,000 shares of common stock issuable upon conversion of
the notes, and the 10,125,000 shares of our common stock issuable upon the
exercise of the warrants.

During 2004 we engaged the services of two investment banking firms to assist us
in raising capital, Roth Capital Partners, LLC (Roth) and Laidlaw & Co.
(Laidlaw). In exchange for the services of Roth, we agreed to pay $320,000 in
cash, plus warrants to purchase 800,000 shares of our common stock. The warrants
have an exercise price of $0.46 per share. This prospectus covers the resale of
the shares of common stock issuable upon the exercise of warrants.

In exchange for the services of Laidlaw, we agreed to pay $320,000 in cash, plus
warrants to purchase 800,000 shares of our common stock. The warrants have an
exercise price of $0.46 per share. This prospectus covers the resale of the
shares of common stock issuable upon the exercise of warrants.

With the exception of the warrants granted to Mr. Bupp in March 2004, all
warrants issued in connection with this transaction expire in December 2009.
This prospectus covers the resale of shares of common stock issuable upon
conversion of the convertible promissory notes, warrants issued to Mr. Bupp in
exchange for extending the due date of the note executed in his favor in
connection with the April 2003 bridge loan agreement, and the shares of common
stock issuable pursuant to the warrants granted to the parties to the Securities
Purchase Agreement 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 $124 million as of September 30,
2004. Although we were profitable in 2000 and in 2001, we incurred substantial
losses in the years prior to that, and in 2002 and 2003. 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 but also potentially related to RIGS and LYMPHOSEEK. As
a result, we are sustaining substantial operating and net losses, and it is
possible that we will never be able to sustain or develop the revenue levels
necessary to again attain profitability.

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 growth 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.

CLINICAL TRIALS FOR OUR PRODUCT CANDIDATES WILL BE LENGTHY AND EXPENSIVE AND
THEIR OUTCOME IS UNCERTAIN.

Before obtaining regulatory approval for the commercial sale of any product
candidates, we must demonstrate through preclinical testing and clinical trials
that our product candidates are safe and effective for use in humans. Conducting
clinical trials is a time consuming, expensive and uncertain process and may
take years to complete. Our most advanced product candidates, LYMPHOSEEK and
RIGSCAN(R) CR are preparing to enter the Phase III stage of clinical trials.
Historically, the results from preclinical testing and early clinical trials
have often not been predictive of results obtained in later clinical trials.
Frequently, drugs that have shown promising results in preclinical or early
clinical trials subsequently fail to establish sufficient safety and efficacy
data necessary to obtain regulatory approval. At any time during the clinical
trials, we, our collaborative partners or the FDA might delay or halt any
clinical trials for our product candidates for various reasons, including:

o ineffectiveness of the product candidate;
o discovery of unacceptable toxicities or side effects;
o development of disease resistance or other physiological factors;
o delays in patient enrollment; or
o other reasons that are internal to the businesses of our potential
collaborative partners, which reasons they may not share with us.

The results of the clinical trials may fail to demonstrate the safety or
effectiveness of our product candidates to the extent necessary to obtain
regulatory approval or such that commercialization of our product candidates is
worthwhile. Any failure or substantial delay in successfully completing clinical
trials and obtaining regulatory approval for our product candidates could
severely harm our business.

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.

IF WE FAIL TO OBTAIN COLLABORATIVE PARTNERS, OR THOSE WE OBTAIN FAIL TO PERFORM
THEIR OBLIGATIONS OR DISCONTINUE CLINICAL TRIALS FOR PARTICULAR PRODUCT
CANDIDATES, OUR ABILITY TO DEVELOP AND MARKET POTENTIAL PRODUCTS COULD BE
SEVERELY LIMITED.

Our strategy for the development and commercialization of our product candidates
depends, in large part, upon the formation of collaborative arrangements.
Collaborations may allow us to:

o generate cash flow and revenue;
o offset some of the costs associated with our internal research and
development, preclinical testing, clinical trials and manufacturing;
o seek and obtain regulatory approvals faster than we could on our
own; and,
o successfully commercialize existing and future product candidates.

We do not currently have collaborative agreements covering LYMPHOSEEK or RIGSCAN
CR. We cannot assure you that we will be successful in securing collaborative
partners, or that we will be able to negotiate acceptable terms for such
arrangements. The development, regulatory approval and commercialization of our
product candidates will depend substantially on the efforts of collaborative
partners, and if we fail to secure or maintain successful collaborative
arrangements, or if our partners fail to perform their obligations, our
development, regulatory, manufacturing and marketing activities may be delayed,
scaled back or suspended.

WE DO NOT HAVE EXPERIENCE IN MARKETING BLOOD FLOW DEVICES AND WE HAVE NOT YET
ESTABLISHED LONG-TERM STRATEGIC RELATIONSHIPS WITH A SIGNIFICANT NUMBER OF
POTENTIAL MARKETING PARTNERS.

We completed the Cardiosonix acquisition on December 31, 2001, and to date we
have limited marketing and distribution experience with the QUANTIX(R) line of
blood flow products covering only a limited number of 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 and will likely be working with pricing
structures such as per-use or leasing with which we have little direct
experience. Further, 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 market, 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.

OUR RADIOPHARMACEUTICAL PRODUCTS ARE SUBJECT TO EXTENSIVE GOVERNMENT REGULATIONS
AND WE MAY NOT BE ABLE TO OBTAIN NECESSARY REGULATORY APPROVALS.

We may not receive the regulatory approvals necessary to commercialize our
product candidates, which could cause our business to be severely harmed. Our
product candidates are subject to extensive and rigorous government regulation.
The FDA regulates, among other things, the development, testing, manufacture,
safety, record-keeping, labeling, storage, approval, advertising, promotion,
sale and distribution of pharmaceutical products. If our potential products are
marketed abroad, they will also be subject to extensive regulation by foreign
governments. None of our product candidates has been approved for sale in the
United States or any foreign market. The regulatory review and approval process,
which includes preclinical studies and clinical trials of each product
candidate, is lengthy, complex, expensive and uncertain. Securing FDA approval
requires the submission of extensive preclinical and clinical data and
supporting information to the FDA for each indication to establish the product
candidate's safety and efficacy. Data obtained from preclinical and clinical
trials are susceptible to varying interpretation, which may delay, limit or
prevent regulatory approval. The approval process may take many years to
complete and may involve ongoing requirements for post-marketing studies. In
light of the limited regulatory history of monoclonal antibody-based
therapeutics, regulatory approvals for our products may not be obtained without
lengthy delays, if at all. Any FDA or other regulatory approvals of our product
candidates, once obtained, may be withdrawn. The effect of government regulation
may be to:

o delay marketing of potential products for a considerable period of
time;
o limit the indicated uses for which potential products may be
marketed;
o impose costly requirements on our activities; and
o provide competitive advantage to other pharmaceutical and
biotechnology companies.

We may encounter delays or rejections in the regulatory approval process because
of additional government regulation from future legislation or administrative
action or changes in FDA policy during the period of product development,
clinical trials and FDA regulatory review. Failure to comply with applicable FDA
or other applicable regulatory requirements may result in criminal prosecution,
civil penalties, recall or seizure of products, total or partial suspension of
production or injunction, as well as other regulatory action against our product
candidates or us. Outside the United States, our ability to market a product is
contingent upon receiving clearances from the appropriate regulatory
authorities. This foreign regulatory approval process includes similar risks to
those associated with FDA approval process.

OUR PRODUCT CANDIDATES WILL REMAIN SUBJECT TO ONGOING REGULATORY REVIEW EVEN IF
THEY RECEIVE MARKETING APPROVAL. IF WE FAIL TO COMPLY WITH CONTINUING
REGULATIONS, WE COULD LOSE THESE APPROVALS AND THE SALE OF OUR PRODUCTS COULD BE
SUSPENDED.

Even if we receive regulatory approval to market a particular product candidate,
the approval could be conditioned on us conducting additional costly
post-approval studies or could limit the indicated uses included in our
labeling. Moreover, the product may later cause adverse effects that limit or
prevent its widespread use, force us to withdraw it from the market or impede or
delay our ability to obtain regulatory approvals in additional countries. In
addition, the manufacturer of the product and its facilities will continue to be
subject to FDA review and periodic inspections to ensure adherence to applicable
regulations. After receiving marketing approval, the manufacturing, labeling,
packaging, adverse event reporting, storage, advertising, promotion and record
keeping related to the product will remain subject to extensive regulatory
requirements. We may be slow to adapt, or we may never adapt, to changes in
existing regulatory requirements or adoption of new regulatory requirements.

If we fail to comply with the regulatory requirements of FDA and other
applicable U.S. and foreign regulatory authorities or previously unknown
problems with our products, manufacturers or manufacturing processes are
discovered, we could be subject to administrative or judicially imposed
sanctions, including:

o restrictions on the products, manufacturers or manufacturing
processes;

o warning letters;

o civil or criminal penalties;

o fines;

o injunctions;

o product seizures or detentions;

o import bans;

o voluntary or mandatory product recalls and publicity requirements;

o suspension or withdrawal of regulatory approvals;

o total or partial suspension of production; and

o refusal to approve pending applications for marketing approval of
new drugs or supplements to approved applications.

UNFAVORABLE PRICING REGULATIONS, THIRD-PARTY REIMBURSEMENT PRACTICES OR
HEALTHCARE REFORM INITIATIVES APPLICABLE TO OUR PRODUCT CANDIDATES COULD LIMIT
OUR POTENTIAL PRODUCT REVENUE.

The regulations governing drug pricing and reimbursement vary widely from
country to country. Some countries require approval of the sale price of a drug
before it can be marketed and, in many of these countries, the pricing review
period begins only after approval is granted. In some countries, prescription
pharmaceutical pricing remains subject to continuing governmental control even
after initial approval is granted. Although we monitor these regulations, our
product candidates are currently in the development stage and we will not be
able to assess the impact of price regulations for at least several years. As a
result, we may obtain regulatory approval for a product in a particular country,
but then be subject to price regulations that delay the commercial launch of the
product and may negatively impact the revenues we are able to derive from sales
in that country.

WE MAY BE UNABLE TO ESTABLISH THE PHARMACEUTICAL MANUFACTURING CAPABILITIES
NECESSARY TO DEVELOP AND COMMERCIALIZE OUR POTENTIAL PRODUCTS.

We do not have our own manufacturing facility for the manufacture of the
radiopharmaceutical compounds necessary for clinical testing or commercial sale.
We intend to rely in part on third-party contract manufacturers to produce
sufficiently large quantities of drug materials that are and will be needed for
clinical trials and commercialization of our potential products. Third-party

manufacturers may not be able to meet our needs with respect to timing, quantity
or quality of materials. If we are unable to contract for a sufficient supply of
needed materials on acceptable terms, or if we should encounter delays or
difficulties in our relationships with manufacturers, our clinical trials may be
delayed, thereby delaying the submission of product candidates for regulatory
approval and the market introduction and subsequent commercialization of our
potential products. Any such delays may lower our revenues and potential
profitability.

We may develop our manufacturing capacity in part by expanding our current
facilities or building new facilities. Either of these activities would require
substantial additional funds and we would need to hire and train significant
numbers of employees to staff these facilities. We may not be able to develop
manufacturing facilities that are sufficient to produce drug materials for
clinical trials or commercial use. We and any third-party manufacturers that we
may use must continually adhere to current Good Manufacturing Practices
regulations enforced by FDA through its facilities inspection program. If our
facilities or the facilities of third-party manufacturers cannot pass a
pre-approval plant inspection, FDA will not grant approval to our product
candidates. In complying with these regulations and foreign regulatory
requirements, we and any of our third-party manufacturers will be obligated to
expend time, money and effort on production, record-keeping and quality control
to assure that our potential products meet applicable specifications and other
requirements. If we or any third-party manufacturer with whom we may contract
fail to maintain regulatory compliance, we or the third party may be subject to
fines and/or manufacturing operations may be suspended.

THE SALE OF THE SHARES OF COMMON STOCK ACQUIRED IN PRIVATE PLACEMENTS COULD
CAUSE THE PRICE OF OUR COMMON STOCK TO DECLINE.

During 2003 and 2004, we completed several financings in which we issued common
stock, convertible notes, warrants and other securities convertible into common
stock to certain private investors and as required under the terms of those
transactions, we filed registration statements with the United States Securities
and Exchange Commission (SEC) under which the investors may resell common stock
acquired in these transactions, as well as common stock acquired on the exercise
of the warrants and convertible securities held by them, to the public. We have
also filed a registration statement covering the resale of common stock issued
to former stockholders of Cardiosonix in connection with our acquisition of that
business.

The selling stockholders under these registration statements may sell none, some
or all of the shares of common stock acquired from us, as well as common stock
acquired on the exercise of the warrants and convertible securities held by
them. We have no way of knowing whether the selling stockholders will sell the
shares covered by these registration statements. Depending upon market liquidity
at the time, a sale of shares covered by these registration statements 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 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 EES 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.

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. FDA enforcement
policy strictly prohibits the marketing of 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 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(TM) and
QUANTIX/OR(TM). We may not be abLe to obtain clearance to market 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 plan
to transfer or manufacturing of the QUANTIX products to a contract manufacturer
located in the United States, certain manufacturing and development activities
underway in Israel have been or will be curtailed or discontinued. While we have
reduced 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 (OCS) 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 OCS. The terms of the OCS grants may affect
our efforts to transfer manufacturing of products 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. As a result of our efforts to transfer a significant
portion of the manufacture of our blood flow products out of Israel, we will
likely be required to pay an increased 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 may impair our ability to effectively
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 related to other grantees 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 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.

RISKS OF SECURED INDEBTEDNESS

All of our material assets, except the intellectual property associated with our
Lymphoseek and RIGS products under development, have been pledged as collateral
for the $8.1 million in principal amount of our 8% Series A Convertible Notes
due December 12, 2008 (the "Notes"). In addition to the security interest in our
assets, the Notes carry substantial covenants that impose significant
requirements on us, including, among others, requirements that:

o we pay all principal, interest and other charges on the Notes when
due;

o we use the proceeds from the sale of the Notes only for permitted
purposes;

o we nominate and recommend for election as a director a person
designated by the holders of the Notes;

o we keep reserved out of our authorized shares of common stock
sufficient shares to satisfy our obligation to issue shares on
conversion of the Notes and the exercise of the warrants issued in
connection with the sale of the Notes;

o we achieve annual revenues on a consolidated basis of at least $5.4
million in 2005, $6.5 million in 2006, and $9 million in each year
thereafter;

o we maintain a minimum cash balances of $4.5 million at the end of
first 6 months of 2005, $4 million at the end of the second six
months of 2005, and $3.5 million at the end of each 6 month period
thereafter; and

o that we indemnify the purchasers of the Notes against certain
liabilities.

Additionally, with certain exceptions, the Notes prohibit us from:

o amending our organizational or governing agreements and documents,
entering into any merger or consolidation, dissolving the Company or
liquidating its assets, or acquiring all or any substantial part of
the business or assets of any other person;

o engaging in transactions with any affiliate;

o entering into any agreement inconsistent with our obligations under
the Notes and related agreements;

o incurring any indebtedness, capital leases, or contingent
obligations outside the ordinary course of business;

o granting or permitting liens against or security interests in our
assets;

o making any material dispositions of our assets outside the ordinary
course of business;

o declaring or paying any dividends or making any other restricted
payments; or

o making any loans to or investments in other persons outside of the
ordinary course of business.

Our ability to comply with these provisions may be affected by changes in our
business condition or results of our operations, or other events beyond our
control. The breach of any of these covenants would result in a default under
the Notes, permitting the holders of the Notes to accelerate their maturity and
to sell the assets securing them. Such actions by the holders of the Notes could
cause us to cease operations or seek bankruptcy protection.

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 Stock Market. 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 $0.25 per share and as high as $1.11 per
share in the last twelve months. Some of the factors leading to the volatility
include:

o price and volume fluctuations in the stock market at large which do
not relate to our operating performance;

o fluctuations in our operating results;

o financing arrangements we may enter that require the issuance of a
significant number of shares in relation to the number of shares
currently outstanding;

o announcements of technological innovations or new products which we
or our competitors make;

o FDA and/or international regulatory actions;

o developments with respect to patents or proprietary rights;

o public concern as to the safety of products that we or others
develop; and

o 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.

Until recently, 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 twelve-month period ended December 20, 2004 was approximately 508,000
shares. Daily volume during that period ranged from 0 shares to 4.4 million
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.

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:

o general economic and business conditions, both nationally and in our
markets,
o our history of losses,
o our expectations and estimates concerning future financial
performance, financing plans and the impact of competition,
o our ability to implement our growth strategy,
o anticipated trends in our business,
o advances in technologies, and
o 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 three 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.

FISCAL YEAR 2004 HIGH LOW CLOSE
------------------------ ----- ----- -----
First Quarter $1.10 $0.28 $0.90
Second Quarter $1.11 $0.41 $0.60
Third Quarter $0.60 $0.35 $0.53
Fourth Quarter through
December 20, 2004 $0.61 $0.37 $0.59

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 $0.43 $0.24 $0.31

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

As of December 20, 2004, 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 physicians. The December 2001 acquisition of
Cardiosonix expanded our potential product offerings beyond the neo2000 gamma
detection device which is marketed in the oncology arena into the area of blood
flow measurement and cardiac care. 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 and has received marketing
clearance for two of its products, QUANTIX/ND and QUANTIX/OR, in Europe and in
the U.S. In addition to our medical device products, we have two
radiopharmaceutical products, RIGSCAN CR and LYMPHOSEEK, in the advanced phases
of clinical development.

YEARS ENDED DECEMBER 31, 2003 AND 2002

RESULTS OF OPERATIONS

Net Sales and Margins. Net sales increased $2.2 million, or 64%, to $5.6 million
in 2003 from $3.4 million in 2002. Gross margins on net sales increased to 44%
of net sales for 2003 compared to 30% of net sales for 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 2002 by 7 percentage points.

Approximately $1.9 million of the increase in net sales was the result of
increased revenue related to our gamma detection products with the remaining
$245,000 generated from our blood flow products. We had only $59,000 in revenues
from blood flow products during 2002. Of the increased revenue from gamma
detection products, approximately 20% was due to increased prices realized on
our NEO2000(R) Control unit and 14mm probes, with approximately 70% due to
increased sales volumes of these products. The remaining 10% was due to various
changes in other products and product mix. The price at which we sell our gamma
detection products to Ethicon Endo-Surgery, Inc., (EES) is based on a percentage
of the global average selling price (ASP) received by EES on sales of Neoprobe
products to end customers, subject to a minimum floor price. The increase in
gross margins was primarily due to the higher recorded revenue per gamma
detection system combined with lower internal manufacturing costs as a result of
headcount reductions during the third and fourth quarters of 2002 that
contributed to lower average costs.

License and Other Revenue. License and other revenue for 2003 and 2002 included
$800,000 from the pro-rata recognition of license fees related to the
distribution agreement with EES and $146,000 and $520,000, 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 decreased
$430,000, or 19%, to $1.9 million during 2003 from $2.3 million in 2002. The
decrease was primarily due to $425,000 in 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. 2003 and 2002 also included $27,000 and $50,000, respectively, of license
fees related to the LYMPHOSEEK tracing agent.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased $165,000, or 5%, to $3.1 million during 2003
from $3.3 million during 2002. The decrease was primarily due to $232,000 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 2003 and 2002
included $30,000 and $138,000, 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
2002 also included $79,000 for the transfer of manufacturing of certain
components of the NEO2000 gamma detection system to UMM.

Other Income (Expenses). Other income decreased $217,000 resulting in other
expenses of $188,000 during 2003 compared to other income of $29,000 during
2002. Other expenses during 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 2002 consisted
primarily of interest income. Our interest income decreased because we
maintained a lower balance of cash and investments during 2003 as compared to
2002.

NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003

RESULTS OF OPERATIONS

Net Sales and Margins. Net sales, primarily of our gamma detection systems,
increased $230,000, or 6%, to $4.1 million during the first nine months of 2004
from $3.9 million during the same period in 2003. Gross margins on net sales
increased to 59% of net sales for the first nine months of 2004 compared to 45%
of net sales for the same period in 2003.

The increase in net sales was primarily a result of a $302,000 increase in gamma
device sales and a $126,000 increase in gamma device service revenue, offset by
a $198,000 decrease in sales of our blood flow measurement devices. We expect
gamma device revenue for 2004 to be generally consistent with gamma device sales
for 2003. During the fourth quarter of 2003 and the first half of 2004, we
identified a market need for certain product enhancements to our blood flow
measurement devices that we are in the process of implementing. As a result, our
sales efforts will be affected until the enhancements can be launched, which we
expect to occur in the fourth quarter of this year. We expect blood flow sales
to begin to pick up during the first quarter of 2005.

The increase in gross margins was primarily due to decreases in the unit costs
to manufacture our neo2000 control unit resulting from internal design changes
and a lower cost structure at the new contract manufacturer. Cost of goods sold
for 2004 included a $78,000 charge for inventory obsolescence primarily related
to design changes in our QUANTIX product line.

License and Other Revenue. License and other revenue in the first nine months of
2004 and 2003 included $600,000 from the pro-rata recognition of license fees
related to the distribution agreement with EES. License and other revenue in the
first nine months of 2003 also included $146,000 from the reimbursement by EES
of certain product development costs.

Research and Development Expenses. Research and development expenses increased
$401,000 or 29% to $1.8 million during the first nine months of 2004 from $1.4
million during the same period in 2003. Research and development expenses in the
first nine months of 2004 included approximately $270,000 in gamma detection
drug development costs, $159,000 related to our gamma detection devices and
$792,000 related to the QUANTIX products. This compares to expenses of $28,000,
$39,000 and $899,000 in these relative segment categories in the same period in
2003. The changes in each segment were primarily due to (i) efforts to support
the re-initiation of our RIGSCAN CR research effort and to move our development
of LYMPHOSEEK forward, (ii) development activities related to updated versions
of our neo2000 control unit and detector probes, and (iii) the costs of product
refinement activities related to the QUANTIX/OR offsetting cost savings from
headcount reductions at our facility in Israel, respectively.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $131,000 or 6% to $2.4 million during the
first nine months of 2004 from $2.2 million during the same period in 2003. The
increase was primarily due to increases of $125,000 in marketing expenses
related to the marketing activities in support of the launch of our QUANTIX line
of blood flow products, $81,000 in increased wages and benefits, and $58,000 in
professional services coupled with increased investor relations services costs
and board meeting expenses, offset by decreases of $81,000 in depreciation and
amortization expenses, $51,000 in consulting services as well as decreases in
space costs and bad debt expense. Selling, general and administrative expenses
in the first nine months of 2003 also included $30,000 in impairment of
intellectual property that we did not believe had ongoing value to the business.

Other Income (Expenses). Other expenses increased $12,000 to $136,000 during the
first nine months of 2004 from $123,000 during the same period in 2003. The
primary reason for the increase was an increase in interest expense on debt
financings entered into during 2003. Of this interest expense, $132,000 and
$62,000 in the first nine months of 2004 and 2003, respectively, was non-cash in
nature related to the amortization of debt discounts resulting from the warrants
and beneficial conversion feature issued in connection with the underlying debt
agreements. Other expenses during the first nine months of 2004 also included
$17,000 in income related to miscellaneous refunds. Other expenses during the
first nine months of 2003 included $30,000 in interest expense related to the
factoring of our accounts receivable.

LIQUIDITY AND CAPITAL RESOURCES

Operating Activities. Cash used in operations decreased $295,000 to $625,000
used during the first nine months of 2004 from $919,000 used during the same
period in 2003. Working capital increased $1.4 million to $4.0 million at
September 30, 2004 as compared to $2.5 million at December 31, 2003. The current
ratio increased to 5.4:1 at September 30, 2004 from 2.6:1 at December 31, 2003.
The increase in working capital was primarily related to cash generated from the
sale of our common stock and the exercise of warrants combined with recognition
of non-cash license fees related to our distribution agreement with EES.

Cash balances increased to $3.0 million at September 30, 2004 from $1.6 million
at December 31, 2003, primarily due to the cash generated from the sale of our
common stock and the exercise of warrants, offset by increased operating
expenses during the first nine months of 2004.

Accounts receivable decreased to $746,000 at September 30, 2004 from $1.1
million at December 31, 2003. We expect receivable levels to continue to
fluctuate over the remainder of 2004 as the level of accounts receivable is
greatly dependent on the timing of purchases and payments by EES as well as the
potential effect of sales of blood flow products.

Inventory levels decreased to $947,000 at September 30, 2004 as compared to $1.0
million at December 31, 2003. We expect inventory levels to increase over the
remainder of 2004 as we re-establish our gamma device safety stock and build
finished units of our blood flow products in preparation for broader
distribution.

Investing Activities. Cash used in investing activities remained constant at
$84,000 during the first nine months of 2004 and 2003. Capital expenditures in
the first nine months of 2004 were primarily related to purchases of technology
infrastructure. Capital expenditures in the first nine months of 2003 were
primarily purchases of production tools and equipment in preparation for the
manufacture of our Quantix line of blood flow measurement devices. Capital needs
for the remainder of 2004 are expected to be consistent with 2003.

Financing Activities. Financing activities generated $2.1 million in cash in the
first nine months of 2004 versus $725,000 provided during the same period in
2003.

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 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 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 second half of 2003, we sold
Fusion a total of 473,869 shares of common stock and realized net proceeds of
$143,693. We issued Fusion 6,462 shares of common stock for commitment fees
related to the sales of our common stock to them during 2003. During the first
nine months of 2004, we sold Fusion a total of 2,350,000 shares of common stock
and realized net proceeds of $1,468,874. We also issued Fusion 66,129 shares of
common stock for commitment fees related to the sales of our common stock to
them during the first nine months of 2004.

the following assumptions: an average risk-free interest rate of 2.9%,
volatility of 139% and no expected dividend rate. Interest accrues on the note
at 8.5% per annum, payable monthly, and the note was originally due on June 30,
2004. On March 8, 2004, at the request of the Board of Directors, Mr. Bupp
agreed to extend the due date of the note from June 30, 2004 to June 30, 2005.
In exchange for extending the due date of the note, we issued Mr. Bupp an
additional 375,000 warrants to purchase our common stock at an exercise price of
$0.50 per share, expiring in March 2009. The per share value of these warrants
was $0.46 on the date of issuance using the Black-Scholes option pricing model
with the following assumptions: an average risk-free interest rate of 2.7%,
volatility of 152% and no expected dividend rate. Mr. Bupp's 750,000 warrants
remain outstanding. The note was repaid with proceeds from the $8.1 convertible
note financing that we closed in December 2004.

During April 2003, we also completed a convertible bridge loan agreement with an
investor for an additional $250,000. In consideration for the loan, we issued a
note to the investor in the principal amount of $250,000. The note was secured
by general assets of the company, excluding accounts receivable. In addition, we
issued the investor 500,000 warrants to purchase shares of our common stock at
an exercise price of $0.13 per share, expiring in April 2008. The per share
value of these warrants was $0.10 on the date of issuance using the
Black-Scholes option pricing model with the following assumptions: an average
risk-free interest rate of 2.9%, volatility of 139% and no expected dividend
rate. Under the terms of the agreement, the note bore interest at 9.5% per
annum, payable monthly, was convertible into common stock and was due on June
30, 2004. During January 2004, the investor converted the entire balance of the
note into 1.1 million shares of common stock according to the conversion terms
of the agreement. The investor's 500,000 warrants remain outstanding.

During 2003, an investment banking firm, Alberdale Capital, LLC (Alberdale),
assisted us in arranging an accounts receivable financing transaction. In
exchange for Alberdale's services, we issued them warrants to purchase 78,261
shares of our common stock. During the first quarter of 2004, Alberdale
exercised these warrants on a cashless basis in exchange for 53,500 shares of
common stock.

During October and November 2003, we executed common stock purchase agreements
with third parties introduced to us by another 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 $2.4 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 1,354,348 shares of our common stock on similar
terms. All warrants issued in connection with the transaction expire in October
2008. The per share value of these warrants was $0.31 on the date of issuance
using the Black-Scholes option pricing model with the following assumptions: an
average risk-free interest rate of 3.2%, volatility of 151% and no expected
dividend rate. During the first nine months of 2004, investors and placement
agents who participated in this placement exercised warrants representing a
total of 3,308,327 shares of common stock resulting in net proceeds of $865,563.

During December 2004, we completed a private placement of 8% Series A
Convertible Notes due December 12, 2008 in an aggregate principal amount of $8.1
million with Biomedical Value Fund, L.P. (BVF), Biomedical Offshore Value Fund,
Ltd. (BOVF) and David C. Bupp (Neoprobe's President and CEO) resulting in
proceeds to us of approximately $7.4 million, net of investment banking and
legal fees. BVF and BOVF are investment funds managed by Great Point Partners,
LLC. The notes will bear interest at 8% per annum and are freely convertible
into shares of our common stock at a price of $0.40 per share. We may force
conversion of the notes prior to their stated maturity under certain
circumstances. The conversion price represents the 10-day volume weighted
average trading price of our common stock through December 10, 2004. The notes
are callable by the holders in the event we do not meet certain revenue, cash
balance and other covenants. As part of this transaction, we issued five-year
warrants to the investors to purchase 10,125,000 shares of our common stock at
an exercise price of $0.46. In connection with this financing, we have also
issued warrants to purchase 1,600,000 shares of the Company's common stock to
placement agents, containing substantially identical terms to the warrants
issued to the note holders. Proceeds from the notes will be used primarily to
fund late stage clinical development of our most advanced radiopharmaceutical
agent, Lymphoseek, for the assessment of the spread of breast cancer and
melanoma to the lymphatic system and to complete the commercial launch of
Neoprobe's blood flow measurement products, the Quantix/OR and the Quantix/ND.

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, our
ability to obtain milestone or development funds from potential development and
distribution partners, regulatory actions by FDA and other international
regulatory bodies, and intellectual property protection. We believe we have
adequate capital to assure that we can properly support our current business
goals and objectives through 2006. Our near-term priorities include preparation
for Phase III clinical trials for two radiopharmaceutical products in our
pipeline, RIGScan CR and Lymphoseek and the identification of a potential
development partner to assist and fund RIGS development. In addition, we are
moving forward with improvements to the Quantix products based on thought leader
feedback received in the US and EU. We believe this will position us for
improved commercial viability of the Quantix products by the beginning of 2005.
We intend to fund the estimated $5 million development of Lymphoseek internally;
however, the decision as to how much, if any, of the estimated total of $15
million in RIGS development costs to fund internally versus through a potential
development partner has not yet been determined. We believe our recently
completed convertible promissory note financing will provide us with adequate
capital to complete the Phase III trial for Lymphoseek and should free up our
existing capital to support some incremental development for RIGS and support
the launch activities surrounding the Quantix products. However, the conversion
features of the notes along with the warrants issued in the transaction have
committed substantially all of our available shares of common stock. As such, we
cannot assure you that we will be able to obtain additional authorized shares
from our shareholders or that we will be able to raise capital, if such shares
are approved, on terms acceptable to us, or at all. We also cannot assure you
that we will be able to achieve significant product revenues from our current or
potential new products. In addition, we cannot assure you that we will achieve
profitability in 2005 or in the future.

CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

The following table presents our contractual obligations and commercial
commitments as of December 31, 2003.

PAYMENTS DUE BY PERIOD
---------------------------------------------------------------------
CONTRACTUAL CASH LESS THAN 1 - 3 4 - 5 AFTER
OBLIGATIONS TOTAL 1 YEAR YEARS YEARS 5 YEARS
----------------------- ---------- ---------- ---------- --------- ---------

Capital Leases $ 74,854(1) $ 21,436 $ 36,616 $ 16,802 $ --

Operating Leases 283,916(2) 138,610 145,306 -- --

Unconditional

Purchase Obligations 2,147,220(3) 2,147,220 -- -- --

Long-Term Debt 500,000 250,000(4) 250,000(5) -- --
---------- ---------- ---------- --------- ---------
Total Contractual

Cash Obligations $3,005,990 $2,557,266 $ 431,922 $ 16,802 $ --
========== ========== ========== ========= =========

(1) In February 2004, we entered into two (2) three-year capital lease
agreements for office equipment. The lease payments total approximately
$10,000 per year.

(2) In February 2004, we entered into a six-month operating lease agreement
for storage space. The lease payments total approximately $17,000 in 2004.

(3) 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 one year.

(4) In January 2004, Mr. Garlikov converted the entire balance of the note
into 1.1 million shares of common stock according to the conversion terms
of the agreement.

(5) In March 2004, the due date of the note to Mr. Bupp was extended to June
30, 2005 under the same terms.

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 1% of total revenues for the first nine
months of 2004 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.

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, 2004, 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 the
capitalized cost of these assets is based on the financial projections and
models related to the future sales success of Cardiosonix' products 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.

Inventory Valuation. We value our inventory at the lower of cost (first-in,
first-out method) or market. Our valuation reflects our estimates of excess,
slow moving and obsolete inventory as well as inventory with a carrying value in
excess of its net realizable value. Write-offs are recorded when product is
removed from saleable inventory. We review inventory on hand at least quarterly
and record provisions for excess and obsolete inventory based on several
factors, including current assessment of future product demand, anticipated
release of new products into the market, historical experience and product
expiration. Our industry is characterized by rapid product development and
frequent new product introductions. Uncertain timing of product approvals,
variability in product launch strategies, product recalls and variation in
product utilization all impact the estimates related to excess and obsolete
inventory.

Allowance for Doubtful Accounts. We maintain an allowance for doubtful accounts
receivable to cover estimated losses resulting from the inability of our
customers to make required payments. We determine the adequacy of this allowance
by regularly reviewing our accounts receivable aging and evaluating individual
customer receivables, considering customers' credit and financial condition,
payment history and relevant economic conditions. If the financial condition of
our customers were to deteriorate, resulting in an impairment of their ability
to make payments, additional allowances for doubtful accounts may be required.

OTHER ITEMS AFFECTING FINANCIAL CONDITION

At December 31, 2003, we had U.S. net operating tax loss carryforwards and tax
credit carryforwards of approximately $90.6 million and $4.3 million,
respectively, available to offset or reduce future income tax liability, if any,
through 2023. 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 significantly limited.

DESCRIPTION OF BUSINESS

DEVELOPMENT OF THE BUSINESS

OUR TECHNOLOGY

GAMMA DETECTION DEVICES

Through the third quarter of 2004, 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 (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
released three major software upgrades for customer units designed to improve
the utility of the system and/or offer the users additional features.

Surgeons are using our gamma detection devices 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-reviewed 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 and breast cancers. Consequently, it is estimated
that more than 80% of breast cancer patients 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. Our marketing
partner has seen continued growth in sales due partially to increased adoption
of the ILM procedure and changes in the competitive landscape. Lymphatic mapping
in breast cancer is the subject of national and international clinical trials,
including studies sponsored by the U.S. Department of Defense, the National
Cancer Institute (NCI) and the American College of Surgeons. Although we have
been selling gamma detection devices for use in surgical oncology for over seven
years, we believe many surgeons, both in the U.S. and the rest of the world have
delayed adoption of lymphatic mapping pending the outcome of these important
trials. We believe that once data from these trials are published; there will be
an additional demand for our devices. We continue to monitor these trials and to
work with our marketing partners and thought leaders in the surgical community
to set up and support training courses internationally for lymphatic mapping. We
also believe, based on anecdotal market intelligence, that over half of the
potential global market for devices such as ours remains untapped. 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.
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 2004 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 MEASUREMENT DEVICES

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

o real-time monitoring;
o intra-operative quantification;
o non-invasive diagnostics; and
o 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(R) 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 made. 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 FDA
510(k) clearance for marketing in the United States.

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
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 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 still in the early stages of
development and is not currently cleared for commercial sale in any market.

Our strategy related to Cardiosonix products for 2004 continues to emphasize the
three primary objectives we established in 2003:

o to promote and expand the clinical evaluation of the QUANTIX/ND and
QUANTIX/OR with thought leaders in the neurosurgical and cardiac
arenas;
o to secure and train additional marketing and distribution partners
for key global markets for the QUANTIX/ND and Quantix/OR devices;
and

o to achieve commercial sales of Cardiosonix' QUANTIX products beyond
demonstration unit sales that 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.

LYMPHOSEEK

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 I/II melanoma trial was funded through a research
grant from the American College of Surgeons. Our discussions held to date in the
further development and commercialization of LYMPHOSEEK have focused on gaining
a better understanding of the regulatory approval process related to LYMPHOSEEK.
To that end, we held a meeting in November 2003 with the Interagency Council on
Biomedical Imaging in Oncology (Interagency Council), an organization
representing FDA, the NCI 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. As a result of that meeting, we
prepared and submitted a clinical protocol to FDA for a pivotal trial to support
the marketing approval of LYMPHOSEEK at the end of the third quarter of 2004. We
are in discussion with the FDA regarding the final design of the trial and hope
to commence the multi-center trials late in the first quarter of 2005. 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.

RIGS

From inception until 1998, Neoprobe devoted significant efforts and resources to
the development of its proprietary RIGS technology. The RIGS system combines a
patented hand-held gamma radiation detection probe, proprietary radiolabeled
cancer-specific targeting agents, and patented surgical methods to provide
surgeons with real-time information to locate tumor deposits not detectable by
conventional methods, and to assist in more thorough removal of the cancer. The
RIGS system is designed to assist the surgeon in the more thorough removal of
the cancer, thereby leading to improved surgical treatment of the patient. The
targeting agents used in the RIGS process are monoclonal antibodies, labeled
with a radioactive isotope that emits low energy gamma rays. The device used is
a very sensitive radiation detection instrument that is capable of detecting
small amounts of radiation bound to the targeting agent. 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 Neoprobe's gamma-detection device, which emits an audible tone to direct the
surgeon to targeted tissue.

RIGSCAN(R) CR is an intraoperative radiodiagnostic agent consisting of a
radiolabeled murine monoclonal antibody (MAb CC49). The radiolabel used is 125I,
a 27 - 35 KeV emitting isotope. The MAb used in RIGSCAN CR is the CC49 MAb
developed by the NCI and licensed to Neoprobe by the National Institutes of
Health (NIH). The CC49 MAb is produced from a murine cell line generated by the
fusion of splenic lymphocytes from mice immunized with tumor-associated
glycoprotein-72 (TAG-72) with non-immunoglobulin secreting P3-NS-1-Ag4 myeloma
cells. The CC49 MAb localizes or binds to TAG-72 and shows a strong reactivity
with both LS-174T colon cancer extract and to a breast cancer extract.

RIGSCAN CR is the biologic component for the RIGS system to be used in patients
with colon or rectal cancer. The RIGS system is designed to be a diagnostic aid
in the intraoperative detection of clinically occult disease. RIGSCAN CR is
intended to be used in conjunction with other diagnostic methods, for the
detection of the extent and location of tumor in patients with colorectal
cancer. The detection of clinically occult tumor provides the surgeon with a
more accurate assessment of the extent of disease and, therefore, may impact the
surgical and therapeutic management of the patient. Clinical trials suggest that
RIGSCAN CR provides additional information outside that provided by standard
diagnostic modalities (including surgical exploration) that may aid in patient
management. Specifically, RIGSCAN CR used as a component of the RIGS system
confirms the location of surgically suspicious metastases, evaluates the margins
of surgical resection, and detects occult tumor in perihepatic (portal and
celiac axis) lymph nodes.

Neoprobe conducted two Phase III studies, NEO2-13 and NEO2-14, of RIGSCAN CR in
patients with colorectal cancer. Both studies were multi-institutional involving
cancer treatment institutions in the United States, Israel, and Europe. The
primary endpoint of both studies was to demonstrate that RIGSCAN CR detected
pathology-confirmed disease that had been undetected by traditional preoperative
(i.e., CT Scans) or intraoperative (i.e., surgeon's visual observations and
palpation) means. That is, the trials were intended to show that the use of
RIGSCAN CR assisted the surgeon in the detection of occult tumor. In 1996,
Neoprobe submitted applications to the European Agency for the Evaluation of
Medicinal Products (EMEA) and FDA for marketing approval of RIGSCAN CR for the
detection of metastatic colorectal cancer.

Clinical study NEO2-14, which was submitted to FDA in the RIGSCAN CR Biologic
License Application (BLA), enrolled 151 colorectal cancer patients with either
suspected metastatic primary colorectal disease or recurrent colorectal disease.
During FDA's review of the BLA, 109 of the enrolled patients were determined to
be evaluable patients. Clinical study NEO2-13 was conducted in 287 enrolled
patients with primary colorectal disease. The primary end-point for clinical
study NEO2-13 was the identification of occult tumor.

NEO2-14 was the pivotal study submitted with Neoprobe's referenced BLA. Two
additional studies evaluating patients with either primary or metastatic
colorectal disease, NEO2-11 (a multi-center study) and NEO2-18 (a single
institution study), were included in the BLA and provided supportive proof of
concept (i.e., localization and occult tumor detection) and safety data. A study
summary report for NEO2-13 was submitted under the BLA; however, FDA undertook
no formal review of the study.

Following review of its applications, we received requests for further
information from FDA and from the European Committee for Proprietary Medicinal
Products (CPMP) on behalf of the EMEA. Both FDA and EMEA acknowledged that our
studies met the diagnostic endpoint of the Phase III clinical study, which was
to provide incremental information to the surgeon regarding the location of
hidden tumor. However, both agencies wanted to know how the finding of
additional tumor provided clinical benefit that altered patient management or
outcome. In a series of conversations with FDA the product claims were narrowed
to the intraoperative detection of hepatic and perihepatic disease in patients
with advanced colorectal cancer and patients with recurrent colorectal cancer.

FDA determined during its review of the BLA review that the clinical studies of
RIGSCAN CR needed to demonstrate clinical utility in addition to identifying
additional pathology confirmed disease. In discussions between Neoprobe and the
agency, an FDA driven post hoc analysis plan was developed to limit the
evaluation of RIGSCAN CR to patients with hepatic and perihepatic disease with
known metastasis to the liver. Findings of "occult" disease and subsequent
changes in patient management (i.e., abandoning otherwise risky hepatic
resections) in this limited population would serve as a measure of patient
benefit. FDA's analysis of the patients enrolled in NEO2-14 matching the limited
criteria was evaluated with a determination to confirm the surgical resection
abandonment outcome. The number of evaluable patients in this redefined patient
population was deemed too small by the agency and the lack of pre-stated
protocol guidance precluded consistent sets of management changes given similar
occult findings. The number of evaluable patients for any measure of clinical
utility, therefore, was too small to meet relevant licensing requirements and
FDA ultimately issued a not approvable letter for the BLA on December 22, 1997,
describing certain clinical and manufacturing deficiencies. Neoprobe also
withdrew its application to the EMEA in November 1997.

We developed a clinical response plan for both agencies during the first half of
1998. However, following our analysis of the regulatory pathways for approval
that existed at that time, we determined that we did not have sufficient
financial resources to conduct the additional studies requested and sought to
identify others with an interest in continuing the development process.

Over the last several years, we have held preliminary discussions with several
parties potentially interested in continuing the RIGS development; however, only
one of those discussions resulted in an arrangement that attempted to restart
the development of RIGS. During 2000, we executed and amended an agreement with
OncoSurg Ltd. (OncoSurg, formerly NuRIGS Ltd.), that provided OncoSurg with an
option exercisable through December 31, 2001 to license the RIGS technology for
use in the diagnosis and treatment of colorectal cancer. During 2001, OncoSurg
conducted pre-clinical testing and sponsored a Phase I physician's
Investigational New Drug (IND) clinical trial for colorectal cancer using a
second-generation humanized version of our RIGSCAN CR antibody. However,
OncoSurg did not exercise its option to continue development at the end of 2001
due to a lack of funding which we believe is unrelated to the clinical results
of the Phase I trial. The physician-IND researchers reported favorable results
of the Phase I trial during fourth quarter of 2003.

We recently obtained results of a third party's survival analysis suggesting
that RIGSCAN CR may be predictive of, or actually contribute to, a positive
outcome when measuring survival of the patients that participated in our
original BLA studies. The data or its possible significance was unknown at the
time of the BLA review given the limited maturity of the follow-up experience.
The data includes publication by some of the primary investigators involved in
the Phase III RIGS trials who have independently conducted survival follow-up
analyses to their own institution's RIGS trial patients with apparently
favorable results relating to the long-term survival prognosis of patients who
were treated with RIGS. In addition, we have recently learned that FDA has held
the BLA originally filed with FDA in 1996 open. Based primarily on these pieces
of information, we requested, a meeting with FDA to discuss the possible next
steps for evaluating the survival related to our previous Phase III clinical
trials as well as the possible submission of this data, if acceptable, as a
prospective analysis in response to questions originally asked by FDA in
response to our original BLA. This meeting with FDA took place in April 2004.

The April 2004 meeting with FDA was an important event in the re-activation of
the RIGS program. The meeting was very helpful from a number of aspects: we
confirmed that the RIGS BLA remains active and open. We believe this will
improve both the cost effectiveness and timeliness of future regulatory
submissions for RIGSSCAN CR. Additionally, FDA preliminarily confirmed that the
BLA may be applicable to the general colorectal population; and not just the
recurrent colorectal market as applied for in 1996. Applicability to a general
colorectal population could result in a greater market potential for the product
than if applicable to just the recurrent population. During the meeting, FDA
indicated that it would consider possible diagnostic/prognostic indications for
RIGScan CR and that survival data from one of our earlier Phase III studies
could be supportive of a prognostic indication. We believe that approval for a
diagnostic indication prior to the submission of additional prognostic data from
a new trial could positively impact the approval timeline for RIGSCAN CR. In
June 2004 we submitted a Phase III protocol to FDA for their comment and review.
The protocol included a proposed clinical plan that included a near term
diagnostic endpoint for the study and a long term prognostic endpoint.

We have received a formal response from FDA to the Phase III protocol submitted
in late June 2004. The response indicates that FDA would be receptive to a
clinical trial design that would incorporate both near term disease progression
and long term survival prognostic endpoints. Further, the response provides us
with guidance for the development of the clinical data sheets and investigator
training programs for the conduct of the Phase III study in primary colorectal
patients as well as for the further development of the study design. We intend
to request a meeting with FDA to review the Phase III study materials, to
provide materials requested by FDA for diagnostic endpoints of the study and to
prepare for the initiation of the Phase III study in 2005. In addition, we
intend to meet with FDA to review the company's biologic and radio labeling
production plans. It is possible that the regulatory pathway may evolve as we
seek to reach a consensus with the agency on the reactivation of the RIGS
filing.

If our plan for evaluating the survival data is received positively, we intend
to engage the services of a clinical research organization (CRO) to review these
survival findings related to all evaluable patients from our Phase III primary
and metastatic colorectal cancer clinical trials. The analysis of this data may
answer some of the questions raised by FDA in response to our original
application; however, the RIGSCAN CR drug has not been produced for several
years and we believe it is likely we would have to perform some additional work
related to ensuring the drug cell line is still viable and submit this data to
FDA for their evaluation before approval could be considered. We have initiated
discussions with established biologic manufacturing organizations to determine
the costs and timelines associated with the production of commercial quantities
of the CC49 antibody. In addition, we will need to establish a process for
radiolabeling the CC49 antibody in order to meet the regulatory needs for the
RIGSCAN CR product. We have met with the centralized European regulatory agency,
the EMEA, to discuss development plans for RIGS. The EMEA indicated that they
were receptive to a similar diagnostic and prognostic clinical plan that is
being reviewed with FDA. In addition, the EMEA indicated that they would
encourage us to conduct the next clinical study on the RIGS technology with the
humanized version of the RIGSSCAN CR.

We are encouraged by the recent developments regarding RIGS. We believe we would
need to obtain additional funding and/or identify a development partner in order
to carry out all the activities necessary for commercialization. We do not have
any agreements in place or pending with third parties that would ensure the
continued development of the RIGS process and the completion of the survival
analysis proposed to FDA at the April 2004 meeting. In addition, even if we are
able to make such arrangements on satisfactory terms, we believe that the time
required for continued development, regulatory approval and commercialization of
a RIGS product would likely be a minimum of two years before we receive any
significant product-related royalties or revenues. However, we cannot assure you
that we will be able to complete definitive agreements with a development
partner for the RIGS technology and do not know if a partner will be obtained on
a timely basis on terms acceptable to us, or at all. We cannot assure you that
FDA or the EMEA will approve 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, Inc. (Aastrom) intended to determine whether Aastrom's
ReplicellTM 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. Although the prospects for
ACT may be improved depending on the outcome of a decision to renew development
efforts for RIGS, we currently 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
NIH estimates the overall annual costs for cancer (the primary focus of our
products) for the U.S. in the year 2003 at $189.5 billion: $64.2 billion for
direct medical costs, $16.3 billion for indirect morbidity, and $109 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 2004.

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 2004 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.

We estimate the total market potential for LYMPHOSEEK, if ultimately approved
for all of these indications, could exceed $200 million. However, we cannot
assure you that LYMPHOSEEK will be approved, or if approved, that it will
achieve the prices or sales we have estimated.

The ACS estimates that over 174,000 new incidences of colorectal and related
cancers will occur in the U.S. in 2004. Based on an assumed recurrence rate of
40%, this would translate into total potential surgical procedures of over
240,000 annually in the U.S. alone. We believe the number of procedures in other
markets of the world to be approximately two times the estimated U.S. market. As
a result, we believe the total potential global market for RIGSCAN CR could,
depending on the reimbursement allowed for RIGSCAN CR, be in excess of $1
billion annually. However, we cannot assure you that RIGSCAN CR will be
approved, or if approved, that it will receive the reimbursement or achieve the
level of sales we have currently estimated.

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 estimates the total cost of cardiovascular
diseases and stroke in the United States will exceed $368.4 billion in 2004. 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.

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

o non-invasive diagnostics (QUANTIX/ND);
o intraoperative assessment (QUANTIX/OR); and
o 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, information obtained from industry sources and data published
by our competitors and other medical device companies, we estimate the worldwide
totals for hospitals and operating rooms to be approximately two to
two-and-a-half times the U.S. totals. In addition, the NCHS estimates that
516,000 cardiac bypass grafts were performed in the U.S. in 2001 on 305,000
patients.

Based on the above number of institutions and procedures, 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 (estimated at averaging $25,000
to $30,000 per system or up to $180 per procedural use), 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 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. EES notified us, in March of 2004, of their desire to exercise
their option for the first of the two-year term extensions, thus extending the
term of our current agreement through December 31, 2006. 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.

GAMMA DETECTION RADIOPHARMACEUTICALS

Due to the recency of the reinvigoration of our development efforts related to
RIGSCAN CR, we have not established a marketing or distribution channel for this
product. We anticipate initiating such discussions following the establishment
of a development timeline following our April 15, 2004 meeting with FDA. We have
had initial discussions with parties who may be interested in marketing and
distribution of LYMPHOSEEK; however, such discussions to date have been
preliminary in nature and have not resulted in any definitive arrangements at
this time. We cannot assure you that we will be able to secure marketing and
distribution partners for RIGS or LYMPHOSEEK, or if secured, that such
arrangements will result in significant sales of either product.

BLOOD FLOW MEASUREMENT DEVICES

Both of our blood flow measurement devices, the QUANTIX/ND and Quantix/OR have
received marketing clearance in the in the U.S. and the EU and certain other
global markets. Our goal is to ensure sales and distribution coverage through
third parties of substantially all of the U.S. and EU and selective markets in
the rest of the world. To that end, we have put in place a master distributor
arrangement covering the major markets in the EU and are working with a number
of independent sales organizations to ensure coverage of major markets within
the U.S. In addition, we have distribution arrangements in place covering major
portions of the Pacific Rim and Central and South America.

We anticipate spending a significant amount of time and effort through the first
quarter of 2005 to penetrate the end-user market. We will need to complete the
training of our distributors and independent sales agents and work through them
with thought leaders in the cardiac and neurosurgical fields to gain penetration
at the end-user level. We anticipate placing some additional blood flow systems
with industry thought leaders to obtain critical pre-commercialization feedback;
however, we plan to continue working with the thought leaders already identified
to promote publication in support of more 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. We are also investigating
different sales models that include both capital sales and per use or lease-type
transactions. We expect the sales model will evolve over the initial months of
sales. 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), 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 for the manufacture of the 14mm probe and the NEO2000 control unit at
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
Electronics, Inc. (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 terminated our relationship with UMM during the
fourth quarter of 2003. In the process of evaluating contract manufacturers for
the QUANTIX product line, we had identified a different contract manufacturer,
TriVirix, and concluded that it would be financially and operationally
beneficial to us to have the NEO2000 and 14mm probe manufactured at the same
location as the QUANTIX products.

In February 2004, we executed a Product Supply Agreement with TriVirix for the
manufacture of the NEO2000 and 14mm probe. We have now completed the transfer of
the manufacturing for the NEO2000 and 14mm probes to TriVirix. TriVirix began
providing 14mm probes during February and the NEO2000 control unit during March
2004 for shipment to EES.

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.

GAMMA DETECTION RADIOPHARMACEUTICALS

We are in the process of establishing biologic production and radiolabeling
capabilities for RIGSCAN CR. We have held discussions with parties who may
assist in the manufacturing validation and radiolabeling of the RIGSCAN product;
however, we have not yet finalized agreements with these entities. We anticipate

finalizing these discussions within the near future to accommodate the planned
commencement of RIGSCAN CR clinical trials next year. We have also entered into
a development agreement with a third party for the manufacture of LYMPHOSEEK
that will ensure adequate supply of the drug for the upcoming Phase III clinical
trials. Further commercial supply and distribution agreements have yet to be
negotiated. We cannot assure you that we will be successful in securing and/or
maintaining the necessary biologic, product and/or radiolabeling capabilities.

BLOOD FLOW MEASUREMENT DEVICES

Currently, the QUANTIX products being distributed are being manufactured at
Cardiosonix' facility in Israel. However, consistent with our stated objectives,
we evaluated different contract manufacturers for the control unit portion of
the QUANTIX product line during the first quarter of 2003 and solicited
competitive bids. During the second quarter of 2003, we selected TriVirix to
assemble the control unit portion of the QUANTIX line. In February 2004, we
executed a Product Supply Agreement for the assembly of the blood flow control
units with TriVirix; however, we are working with TriVirix to maintain some
level of component sourcing from Israel that will satisfy our royalty
requirements to the Israeli government (See Risk Factors). Assembly of the
QUANTIX control units at TriVirix is expected to start during the first half of
2005. The ultrasound probes distributed with the QUANTIX control units, while
currently assembled at Cardiosonix' facility, use ultrasound transducers
manufactured by Vermon S.A. (Vermon) of France. We currently purchase ultrasound
transducer modules and subassemblies 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 Vermon or other subcontractors for the QUANTIX products, that we
will be able to maintain our agreement with TriVirix, 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 determined that development of the QUANTIX line had progressed
to the point where we did not need the number of development staff we had in
order to support the final development phases and to support our
commercialization efforts. As such, we reduced employment at our Cardiosonix
subsidiary during the fourth quarter of 2003. We have entered into new
employment arrangements with certain key personnel in Israel in order to
continue to provide limited developmental and commercial support for the QUANTIX
products.

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 was 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 has
retreated from the sale of gamma detection devices in the U.S. and certain 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 or increased slightly in light of changes in the competitive landscape
over the past few years. As we have discussed, we believe that current sales
levels indicate that some prospective customers may be waiting on the results of
important international clinical trials prior to adoption the ILM procedure and
purchasing a gamma detection device. 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.

GAMMA DETECTION RADIOPHARMACEUTICALS

We do not believe there are any directly competitive intraoperative diagnostic
radiopharmaceuticals with RIGSCAN CR that would be used intraoperatively in the
colorectal cancer application that RIGSCAN CR is initially targeted for. There
are other radiopharmaceuticals that are used as preoperative imaging agents;
however, we are unaware of any that could be used as a real-time diagnostic aid
during surgery such as RIGSCAN CR. Surgeons who practice the lymphatic mapping
procedure that LYMPHOSEEK is intended for currently use other
radiopharmaceuticals such as sulphur-colloid compound in the U.S. and other
colloid compounds in other markets. However, these drugs are being used
"off-label" (i.e., they are not specifically indicated for use as a lymphatic
targeting agent). As such, we believe that LYMPHOSEEK, if ultimately approved,
would be the first drug specifically labeled for use as a lymphatic tissue
targeting agent.

BLOOD FLOW MEASUREMENT 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

o 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.

o 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.

o 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, inaccurate and does not
offer monitoring capabilities. However, plain Doppler systems provide only
blood flow velocity rather than volume flow.

INDIRECT BLOOD FLOW MEASUREMENT DEVICES

o 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, 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).

o 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.

o 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.

o 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.

o 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.

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

o 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:

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

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

o Critical care monitoring: Deltex Medical Ltd. 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 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 was issued in the U.S. in January 2003 and claims
for the second patent have been allowed. Two patents have been filed in the EU
and the claims of one patent have been allowed and the claims of the second
patent are in the late stage 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. The claims of the composition of
matter patent covering LYMPHOSEEK have been allowed in the EU and the
composition of matter patent is being prosecuted in Japan.

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. The most recent of these patents issued in
2004.

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, 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, 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 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 FDA to clear medical products for
commercial release lengthened and the number of marketing clearances decreased.
In response to public and congressional concern, 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 FDA review times have improved
since passage of the 1997 Act, we cannot assure you that 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 MEASUREMENT 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 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 FDA in December 1986 with modified versions receiving similar
clearances in 1992 through 1997. In 1998, 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 CE Mark clearance to market in the EU and 510(k) clearance in the U.S.
Our distribution partners in certain foreign markets other than the EU are
seeking marketing clearances, as required, for both the QUANTIX/ND and
QUANTIX/OR. We intend to submit additional applications for clearance or
amendments, as appropriate, for the QUANTIX/TE in the future.

GAMMA DETECTION RADIOPHARMACEUTICALS (LYMPHOSEEK AND RIGS)

Our radiolabeled targeting agents and biologic products, if developed, would
require a regulatory license to market by 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 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 December 20, 2004, we had 21 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
September 2006, with the landlord of these facilities for approximately 9,000
square feet. The lease provides for a monthly base rent of approximately $6,200
in 2004. 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,
but that we may need to expand our space lease somewhat related to our
radiopharmaceutical activities depending on the level of activities performed
internally versus by third parties.

Our subsidiary, Cardiosonix Ltd., currently leases its office in the Kital
Building at 8 Hasadna Street, Ra'anana, Israel. The lease covers approximately
350 square meters of space and expires in June 2005. The lease provides for a
monthly base rent of $2,400 through the expiration of the lease.

OUR MANAGEMENT

DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS

DIRECTORS

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

CARL J. ASCHINGER, JR., age 65, has served as a director of our Company since
June 2004. Mr. Aschinger is the Chairman and Chief Executive Officer of Columbus
Show Case Co., a privately-held company that manufactures showcases for the
retail industry. Mr. Aschinger also serves on the Board of Directors and as
Chairman of the Audit Committee of Wilson-Bohannon, a privately-held company
that manufactures padlocks. Mr. Aschinger is a former director of Liqui-Box
Corporation and Huntington National Bank as well as other privately-held
ventures and has served on boards or advisory committees of several
not-for-profit organizations.

NANCY E. KATZ, age 45, has served as a director of our Company since January
2001. Ms. Katz currently is an independent health care business consultant. Ms.
Katz served as President, Chief Executive Officer and 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 65, has served as a director of our Company since January
2002. Mr. Miller serves as Chairman of the Audit Committee. 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 DIRECTORS' TERMS CONTINUE UNTIL THE 2006 ANNUAL MEETING:

KIRBY I. BLAND, M.D., age 62, has served as a director of our Company since May
2004. Dr. Bland currently serves as Professor and Chairman and Fay Fletcher
Kerner Professor and Chairman Department of Surgery of the University of Alabama
at Birmingham (UAB) School of Medicine since 1999 and 2002, respectively, Deputy
Director of the UAB Comprehensive Cancer Center since 2000 and Senior Scientist,
Division of Human Gene Therapy, UAB School of Medicine since 2001. Prior to his
appointments at UAB, Dr. Bland was J. Murry Breadsley Professor and Chairman,
Professor of Medical Science, Department of Surgery and Director, Brown
University Integrated Program in Surgery at Brown University School of Medicine
from 1993 to 1999. Prior to his appointments at Brown University, Dr. Bland was
Professor and Associate Chairman, Department of Surgery, University of Florida
College of Medicine from 1983 to 1993 and Associate Director of Clinical
Research at the University of Florida Cancer Center from 1991 to 1993. Dr. Bland
held a number of medical staff positions at the University of Louisville, School
of Medicine from 1977 to 1983 and at M. D. Anderson Hospital and Tumor Institute
from 1976 to 1977. Dr. Bland is a member of the Board of Governors of the
American College of Surgeons (ACS), a member of the ACS' Advisory Committee,
Oncology Group (ACOSOG), a member of the ACS' American Joint Committee on Cancer
Task Force and serves as Chairman of the ACS' Breast Disease Site Committee,
COC. Dr. Bland is a past President of the Society of Surgical Oncology. Dr.
Bland received his B.S. in Chemistry/Biology from Auburn University and a M.D.
degree from the University of Alabama, Medical College of Alabama.

J. FRANK WHITLEY, JR., age 62, 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.

THE FOLLOWING DIRECTORS' TERMS CONTINUE UNTIL THE 2007 ANNUAL MEETING:

REUVEN AVITAL, age 53, 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 Israeli 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 55, 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 80, 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. 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. Dr. Krevans has a B.S. degree and a M.D. degree, both from New York
University.

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
------------------ ----- -------------------------------------------------
Anthony K. Blair 44 Vice President, Manufacturing Operations
Carl M. Bosch 47 Vice President, Research and Development
Rodger A. Brown 53 Vice President, Regulatory Affairs
and Quality Assurance
Brent L. Larson 41 Vice President, Finance; Chief Financial Officer;
Treasurer and Secretary

ANTHONY K. BLAIR has served as Vice President, Manufacturing Operations of our
Company since July 2004. Mr. Blair has 16 years of experience in the medical
device industry. Prior to joining our Company, he served as Vice President,
Manufacturing Operations of Enpath Medical, Lead Technologies Division, formerly
known as Biomec Cardiovascular, Inc. from 2002 to June 2004. From 1998 through
2001, Mr. Blair led the manufacturing efforts at Astro Instrumentation, a
medical device contract manufacturer. From 1989 to 1998 at Ciba Corning
Diagnostics (now Bayer), Mr. Blair held managerial positions including
Operations Manager, Materials Manager, Purchasing Manager and Production
Supervisor. From 1985 to 1989, Mr. Blair was employed by Bailey Controls and
held various positions in purchasing and industrial engineering. Mr. Blair
started his career at Fisher Body, a division of General Motors, in production
supervision. Mr. Blair has a B.B.A. degree in management and labor relations
from Cleveland State University.

CARL M. BOSCH has served as Vice President, Research and 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.

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 four highest
paid 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
------------------------
RESTRICTED SECURITIES
ANNUAL COMPENSATION STOCK UNDERLYING
-------------------------- AWARDS OPTIONS ALL OTHER
YEAR SALARY BONUS ($) (#) COMPENSATION
NAME AND PRINCIPAL POSITION
---------------------------

Carl M. Bosch 2003 $135,125 $ -- -- 70,000 $ 6,573(a)
Vice President, 2002 129,375 -- -- 50,000 3,093(a)
Research and Development 2001 129,375 25,250 -- 45,000 3,081(a)

Rodger A. Brown 2003 $125,316 $ -- -- 70,000 $ --
Vice President, Regulatory Affairs/ 2002 105,417 -- -- 50,000 --
Quality Assurance 2001 99,875 19,000 -- 45,000 --

David C. Bupp 2003 $222,167 $ 32,500 -- 170,000 $ 31,090(b)
President and 2002 297,083 -- -- 180,000 5,738(b)
Chief Executive Officer 2001 310,000 46,500 -- 180,000 5,161(b)

Brent L. Larson 2003 $135,125 $ -- -- 70,000 $ 11,733(c)
Vice President, Finance and 2002 129,375 -- -- 50,000 2,993(c)
Chief Financial Officer 2001 131,250 20,250 -- 60,000 3,400(c)

Dan Manor 2003 $145,000 $ -- -- 40,000 $ 15,443(e)
President and Chief Executive 2002 145,000 -- -- 50,000 14,248(e)
Officer, Cardiosonix Ltd.(d) 2001 -- -- -- -- --

----------
(a) Amounts represent solely matching contribution under the Neoprobe
Corporation 401(k) Plan (the Plan), except for 2003, which includes $3,870
related to the vesting of restricted stock. 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.

(b) Amounts represent matching contribution under the Plan, except for 2003,
which includes $27,090 related to the vesting of restricted stock and
social luncheon club dues.

(c) Amounts represent solely matching contribution under the Plan, except for
2003, which includes $9,030 related to the vesting of restricted stock.

(d) Mr. Manor began his employment with our company on January 1, 2002, in
connection with our acquisition of Cardiosonix Ltd. (formerly Biosonix
Ltd.) and ended his employment on December 31, 2003.

(e) 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 the 2002 Stock Incentive Plan during the
2003 fiscal year.

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

Carl M. Bosch 40,000(a) 3.9% $ 0.14(b) 1/15/13
30,000(a) 2.9% $ 0.13(c) 2/15/13

Rodger A. Brown 40,000(a) 3.9% $ 0.14(b) 1/15/13
30,000(a) 2.9% $ 0.13(c) 2/15/13

David C. Bupp 100,000(a) 9.7% $ 0.14(b) 1/15/13
70,000(a) 6.8% $ 0.13(c) 2/15/13

Brent L. Larson 40,000(a) 3.9% $ 0.14(b) 1/15/13
30,000(a) 2.9% $ 0.13(c) 2/15/13

Dan Manor 40,000(a) 3.9% $ 0.14(b) 1/15/13

----------
(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
2003 was $0.12 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 2.7%, volatility of 146% and no
expected dividend rate.

(c) The per share weighted average fair value of these stock options during
2003 was $0.11 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 2.5%, volatility of 146% and no
expected dividend rate.

(d) 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, 2003). There were no stock options exercised by the
Named Executives during the fiscal year ended December 31, 2003.

NUMBER OF SECURITIES UNDERLYING
UNEXERCISED OPTIONS AT FISCAL VALUE OF UNEXERCISED IN-THE-MONEY
YEAR-END: OPTIONS AT FISCAL YEAR-END:
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE(1)
----------------- ------------------------------- ----------------------------

Carl M. Bosch 121,667 / 118,333 $0 / $12,200

Rodger A. Brown 116,167 / 118,333 $0 / $12,200

David C. Bupp 410,000 / 450,000 $0 / $12,200

Brent L. Larson 173,867 / 123,333 $0 / $29,600

Dan Manor 16,667 / 33,333 $0 / $ 6,800

----------
(1) Represents the total gain which would be realized if all in-the-money
options held at year end were exercised, determined by multiplying the
number of shares underlying the options by the difference between the per
share option exercise price and the per share fair market value at year
end of $0.31. An option is in-the-money if the fair market value of the
underlying shares exceeds the exercise price of the option.

COMPENSATION OF NON-EMPLOYEE DIRECTORS

We did not pay directors for participation in board or committee meetings in
2003. We reimbursed non-employee directors for travel expenses for meetings
attended during fiscal 2003. In addition, each non-employee director received
20,000 options 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 not less than the closing
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 January 1, 2004. The employment agreement
provides for an annual base salary of $271,250.

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. Mr. Bupp was paid a bonus of $32,500 relating
to fiscal year 2003.

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

o 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);

o the term of Mr. Bupp's employment agreement expires; or

o 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 $650,000 (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:

o 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;

o 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;

o 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

o 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 will be paid a severance amount of $406,250 if his employment is
terminated at the end of his employment agreement or without cause and his
benefits will continue for the longer of twenty-four months or the full term of
the agreement.

Restricted Stock Agreements. Mr. Bupp holds 100,000, 35,000, 45,000 and 30,000
shares of our common stock that was originally granted as restricted stock
grants 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 vested and contained certain change of
control provisions. However, in connection with the February 1, 2003 amendment
to Mr. Bupp's previous employment agreement, we vested Mr. Bupp's interest in
the shares. We recognized $27,090 in compensation expense related to the vesting
of the restricted stock in 2003 which occurred as a result of the execution of a
February 1, 2003 amendment to Mr. Bupp's previous employment agreement.

COMPENSATION AGREEMENTS WITH OTHER NAMED EXECUTIVES

Carl M. Bosch

Employment Agreement. Carl Bosch is employed under a twelve-month employment
agreement effective January 1, 2004. The employment agreement provided for an
annual base salary of $135,000 through June 30, 2004 when Mr. Bosch's annual
base salary was increased to $141,750.

The Compensation Committee 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 2003. Mr. Bosch was paid $26,000 in salary during 2003 that was
deferred under the terms of his previous employment agreement.

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

o 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);

o the term of Mr. Bosch's employment agreement expires; or

o 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 $270,000 and will continue
his benefits for the longer of twelve months or the remaining term of his
employment agreement.

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

o 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;

o 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
previous employment agreement that was effective from February 1, 2003 through
December 31, 2003 and Mr. Bosch's waiver of amounts previously deferred under an
August 1, 2002 amendment to another previous employment agreement, we vested Mr.
Bosch's interest in the shares. We recognized $3,870 in compensation expense
related to the vesting of the restricted stock in 2003 concurrent with the
execution of Mr. Bosch's previous employment agreement.

Rodger A. Brown

Employment Agreement. Rodger Brown is employed under a twelve-month employment
agreement effective January 1, 2004. The employment agreement provided for an
annual base salary of $115,000 through June 30, 2004 when Mr. Brown's annual
base salary was increased to $119,600. Mr. Brown was paid $32,733 in salary
during 2003 that was deferred under the terms of his previous employment
agreements.

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.

The Compensation Committee 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 2003.

Brent L. Larson

Employment Agreement. Brent Larson is employed under a twelve-month employment
agreement effective January 1, 2004. The employment agreement provides for an
annual base salary of $135,000 through June 30, 2004 when Mr. Larson's annual
base salary was increased to $140,400. Mr. Larson was paid $26,000 in salary
during 2003 that was deferred under the terms of his previous employment
agreement.

The terms of Mr. Larson's employment agreement are substantially identical to
Mr. Bosch's employment agreement. The Compensation Committee 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 2003.

Restricted Stock Agreement(s). Mr. Larson also holds 40,000, 20,000 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 previous
employment agreement that was effective from February 1, 2003 through December
31, 2003 and Mr. Larson's waiver of amounts previously deferred under an August
1, 2002 amendment to another previous employment agreement, we vested Mr.
Larson's interest in the shares. We recognized $9,030 in compensation expense
related to the vesting of the restricted stock in 2003 concurrent with the
execution of Mr. Larson's previous employment agreement.

Dan Manor

Dan Manor was employed by our subsidiary, Cardiosonix Ltd., as its President
under a two-year employment agreement effective January 1, 2002. The employment
agreement provided for a monthly basic salary of $12,083 and automatically
renewed for one-year increments unless written notice was 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 provided Dr. Manor with an automobile
allowance, and provided 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 on December
31, 2003; however, the royalty provisions of his agreement survive the end of
his employment with Cardiosonix and continue through December 31, 2006.

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 December 20, 2004, certain information
with respect to the beneficial ownership of shares of our 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 "Executive Compensation
- Summary Compensation Table"), and (iv) our directors and executive officers as
a group.

NUMBER OF
SHARES BENEFICIALLY PERCENT
BENEFICIAL OWNER OWNED(*) OF CLASS(**)
--------------------------------------- ------------------- --------------
Carl J. Aschinger, Jr. 63,000(a) (q)
Reuven Avital 2,836,791(b) 4.9%
Anthony K. Blair 50,000(c) (q)
Kirby I. Bland 50,000(d) (q)
Carl M. Bosch 308,619(e) (q)
Rodger A. Brown 224,500(f) (q)
David C. Bupp 2,313,226(g) 3.8%
Nancy E. Katz 84,068(h) (q)
Julius R. Krevans 228,668(i) (q)
Brent L. Larson 401,657(j) (q)
Fred B. Miller 62,668(k) (q)
J. Frank Whitley, Jr. 142,668(l) (q)
All directors and officers as a group 6,765,866(m) 11.0%
(11 persons)

Dan Purjes, et al. 3,913,044(n) 6.6%
Dan Manor (o) (o)
Great Point Partners, L.P. 30,000,000(p) 34.0%

----------
(*) 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 December 20, 2004, plus the number of shares the person has
the right to acquire within 60 days of December 20, 2004.

(a) This amount includes 40,000 shares issuable upon exercise of options which
are not exercisable within 60 days.

(b) 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 51,668
shares issuable upon exercise of options which are exercisable within 60
days but does not include 33,332 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.

(c) This amount does not include 90,000 shares issuable upon exercise of
options which are not exercisable within 60 days.

(d) This amount includes 50,000 shares issuable upon exercise of options which
are exercisable within 60 days but does not include 20,000 shares issuable
upon exercise of options which are not exercisable within 60 days.

(e) This amount includes 230,001 shares issuable upon exercise of options
which are exercisable within 60 days and 38,618 shares in Mr. Bosch's
account in the 401(k) Plan, but does not include 179,999 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 274,648 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.

(f) This amount includes 224,501 shares issuable upon exercise of options
which are exercisable within 60 days, but does not include 169,999 shares
issuable upon exercise of options which are not exercisable within 60
days.

(g) This amount includes 730,001 shares issuable upon exercise of options
which are exercisable within 60 days, 875,000 warrants which are
exercisable within 60 days, a promissory note convertible into 250,000
shares of our common stock, 50,875 shares that are held by Mr. Bupp's wife
for which he disclaims beneficial ownership and 56,850 shares in Mr.
Bupp's account in the 401(k) Plan, but it does not include 629,999 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 274,648 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.

(h) This amount includes 81,668 shares issuable upon exercise of options which
are exercisable within 60 days, but does not include 33,332 shares
issuable upon the exercise of options which are not exercisable within 60
days.

(i) This amount includes 226,668 shares issuable upon exercise of options
which are exercisable within 60 days, but does not include 73,332 shares
issuable upon exercise of options which are not exercisable within 60
days.

(j) This amount includes 287,201 shares issuable upon exercise of options
which are exercisable within 60 days and 38,956 shares in Mr. Larson's
account in the 401(k) Plan, but it does not include 179,999 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 274,648 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.

(k) This amount includes 51,668 shares issuable upon exercise of options which
are exercisable within 60 days and 11,000 shares held by Mr. Miller's wife
for which he disclaims beneficial ownership, but does not include 73,332
shares issuable upon the exercise of options which are not exercisable
within 60 days.

(l) This amount includes 141,668 shares issuable upon exercise of options
which are exercisable within 60 days, but does not include 33,332 shares
issuable upon exercise of options which are not exercisable within 60
days.

(m) This amount includes 2,115,044 shares issuable upon exercise of options
which are exercisable within 60 days and 134,424 shares held in the 401(k)
Plan, but it does not include 1,516,665 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 274,648 shares of common stock.

(n) This amount consists of 434,783 shares owned by MFW Associates, 217,391
warrants held by MFW associates which are exercisable within 60 days,
869,565 shares owned collectively by Dan & Edna Purjes, 434,783 warrants
held collectively by Dan & Edna Purjes which are exercisable within 60
days, 217,391 shares owned by Y Securities Management, Ltd., 108,696
warrants held by Y Securities Management, Ltd. which are exercisable
within 60 days, 217,391 shares owned by the Purjes Foundation, 108,696
warrants held by the Purjes Foundation which are exercisable within 60
days, 869,565 shares owned by Dan Purjes IRA and 434,783 warrants held by
Dan Purjes IRA which are exercisable within 60 days (collectively, Dan
Purjes, et al.). This amount is based on information provided to us in
connection with the purchase of these securities in a private placement
and subsequent filing of a registration statement and represents the best
information available to us at the time of this filing.

(o) Mr. Manor is no longer affiliated with our Company. As a consequence, we
are unable to determine his beneficial ownership of shares or the
percentage of outstanding shares held.

(p) This amount includes 11,000,000 shares convertible from promissory notes
of $4,400,000 held by Biomedical Value Fund, L.P. (BVF) that are
convertible within 60 days, 9,000,000 shares convertible from promissory
notes of $3,600,000 held by Biomedical Offshore Value Fund, LTD. (BOVF)
that are convertible within 60 days, 5,500,000 warrants held by BVF that
are exercisable within 60 days and 4,500,000 warrants held by BOVF that
are exercisable within 60 days. BVF and BOVF are investment funds managed
by Great Point Partners, LLP.

(q) Less than one percent.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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. In consideration for the loan, we issued Mr. Bupp warrants, expiring
in April 2008, to purchase 375,000 shares of our common stock at an exercise
price of $0.13 per share. Interest accrued on the note at the rate of 8.5% per
annum, payable monthly, and the note was due on June 30, 2004. On March 8, 2004,
the due date of the note to Mr. Bupp was extended to June 30, 2005. In exchange
for extending the due date of the note, we issued Mr. Bupp an additional
warrant, expiring in March 2009, to purchase 375,000 shares of our common stock
at an exercise price of $0.50 per share. The shares covered by this prospectus
include the 375,000 shares of common stock issuable pursuant to the warrants
granted to Mr. Bupp in March 2009. The note was repaid with proceeds from our
convertible note financing in December 2004.

On December, 13, 2004, we completed a Securities Purchase Agreement for the
purchase of convertible promissory notes in an aggregate principal amount of
$8.1 million with Biomedical Value Fund, L.P., Biomedical Offshore Value Fund,
Ltd. and Mr. Bupp. Biomedical Value Fund, L.P. and Biomedical Offshore Value
Fund, Ltd. are funds managed by Great Point Partners, LLC. The notes will bear
interest at 8% per annum and are freely convertible into shares of our common
stock at a price of $0.40 per share. In addition to the notes, we also issued
five-year warrants to Biomedical Value Fund, L.P., Biomedical Offshore Value
Fund, Ltd. and Mr. Bupp to purchase an aggregate 10,125,000 shares of our common
stock at an exercise price of $0.46. The shares covered by this prospectus
include 20,250,000 shares of common stock issuable upon conversion of the notes,
and the 10,125,000 shares of our common stock issuable upon the exercise of the
warrants. Pursuant to the terms of the Securities Purchase Agreement, the
Company agreed that while the notes remain outstanding, its Board of Directors
(or if it then exists, the nominating committee of the Board) shall nominate one
independent director, reasonably acceptable to the BV Funds, for election to the
Board at each meeting of the stockholders of the Company at which directors are
to be elected and shall recommend to such stockholders that they vote in favor
of such nominee's election to the Board.

DESCRIPTION OF CAPITAL STOCK

Authorized and Issued Stock
NUMBER OF SHARES AT NOVEMBER 15, 2004
-----------------------------------------------------------------------------------
TITLE OF CLASS AUTHORIZED OUTSTANDING RESERVED
-------------------------- ------------------------ -----------------------

Common Stock, $0.001 par value per share 100,000,000 58,287,057 9,902,214

Preferred Stock, $0.001 par value per 5,000,000 0 5,000,000
share(1)

----------
(1) Preferred Stock includes 500,000 shares which have been designated as
Series A Junior Participating Preferred Stock.

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:

o 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;

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

o 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. In consideration for the loan, we issued Mr. Bupp warrants, expiring
in April 2008, to purchase 375,000 shares of our common stock at an exercise
price of $0.13 per share. Interest accrued on the note at the rate of 8.5% per
annum, payable monthly, and the note was due on June 30, 2004. On March 8, 2004,
the due date of the note to Mr. Bupp was extended to June 30, 2005. In exchange
for extending the due date of the note, we issued Mr. Bupp an additional
warrant, expiring in March 2009, to purchase 375,000 shares of our common stock
at an exercise price of $0.50 per share. The shares covered by this prospectus
include the 375,000 shares of common stock issuable pursuant to the warrants
granted to Mr. Bupp in March 2004. The note was repaid with proceeds from our
convertible note financing in December 2004.

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

David C. Bupp(2) 2,313,226 3.8% 750,000 2.6%

Great Point Partners, LLC(3) 0 * 30,000,000 *

Roth Capital Partners, LLC(4) 0 * 800,000 *

Laidlaw & Co.(5) 3,510,870 5.9% 800,000 4.6%

----------------------
* 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 stockholder that were
exercisable on or within 60 days after December 20, 2004, were deemed
outstanding for the purpose of computing the percentage ownership of any
other person. The ownership percentages are calculated assuming that
58,287,087 shares of common stock were outstanding on December 20, 2004.

(2) Prior to giving effect to the offering, Mr. Bupp held 350,500 shares of
common stock, options exercisable within 60 days after December 20, 2004,
for 730,001 shares of common stock, 58,650 shares of common stock in his
account in the 401(k) plan, unvested options to purchase 629,999 shares of
common stock, exercisable Series Q warrants to purchase 750,000 shares of
our common stock, a promissory note convertible into 250,000 shares of our
common stock and a warrant to purchase an additional 125,000 shares of our
common stock issued in connection with the Securities Purchase Agreement
dated December 13, 2004. After giving effect to the offering Mr. Bupp will
hold 350,500 shares of common stock, options exercisable within 60 days
after December 20, 2004 for 730,001 shares of common stock, shares of
common stock in his account in the 401(k) plan, unvested options to
purchase 629,999 shares of common stock and 375,000 Series Q warrants to
purchase shares of common stock exercisable within 60 days after December
20, 2004.

(3) Prior to giving effect to the offering, Great Point Partners, LLC held
exercisable warrants to purchase 10,000,000 shares of our common stock and
promissory notes convertible into 20,000,000 shares of our common stock.
This amount consists of exercisable warrants to purchase 5,500,000 shares
of our common stock, and a promissory note convertible into 11,000,000
shares of our common stock, held by Biomedical Value Fund, L.P., an
investment fund under the management and control of Great Point Partners,
LLC; and, exercisable warrants to purchase 4,500,000 shares of our common
stock, and a promissory note convertible into 9,000,000 shares of our
common stock, held by Biomedical Offshore Value Fund, Ltd., an investment
fund also under the management and control of Great Point Partners, LLC.
Following the offering Great Point Partners, LLC will not hold any
warrants to purchase shares of our common stock or any convertible shares
of our common stock.

(4) Prior to giving effect to the offering, Roth Capital Partners, LLC held
exercisable warrants to purchase 800,000 shares of our common stock.
Following the offering Roth Capital Partners, LLC will not hold any
warrants to purchase shares of our common stock.

(5) Prior to giving effect to the offering, Laidlaw & Co. (formerly Sands
Brothers) held exercisable warrants to purchase 800,000 shares of our
common stock. Following the offering Laidlaw & Co. will not hold any
warrants to purchase shares of our common stock.

PLAN OF DISTRIBUTION

The Selling Stockholders and any of their pledgees, donees, transferees,
assignees and successors-in-interest may, from time to time, sell any or all of
their shares of common stock on any stock exchange, market or trading facility
on which the shares are traded or in private transactions. These sales may be at
fixed or negotiated prices. The Selling Stockholders may use any one or more of
the following methods when selling shares:

o ordinary brokerage transactions and transactions in which the
broker-dealer solicits investors;

o block trades in which the broker-dealer will attempt to sell the
shares as agent but may position and resell a portion of the block
as principal to facilitate the transaction;

o purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;

o an exchange distribution in accordance with the rules of the
applicable exchange;

o privately negotiated transactions;

o to cover short sales made after the date that this Registration
Statement is declared effective by the Commission;

o broker-dealers may agree with the Selling Stockholders to sell a
specified number of such shares at a stipulated price per share;

o a combination of any such methods of sale; and

o any other method permitted pursuant to applicable law.

The Selling Stockholders may also sell shares under Rule 144 under the
Securities Act, if available, rather than under this prospectus.

Broker-dealers engaged by the Selling Stockholders may arrange for other
brokers-dealers to participate in sales. Broker-dealers may receive commissions
or discounts from the Selling Stockholders (or, if any broker-dealer acts as
agent for the purchaser of shares, from the purchaser) in amounts to be
negotiated. The Selling Stockholders do not expect these commissions and
discounts to exceed what is customary in the types of transactions involved.

The Selling Stockholders may from time to time pledge or grant a security
interest in some or all of the Shares owned by them and, if they default in the
performance of their secured obligations, the pledgees or secured parties may
offer and sell shares of common stock from time to time under this prospectus,
or under an amendment to this prospectus under Rule 424(b)(3) or other
applicable provision of the Securities Act of 1933 amending the list of selling
stockholders to include the pledgee, transferee or other successors in interest
as selling stockholders under this prospectus.

Upon the Company being notified in writing by a Selling Stockholder that any
material arrangement has been entered into with a broker-dealer for the sale of
common stock through a block trade, special offering, exchange distribution or
secondary distribution or a purchase by a broker or dealer, a supplement to this
prospectus will be filed, if required, pursuant to Rule 424(b) under the
Securities Act, disclosing (i) the name of each such Selling Stockholder and of
the participating broker-dealer(s), (ii) the number of shares involved, (iii)
the price at which such the shares of common stock were sold, (iv)the
commissions paid or discounts or concessions allowed to such broker-dealer(s),
where applicable, (v) that such broker-dealer(s) did not conduct any
investigation to verify the information set out or incorporated by reference in
this prospectus, and (vi) other facts material to the transaction. In addition,
upon the Company being notified in writing by a Selling Stockholder that a donee
or pledgee intends to sell more than 500 shares of common stock, a supplement to
this prospectus will be filed if then required in accordance with applicable
securities law.

The Selling Stockholders also may transfer the shares of common stock in other
circumstances, in which case the transferees, pledgees or other successors in
interest will be the selling beneficial owners for purposes of this prospectus.

The Selling Stockholders and any broker-dealers or agents that are involved in
selling the shares may be deemed to be "underwriters" within the meaning of the
Securities Act in connection with such sales. In such event, any commissions
received by such broker-dealers or agents and any profit on the resale of the
shares purchased by them may be deemed to be underwriting commissions or
discounts under the Securities Act. Discounts, concessions, commissions and
similar selling expenses, if any, that can be attributed to the sale of
Securities will be paid by the Selling Stockholder and/or the purchasers. Each
Selling Stockholder has represented and warranted to the Company that it
acquired the securities subject to this registration statement in the ordinary
course of such Selling Stockholder's business and, at the time of its purchase
of such securities such Selling Stockholder had no agreements or understandings,
directly or indirectly, with any person to distribute any such securities.

The Company has advised each Selling Stockholder that it may not use shares
registered on this Registration Statement to cover short sales of Common Stock
made prior to the date on which this Registration Statement shall have been
declared effective by the Commission. If a Selling Stockholder uses this
prospectus for any sale of the common stock, it will be subject to the
prospectus delivery requirements of the Securities Act. The Selling Stockholders
will be responsible to comply with the applicable provisions of the Securities
Act and Exchange Act, and the rules and regulations thereunder promulgated,
including, without limitation, Regulation M, as applicable to such Selling
Stockholders in connection with resales of their respective shares under this
Registration Statement.

The Company is required to pay all fees and expenses incident to the
registration of the shares, but the Company will not receive any proceeds from
the sale of the common stock. The Company has agreed to indemnify the Selling
Stockholders against certain losses, claims, damages and liabilities, including
liabilities under the Securities Act.

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,
2003 and 2002, and for the years then ended, have been included herein and in
the registration statement in reliance upon the report of KPMG LLP, an
independent registered public accounting firm, appearing elsewhere herein, and
upon the authority of said firm as experts in accounting and auditing.

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

Report of Independent Registered Public Accounting Firm F-2

Consolidated Balance Sheets as of December 31, 2003 and December 31, 2002 F-3

Consolidated Statements of Operations for the years ended
December 31, 2003 and December 31, 2002 F-5

Consolidated Statements of Stockholders' Equity for the years ended
December 31, 2003 and December 31, 2002 F-6

Consolidated Statements of Cash Flows for the years ended
December 31, 2003 and December 31, 2002 F-7

Notes to the Consolidated Financial Statements F-8

Unaudited Consolidated Financial Statements of Neoprobe Corporation

Consolidated Balance Sheets as of September 30, 2004 and
December 31, 2003 F-25

Consolidated Statements of Operations for the quarters ended
September 30, 2004 and September 30, 2003 F-27

Consolidated Statements of Cash Flows for the quarters ended
September 30, 2004 and September 30, 2003 F-28

Notes to the Consolidated Financial Statements F-29

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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, 2003 and 2002, 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 of the Public
Company Accounting Oversight Board (United States). 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, 2003 and 2002, and the results of their
operations and their cash flows for the years then ended in conformity with U.S.
generally accepted accounting principles.

/s/ KPMG LLP

Columbus, Ohio
March 29, 2004

F-2

NEOPROBE CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS

December 31, 2003 and 2002

ASSETS 2003 2002
---------- ----------
Current assets:
Cash and cash equivalents $1,588,760 $ 700,525
Accounts receivable, net 1,107,800 746,107
Inventory 1,008,326 1,191,918
Prepaid expenses and other 346,449 451,537
---------- ----------

Total current assets 4,051,335 3,090,087
---------- ----------
Property and equipment 2,237,741 2,346,445
Less accumulated depreciation and amortization 1,875,028 1,883,797
---------- ----------
362,713 462,648
---------- ----------

Patents and trademarks 3,156,101 3,129,031
Non-compete agreements 584,516 584,516
Acquired technology 237,271 237,271
---------- ----------
3,977,888 3,950,818
Less accumulated amortization 1,042,373 584,490
---------- ----------
2,935,515 3,366,328
---------- ----------
Other assets 35,479 160,778
---------- ----------
Total assets $7,385,042 $7,079,841
========== ==========

F-3

CONTINUED
NEOPROBE CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS, CONTINUED

LIABILITIES AND STOCKHOLDERS' EQUITY 2003 2002
------------- -------------

Current liabilities:
Notes payable to finance companies $ 192,272 $ 172,381
Capital lease obligations, current 9,731 14,683
Accrued liabilities 227,306 397,161
Accounts payable 225,032 432,140
Deferred revenue, current 886,657 933,860
------------- -------------
Total current liabilities 1,540,998 1,950,225
------------- -------------
Note payable to CEO, net of discount 237,298 --
Note payable to investor, net of discount 217,504 --
Capital lease obligations 24,009 5,328
Deferred revenue 68,930 703,625
Contingent consideration for acquisition -- 288,053
Other liabilities 37,358 172,474
------------- -------------
Total liabilities 2,126,097 3,119,705
------------- -------------
Commitments and contingencies

Stockholders' equity:
Preferred stock; $.001 par value; 5,000,000 shares authorized at
December 31, 2003 and 2002; none issued and outstanding (500,000
shares designated as Series A, $.001 par
value, at December 31, 2003 and 2002; none outstanding) -- --
Common stock; $.001 par value; 75,000,000 shares
authorized; 51,520,723 shares issued and
outstanding at December 31, 2003; 36,502,183
shares issued and outstanding at December 31, 2002 51,521 36,502
Additional paid-in capital 127,684,555 124,601,770
Accumulated deficit (122,477,131) (120,678,136)
------------- -------------
Total stockholders' equity 5,258,945 3,960,136
------------- -------------
Total liabilities and stockholders' equity $ 7,385,042 $ 7,079,841
============= =============

See accompanying notes to consolidated financial statements.

F-4

NEOPROBE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS

YEARS ENDED DECEMBER 31,
----------------------------
2003 2002
------------ ------------
Revenues:
Net sales $ 5,564,275 $ 3,382,707
License and other revenue 945,633 1,538,233
------------ ------------
Total revenues 6,509,908 4,920,940
------------ ------------

Cost of goods sold 3,124,978 2,351,169
------------ ------------

Gross profit 3,384,930 2,569,771
------------ ------------

Operating expenses:
Research and development 1,893,520 2,323,710
Selling, general and administrative 3,102,535 3,267,361
Acquired in-process research and development -- (28,368)
------------ ------------
Total operating expenses 4,996,055 5,562,703
------------ ------------

Loss from operations (1,611,125) (2,992,932)
------------ ------------

Other income (expense):
Interest income 9,423 74,257
Interest expense (186,912) (31,946)
Other (10,381) (13,104)
------------ ------------
Total other (expenses) income (187,870) 29,207
------------ ------------

Net loss $ (1,798,995) $ (2,963,725)
============ ============

Net loss per common share:
Basic $ (0.04) $ (0.08)
Diluted $ (0.04) $ (0.08)

Weighted average shares outstanding:
Basic 40,337,679 36,045,196
Diluted 40,337,679 36,045,196

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, 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 as fees to investor
relations firm -- -- 14,018 -- 14,018
Registration costs paid in connection
with stock purchase agreement -- -- (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

Issued contingent shares related to
2001 acquisition of subsidiary 2,085,826 2,086 283,100 -- 285,186
Removed restrictions on stock
issued to executives -- -- 39,990 -- 39,990
Issued warrants in connection with
issuance of notes payable -- -- 112,994 -- 112,994
Issued to 401(k) plan at $0.26 100,327 100 25,852 -- 25,952
Issued shares in connection with stock
purchase agreement, net of offering costs 480,331 481 143,212 -- 143,693
Issued shares and warrants in connection
with private placement, net of offering costs 12,173,914 12,174 2,420,742 -- 2,432,916
Issued shares and warrants as fees
to investment banking firms 178,142 178 56,895 -- 57,073
Net loss -- -- -- (1,798,995) (1,798,995)
------------- ------------- ------------- ------------- -------------
Balance, December 31, 2003 51,520,723 $ 51,521 $ 127,684,555 $(122,477,131) $ 5,258,945
============= ============= ============= ============= =============

See accompanying notes to consolidated financial statements.

F-6

NEOPROBE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31,
--------------------------
2003 2002
----------- -----------

Cash flows from operating activities:
Net loss $(1,798,995) $(2,963,725)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation of property and equipment 246,975 402,878
Amortization of intangible assets 429,360 393,953
Provision for bad debts 49,582 28,751
Net loss on disposal and abandonment of assets 55,235 130,380
Amortization of debt discount and offering costs 81,449 --
Acquired in-process research and development -- (28,368)
Other 134,332 64,123
Change in operating assets and liabilities:
Accounts receivable (411,275) (216,429)
Inventory 169,135 213,948
Prepaid expenses and other assets 471,958 65,628
Accrued liabilities and other liabilities (353,186) (377,512)
Accounts payable (207,108) (57,548)
Deferred revenue (681,897) (672,356)
----------- -----------
Net cash used in operating activities (1,814,435) (3,016,277)
----------- -----------
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 (75,456) (263,012)
Proceeds from sales of property and equipment 250 618
Patent and trademark costs (34,270) (29,256)
Subsidiary acquisition costs -- (24,028)
----------- -----------
Net cash used in investing activities (109,476) (314,734)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock 2,943,797 --
Payment of offering costs (370,056) (48,627)
Proceeds from line of credit -- 2,000,000
Payments under line of credit -- (2,000,000)
Proceeds from notes payable, net of offering costs 458,334 --
Payment of notes payable (204,983) (194,024)
Payments under capital leases (14,946) (12,914)
----------- -----------
Net cash provided by (used in) financing activities 2,812,146 (255,565)
----------- -----------
Net increase (decrease) in cash and cash equivalents 888,235 (3,586,576)

Cash and cash equivalents, beginning of year 700,525 4,287,101
----------- -----------
Cash and cash equivalents, end of year $ 1,588,760 $ 700,525
=========== ===========

See accompanying notes to consolidated financial statements.

F-7

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 gamma detection device 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, 2003 and 2002, 91% of net sales were made
to EES. The loss of this customer would have a significant adverse
effect on our operating results.

Our blood flow measurement device product line 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.

We also have developmental and/or intellectual property rights
related to two drugs that might be used in connection with gamma
detection devices in cancer surgeries. The first, RIGScan(R) CR49,
is intended to be used to help surgeons locate cancerous tissue
during colorectal cancer surgeries. The second, LymphoseekTM, is
intended to be used in tracing the spread of certain solid tumor
cancers. Both of these drug products are still in development and
must be approved by the appropriate regulatory bodies before they
can be sold in any markets.

B. PRINCIPLES OF CONSOLIDATION: Our consolidated financial statements
include the accounts of our company and our wholly-owned subsidiary.
All significant inter-company accounts were eliminated in
consolidation.

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 companies: 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, 2003 and 2002, the carrying values of these
instruments approximate fair value.

(3) Note payable to CEO: The fair value of our debt is presented
as the face amount of the note less the unamortized discount
related to the warrants to purchase common stock issued in
connection with the note. At December 31, 2003, the carrying
value of the note approximates fair value.

(4) Note payable to outside investor: The fair value of our debt
is presented as the face amount of the note less the
unamortized discounts related to the conversion feature and
the warrants to purchase common stock issued in connection
with the note. At December 31, 2003, the carrying value of the
note approximates fair value.

D. CASH AND CASH EQUIVALENTS: There were no cash equivalents at
December 31, 2003 or 2002. None of the cash presented in the
December 31, 2003 and 2002 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.

F-8

The components of net inventory at December 31, 2003 and 2002 are as
follows:

2003 2002
---------- ----------

Materials and component parts $ 747,788 $ 760,540
Work in process -- 59,888
Finished goods 260,538 371,490
---------- ----------
$1,008,326 $1,191,918
========== ==========

During 2003, we wrote off $70,000 of excess and obsolete
Quantix(R)-related materials, primarily due to potential design
changes. 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 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
$80,000 and $51,000 of equipment under capital leases with
accumulated amortization of $48,000 and $30,000 at December 31, 2003
and 2002, respectively. During 2003 and 2002, we recorded losses of
$20,000 and $2,000, 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:

2003 2002
---------- ----------

Production machinery and equipment $1,050,806 $ 981,355
Other machinery and equipment, primarily
computers and research equipment 599,193 761,698
Furniture and fixtures 358,760 358,155
Leasehold improvements 117,547 121,808
Software 111,435 123,429
---------- ----------
$2,237,741 $2,346,445
========== ==========

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 5 to 15 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.)

F-9

The major classes of intangible assets are as follows:

DECEMBER 31, 2003 DECEMBER 31, 2002
--------------------------- -------------------
GROSS CARRYING ACCUMULATED GROSS CARRYING ACCUMULATED
AMOUNT AMORTIZATION AMOUNT AMORTIZATION
---------- ---------- ---------- ----------
Patents and trademarks $3,156,101 $ 678,160 $3,129,031 $ 398,501
Non-compete agreements 584,516 295,486 584,516 150,970
Acquired technology 237,271 68,727 237,271 35,019
---------- ---------- ---------- ----------
Total $3,977,888 $1,042,373 $3,950,818 $ 584,490
========== ========== ========== ==========

During 2003 and 2002, we recorded general and administrative expenses
of $459,000 and $462,000, respectively, of intangible asset
amortization expense. Of those amounts, $30,000 and $68,000,
respectively, related to the abandonment of gamma detection patents
and patent applications that were deemed no longer recoverable or
part of our ongoing business.

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

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

For the year ended 12/31/2004 $ 427,285
For the year ended 12/31/2005 427,285
For the year ended 12/31/2006 282,770
For the year ended 12/31/2007 214,545
For the year ended 12/31/2008 204,002

H. REVENUE RECOGNITION

(1) PRODUCT SALES: We derive revenues primarily from sales of our
medical devices. We generally 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. To the extent we enter into
multiple-element arrangements, we allocate revenue based on
the relative fair value of the elements.

(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.

F-10

(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
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, 2003, 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 related to options 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. However, we did incur
$39,990 of compensation expense related to the vesting of restricted
stock.

F-11

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,
--------------------------
2003 2002
----------- -----------

Net loss, as reported $(1,798,995) $(2,963,725)
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 (241,437) (279,161)
----------- -----------
Pro forma net loss $(2,000,442) $(3,242,886)
=========== ===========
Loss per common share:
As reported (basic and diluted) $ (0.04) $ (0.08)
Pro forma (basic and diluted) $ (0.05) $ (0.09)

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, 2003 and 2002.

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 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.

F-12

2. EARNINGS PER SHARE:

Basic earnings (loss) per share are 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, 2003 DECEMBER 31, 2002
-------------------------- ---------------------------
BASIC DILUTED BASIC DILUTED
EARNINGS EARNINGS EARNINGS EARNINGS
PER SHARE PER SHARE PER SHARE PER SHARE
----------- ----------- ----------- -----------

Outstanding shares 51,520,723 51,520,723 36,502,183 36,502,183
Effect of weighting changes
in outstanding shares (11,053,044) (11,053,044) (16,987) (16,987)
Contingently issuable shares (130,000) (130,000) (440,000) (440,000)
----------- ----------- ----------- -----------
Adjusted shares 40,337,679 40,337,679 36,045,196 36,045,196
=========== =========== =========== ===========

There is no difference in basic and diluted loss per share related to 2003
or 2002. Basic and diluted loss per share for the year ended December 31,
2002 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 2003 and
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.

3. ACCOUNTS RECEIVABLE AND CONCENTRATIONS OF CREDIT RISK:

Accounts receivable at December 31, 2003 and 2002, net of allowance for
doubtful accounts of $46,000 and $29,095, respectively, consist of the
following:

2003 2002
---------- ----------

Trade $1,063,614 $ 623,213
Other 44,186 122,894
---------- ----------
$1,107,800 $ 746,107
========== ==========

At December 31, 2003 and 2002, approximately 85% and 86%, 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, 2003 and 2002 is as follows:

2003 2002
-------- --------

Allowance for doubtful accounts at beginning of year $ 29,095 $ 39,670
Provision for bad debts 49,582 28,751
Write-offs charged against the allowance (32,677) (39,326)
-------- --------
Allowance for doubtful accounts at end of year $ 46,000 $ 29,095
======== ========

F-13

4. ACCRUED LIABILITIES AND ACCOUNTS PAYABLE:

Accrued liabilities at December 31, 2003 and 2002 consist of the
following:

2003 2002
-------- --------

Contracted services and other $107,843 $164,634
Compensation 66,463 177,991
Warranty reserve 53,000 35,000
Inventory purchases -- 19,536
-------- --------
$227,306 $397,161
======== ========

Accounts payable at December 31, 2003 and 2002 consist of the following:

2003 2002
-------- --------

Trade $146,117 $391,858
Other 78,915 40,282
-------- --------
$225,032 $432,140
======== ========

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. Payments charged against the reserve are
disclosed net of EES' reimbursement.

The activity in the warranty reserve account for the years ended December
31, 2003 and 2002 is as follows:

2003 2002
-------- --------

Warranty reserve, at beginning of year $ 35,000 $ 90,000
Provision for warranty claims and
changes in reserve for warranties 18,464 31,043
Payments charged against the reserve (464) (86,043)
-------- --------
Warranty reserve, at end of year $ 53,000 $ 35,000
======== ========

6. NOTES PAYABLE:

During April 2003, we also completed a bridge loan agreement with an
outside investor for an additional $250,000. In consideration for the
loan, we issued a note in the principal amount of $250,000. The note was
secured by general assets of the company, excluding accounts receivable.
The note bore interest at 9.5% per annum, payable monthly, was convertible
into common stock and was due on June 30, 2004. Fifty percent of the
principal and accrued interest of the note was convertible into common
stock at a 15% discount to the closing market price on the date of
conversion, subject to a floor conversion price of $0.10. The remaining
50% of the principal and accrued interest was convertible into common
stock based on a 15% discount to the closing market price on the date of
conversion, subject to a floor conversion price of $0.10 and a ceiling
conversion price of $0.20. In addition, we issued the investor 500,000
warrants to purchase common stock at an exercise price of $0.13 per share.
See Note 16(b).

F-14

The per share value of the warrants issued to Mr. Bupp and the outside
investor was $0.10 on the date of issuance using the Black-Scholes option
pricing model with the following assumptions: an average risk-free
interest rate of 2.9%, volatility of 139% and no expected dividend rate.
The total estimated fair values for the warrants issued to Mr. Bupp and
the outside investor were $31,755 and $40,620, respectively. These amounts
were recorded as a discount on the notes and are being amortized over the
period of the notes. At December 31, 2003, the unamortized discounts
related to Mr. Bupp's note and the note to the outside investor totaled
$12,702 and $16,248, respectively. The intrinsic value of the conversion
feature of the note to the outside investor was estimated at $40,620 based
on the effective conversion price at the date of issuance and was recorded
as an additional discount on the note. The additional discount related to
the conversion feature is being amortized over the period of the note. At
December 31, 2003 the additional unamortized discount related to the
conversion feature totaled $16,248.

7. INCOME TAXES:

As of December 31, 2003, our net deferred tax assets in the U.S. were
approximately $35.7 million. Approximately $30.8 million of the deferred
tax assets relate principally to net operating loss carryforwards of
approximately $90.6 million available to offset future taxable income, if
any, through 2023. 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 2023. The remaining $596,000 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, 2003.

As of December 31, 2003, Cardiosonix had net deferred tax assets in Israel
of approximately $1.8 million, primarily related to net operating loss
carryforwards of approximately $3.7 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, 2003. 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, 2003, 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 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.

F-15

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 2003 and 2002, respectively: average
risk-free interest rates of 2.6% and 4.0%; expected average lives of
three to four years for each of the years presented; no dividend
rate for any year; and volatility of 146% for 2003 and 145% for
2002. The weighted average fair value of options granted in 2003 and
2002 was $0.16 and $0.36, respectively.

A summary of the status of stock options under our stock option
plans as of December 31, 2003 and 2002, and changes during the years
ended on those dates is presented below:

2003 2002
---------------------------------------- ----------------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE
----------------- ------------------- ----------------- -------------------

Outstanding at
beginning of year 2,317,725 $ 0.70 1,862,123 $ 0.81
Granted 1,030,000 $ 0.18 905,000 $ 0.42
Forfeited (416,417) $ 0.41 (449,398) $ 0.57
Exercised - - - -
----------------- -----------------

Outstanding at
end of year 2,931,308 $ 0.56 2,317,725 $ 0.70
================= =================

Included in outstanding options as of December 31, 2003, 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, 2003:

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

NUMBER WEIGHTED NUMBER
OUTSTANDING AS OF AVERAGE WEIGHTED EXERCISABLE AS OF WEIGHTED
RANGE OF EXERCISE DECEMBER 31, REMAINING AVERAGE DECEMBER 31, AVERAGE
PRICES 2003 CONTRACTUAL EXERCISE 2003 EXERCISE
LIFE PRICE PRICE
-------------------- -------------------- ----------------- --------------- ------------------- ---------------

$ 0.13 - $ 0.40 906,667 9 years $ 0.19 40,001 $ 0.30
$ 0.41 - $ 0.50 1,526,668 7 years $ 0.44 980,008 $ 0.45
$ 0.60 - $ 1.50 325,773 6 years $ 1.04 314,107 $ 1.05
$ 2.50 - $ 5.63 172,200 1 year $ 2.67 72,200 $ 2.92
-------------------- -------------------
2,931,308 7 years $ 0.56 1,406,316 $ 0.71
==================== ===================

B. RESTRICTED STOCK: 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
transaction in the first quarter of 2003. At December 31, 2003, we
have 130,000 restricted shares outstanding, all of which are pending
cancellation due to failure to vest under the terms of issuance of
these shares. Restricted shares, if any, generally 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 related to past grants of restricted stock due to the
inability to assess the probability of the vesting event.

F-16

C. STOCK WARRANTS: At December 31, 2003, there are 8.5 million warrants
outstanding to purchase our common stock. The warrants are
exercisable at prices ranging from $0.13 to $5.00 per share with a
weighted average exercise price per share of $0.30. See Note 16 (b),
(e) and (f).

The following table summarizes information about our outstanding
warrants at December 31, 2003:

EXERCISE PRICE NUMBER OF WARRANTS
EXPIRATION DATE
------------------ ---------------------- -----------------

Series M $ 5.00 50,000 February 2004
Series O $ 0.75 25,000 October 2005
Series O $ 0.75 25,000 October 2006
Series P $ 0.30 50,000 June 2005
Series Q $ 0.13 875,000 April 2008
Series R $ 0.28 6,086,959 October 2008
Series S $ 0.28 1,432,609 October 2008
----------------------
$ 0.30 8,544,568
======================

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 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 in 2001, we issued
449,438 shares of our common stock to Fusion as a partial payment of
the commitment fee. During 2003, we sold Fusion a total of 473,869
shares of common stock and realized net proceeds of $143,693. We
issued Fusion 6,462 shares of common stock during 2003 for
commitment fees due to Fusion related to the sales of our common
stock to them. See Note 16(e).

F. PRIVATE PLACEMENT: 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, Inc. (Trautman Wasserman). In exchange for
Alberdale's services, we agreed to pay them a monthly retainer of
$10,000, half payable in cash and half payable in common stock, and
we agreed to pay them additional compensation upon the successful
completion of a private placement of our securities. We terminated
the agreement with Alberdale in September 2003, but agreed to issue
them a total of 150,943 shares of common stock in payment for one
half of their retainer. The fair market value of $26,000 related to
the shares issued to Alberdale was recorded as general and
administrative expense in 2003. In addition, Series S warrants to
purchase 78,261 shares of common stock were issued in exchange for
their assistance in arranging an accounts receivable financing
transaction. The warrants have an exercise price of $0.28 per share.
The per share value of these warrants was $0.33 on the date of
issuance using the Black-Scholes option pricing model with the
following assumptions: an average risk-free interest rate of 3.1%,
volatility of 150% and no expected dividend rate. We recorded the
estimated fair market value of the warrants issued as additional
interest expense. In exchange for the services of Trautman
Wasserman, we agreed to pay a retainer of $10,000, payable in cash
and common 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 their retainer. The fair market value of $5,000 related
to the shares issued to Trautman Wasserman was recorded as general
and administrative expense in 2003. The services of Trautman
Wasserman were terminated in September 2003.

F-17

In November 2003, we completed a $2.8 million placement of common
stock and warrants for net proceeds of $2.4 million. In the
placement, 12,173,914 shares of common stock were issued at $0.23
per share, and Series R warrants were issued to purchase an
additional 6,086,959 shares of common stock at $0.28 per share. In
addition, we paid $291,000 in cash and issued 1,354,348 Series S
warrants to purchase common stock at $0.28 per share as fees to the
placement agents. All warrants issued in connection with the
placement expire in October 2008. The per share value of these
warrants was $0.31 on the date of issuance using the Black-Scholes
option pricing model with the following assumptions: an average
risk-free interest rate of 3.2%, volatility of 151% and no expected
dividend rate. A registration statement registering for resale the
common stock and warrants issued in the private placement was
declared effective on December 17, 2003. See Note 16(e).

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 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.

F-18

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
2003 DETECTION FLOW UNALLOCATED TOTAL
--------------------------------------------------------------------------------

Net sales:
United States1 $ 5,284 $ -- $ -- $ 5,284
International 35 245 -- 280
License and other revenue 946 -- -- 946
Research and development expenses (668) (1,226) -- (1,894)
Selling, general and administrative
expenses -- -- (3,103) (3,103)
Income (loss) from operations2 2,657 (1,165) (3,103) (1,611)
Other expenses -- -- (188) (188)
Total assets, net of depreciation and
amortization:
United States 1,728 146 1,965 3,839
Cardiosonix Ltd. -- 3,546 -- 3,546
Capital expenditures 13 50 12 75

2002
------------------------------------
Net sales
United States1 $ 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 operations2 1,554 (1,280) (3,267) (2,993)
Other income -- -- 29 29
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

----------
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 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.

F-19

In accordance with SFAS No. 141, we recorded the contingent amount
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 of December 31, 2002.

As a part of the acquisition, we also 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 up
to $120 million in net revenue generated by the sale of Cardiosonix
blood flow products through 2006.

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. Our stock of crystal
modules was consumed during 2003; therefore we resumed purchasing
crystal modules in the fourth quarter of 2003. As a result, total
purchases under the supply agreement were $138,000 and $82,000 for
the years ended December 31, 2003 and 2002, respectively. We have
issued a purchase order for $298,000 of crystal modules for delivery
of product through September 2004.

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. During 2003, we terminated our agreement with
UMM for the manufacture of the neo2000 control unit and 14mm probe.
As a part of the termination, we were required to purchase $97,000
in residual materials that were not used by UMM, a portion of which
will be used in production at a new contract manufacturer. Total
purchases under the manufacturing and supply agreement were $1.5
million and $1.2 million for the years ended December 31, 2003 and
2002, respectively.

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 December 31,
2004, with options to extend for two successive two-year terms (See
Note 16(d).). 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 were 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.

F-20

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, they 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.

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 potential
obligation for royalties, based on royalty-bearing government
participation, was approximately $775,000 as of December 31, 2003.

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. Total costs related to
the UCSD license agreement were $29,000 and $54,000 in 2003 and
2002, 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 five
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 $1.7 million. The
employment agreements also provide for severance, disability and
death benefits. See Note 16(a).

F-21

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 were 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
$69,000.

12. LEASES:

We lease certain office equipment under capital leases which expire from
2004 to 2008. In December 1996, we entered into an operating lease
agreement for office space, which expired in August 2003. In August 2003,
we entered into an operating lease agreement for office space, which
expires in September 2006. In April 2002, Cardiosonix entered into an
operating sublease agreement for office and parking space, expiring in
April 2004. In addition, Cardiosonix leases four automobiles under
three-year operating leases.

The future minimum lease payments for the years ending December 31 are as
follows:

CAPITAL OPERATING
LEASES LEASES
------------------- -----------------
2004 $ 13,436 $ 121,732
2005 7,964 86,738
2006 7,964 58,568
2007 7,964 -
2008 7,300 -
------------------- -----------------
44,627 $ 267,039
=================
Less amount representing interest 10,959
-------------------
Present value of net minimum
lease payments 33,740
Less current portion 9,731
-------------------
Capital lease obligations,
excluding current portion $ 24,009
===================

Total rental expense, net of sublease rental income of $82,000 and
$132,000, was $238,000 and $213,000 for the years ended December 31, 2003 and
2002, 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
$14,000 and $26,000 during 2003 and 2002, respectively, related to common
stock to be subsequently contributed to the plan.

14. SUPPLEMENTAL DISCLOSURE FOR STATEMENTS OF CASH FLOWS:

We paid interest aggregating $94,000 and $32,000 for the years ended
December 31, 2003 and 2002, respectively. During 2002, we received a net
refund of $700 related to overpayment of estimated 2001 income taxes.

During 2003, we purchased equipment under a capital lease totaling
$29,000. During 2003 and 2002, we transferred $14,000 and $25,000,
respectively, in inventory to fixed assets related to the creation of a
pool of service loaner equipment. Also during 2003 and 2002, we prepaid
$225,000 and $205,000, respectively, in insurance through the issuance of
notes payable with weighted average interest rates of 6%. The notes issued
in 2003 mature in July and August 2004.

F-22

15. CONTINGENCIES:

We are 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.

16. SUBSEQUENT EVENTS:

A. EMPLOYMENT AGREEMENTS: Effective January 1, 2004, we entered into
new employment agreements with our President and CEO and three other
executive officers. The new agreements have substantially similar
terms to the previous agreements. The maximum contingent liability
under these agreements in the event of termination is $1.5 million.
See Note 11(d).

B. NOTES PAYABLE: On March 8, 2004, the due date of the note to our
President and CEO, David Bupp, was extended from June 30, 2004 to
June 30, 2005 with the same terms. In exchange for extending the due
date of the note, we issued Mr. Bupp an additional 375,000 warrants,
expiring in March 2009, to purchase our common stock at an exercise
price of $0.50 per share. The per share value of these warrants was
$0.46 on the date of issuance using the Black-Scholes option pricing
model with the following assumptions: an average risk-free interest
rate of 2.7%, volatility of 152% and no expected dividend rate. See
Note 6.

During January 2004, the outside investor converted the entire
balance of the note into 1.1 million shares of common stock
according to the conversion terms of the agreement. The total value
of shares issued in conversion of the note was $378,955 based on the
closing market prices for our common stock on the dates of
conversion. See Note 6.

C. AGREEMENTS: In February 2004, we entered into a product supply
agreement with TriVirix International (TriVirix) for the manufacture
of the neo2000 control unit, 14mm probe, 11mm laparoscopic probe,
Quantix/ORTM control unit and Quantix/NDTM control unit. The initial
term of the agreement expires in January 2007, but may be
automatically extended for successive one-year periods. Either party
has the right to terminate the agreement at any time upon one
hundred eighty (180) days prior written notice, or may terminate the
agreement upon a material breach or repeated non-material breaches
by the other. We have issued purchase orders for $1.8 million of
neo2000 control units, 14mm probes and Quantix control units for
delivery of product through December 2004.

D. DISTRIBUTION AGREEMENT: In March 2004, we were notified by EES that
they were exercising their option to renew their distribution
agreement with us covering our gamma detection devices through the
end of 2006. See Note 11(b).

E. COMMON STOCK PURCHASE AGREEMENT: From January 1 through March 29,
2004, we sold Fusion a total of 2,100,000 million shares of common
stock and realized proceeds of $1,271,334. We issued Fusion 57,140
shares of common stock during the first quarter of 2004 for
commitment fees due to Fusion related to the sale of our common
stock to them. See Note 8(e).

F. WARRANT EXERCISES: During the first quarter of 2004, certain
investors exercised a total of 1.6 million warrants to purchase our
common stock and we realized proceeds of $457,000. See Note 8(c).

F-23

17. 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,
-------------------------------------------------------
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------

Statement of Operations Data:
Net sales $ 5,564 $ 3,383 $ 6,764 $ 8,835 $ 9,246
License and other revenue 946 1,538 1,428 1,395 325
Gross profit 3,385 2,570 3,802 5,240 5,063
Research and development expenses 1,894 2,324 948 993 1,513
Selling, general and administrative expenses 3,103 3,267 2,321 2,911 8,131
Acquired in-process research and development -- (28) 885 -- --
Losses related to subsidiaries in liquidation -- -- -- -- 475
-------- -------- -------- -------- --------
(Loss) income from operations (1,611) (2,993) (352) 1,336 (5,057)

Other (expenses) income (188) 29 370 504 883
-------- -------- -------- -------- --------
Net (loss) income $ (1,799) $ (2,964) $ 15 $ 1,840 $ (4,174)
-------- -------- -------- -------- --------
(Loss) income attributable to common
stockholders $ (1,799) $ (2,964) $ 15 $ 1,075 $ (7,895)
======== ======== ======== ======== ========
(Loss) Income per common share:
Basic $ (0.04) $ (0.08) $ 0.00 $ 0.04 $ (0.34)
Diluted $ (0.04) $ (0.08) $ 0.00 $ 0.04 $ (0.34)

Shares used in computing (loss) income per
common share: (1)
Basic 40,338 36,045 25,899 25,710 23,003
Diluted 40,338 36,045 26,047 26,440 23,003

AS OF DECEMBER 31,
-------------------------------------------------------------
2003 2002 2001 2000 1999
--------- --------- --------- --------- ---------
Balance Sheet Data:
Total assets $ 7,385 $ 7,080 $ 11,329 $ 7,573 $ 10,323
Long-term obligations 585 1,169 1,981 2,233 4,314
Accumulated deficit (122,477) (120,678) (117,714) (117,729) (119,569)

----------
(1) Basic earnings (loss) per share are 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-24

NEOPROBE CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS

SEPTEMBER 30, DECEMBER 31,
ASSETS 2004 2003
(UNAUDITED)
---------- ----------
Current assets:
Cash and cash equivalents $3,008,201 $1,588,760
Accounts receivable, net 746,424 1,107,800
Inventory 946,664 1,008,326
Prepaid expenses and other 146,898 346,449
---------- ----------

Total current assets 4,848,187 4,051,335
---------- ----------

Property and equipment 2,317,282 2,237,741
Less accumulated depreciation and amortization 1,971,192 1,875,028
---------- ----------

346,090 362,713
---------- ----------

Patents and trademarks 3,173,608 3,156,101
Non-compete agreements 584,516 584,516
Acquired technology 237,271 237,271
---------- ----------
3,995,395 3,977,888
Less accumulated amortization 1,366,000 1,042,373
---------- ----------
2,629,395 2,935,515
---------- ----------
Other assets 137,515 35,479
---------- ----------
Total assets $7,961,187 $7,385,042
========== ==========

CONTINUED

F-25

NEOPROBE CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS, CONTINUED

LIABILITIES AND STOCKHOLDERS' EQUITY

SEPTEMBER 30, DECEMBER 31,
2004 2003
(UNAUDITED)
--------------- --------------

Current liabilities:
Note payable to CEO, net of discount of $135,360 $ 148,480 $ --
Notes payable to finance companies -- 192,272
Capital lease obligations, current 13,499 9,731
Accrued liabilities 302,331 227,306
Accounts payable 230,679 225,032
Deferred revenue, current 382,537 886,657
------------- -------------
Total current liabilities 897,095 1,540,998
------------- -------------
Note payable to CEO, net of discount of $12,702 -- 237,298
Note payable to investor, net of discount of $32,496 -- 217,504
Capital lease obligations 33,903 24,009
Deferred revenue 47,184 68,930
Other liabilities 51,452 37,358
------------- -------------
Total liabilities 1,029,634 2,126,097
------------- -------------
Commitments and contingencies

Stockholders' equity:
Preferred stock; $.001 par value; 5,000,000 shares authorized at June 30,
2004 and December 31, 2003; none issued and outstanding (500,000 shares
designated as Series A, $.001 par value, at June 30, 2004 and
and December 31, 2003; none outstanding) -- --
Common stock; $.001 par value; 75,000,000 shares
authorized; 58,087,057 shares issued and outstanding
at June 30, 2004; 51,520,723 shares issued and
outstanding at December 31, 2003 58,287 51,521
Additional paid-in capital 130,607,605 127,684,555
Accumulated deficit (123,734,339) (122,477,131)
------------- -------------
Total stockholders' equity 6,931,553 5,258,945
------------- -------------
Total liabilities and stockholders' equity $ 7,961,187 $ 7,385,042
============= =============

See accompanying notes to the consolidated financial statements

F-26

NEOPROBE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2004 2003 2004 2003
------------ ------------ ------------ ------------

Revenues:
Net sales $ 1,525,134 $ 927,949 $ 4,098,679 $ 3,868,655
License and other revenue 200,000 257,588 600,000 745,633
------------ ------------ ------------ ------------
Total revenues 1,725,134 1,185,537 4,698,679 4,614,288
------------ ------------ ------------ ------------
Cost of goods sold 643,303 497,458 1,692,084 2,112,247
------------ ------------ ------------ ------------
Gross profit 1,081,831 688,079 3,006,595 2,502,041
------------ ------------ ------------ ------------
Operating expenses:
Research and development 588,435 508,693 1,766,265 1,365,277
Selling, general and administrative 695,399 755,104 2,361,941 2,230,693
------------ ------------ ------------ ------------
Total operating expenses 1,283,834 1,263,797 4,128,206 3,595,970
------------ ------------ ------------ ------------
Loss from operations (202,003) (575,718) (1,121,611) (1,093,929)
------------ ------------ ------------ ------------
Other income (expenses):
Interest income 8,367 19,695 13,724 24,834
Interest expense (42,494) (99,520) (158,647) (140,182)
Other (2,628) (3,571) 9,326 (7,777)
------------ ------------ ------------ ------------
Total other expenses (36,755) (83,396) (135,597) (123,125)
------------ ------------ ------------ ------------
Net loss $ (238,758) $ (659,114) $ (1,257,208) $ (1,217,054)
============ ============ ============ ============

Net loss per common share:
Basic $ (0.00) $ (0.02) $ (0.02) $ (0.03)
Diluted $ (0.00) $ (0.02) $ (0.02) $ (0.03)

Weighted average shares outstanding:
Basic 58,076,622 38,555,261 56,290,885 38,454,446
Diluted 58,076,622 38,555,261 56,290,885 38,454,446

See accompanying notes to the consolidated financial statements.

F-27

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

NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
2004 2003
----------- -----------

Cash flows from operating activities:
Net loss $(1,257,208) $(1,217,054)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 444,021 555,388
Amortization of debt discount and offering costs 130,539 61,818
Other 130,831 107,599
Change in operating assets and liabilities:
Accounts receivable 361,376 (387,446)
Inventory 51,497 10,474
Prepaid expenses and other assets 125,857 160,733
Accrued and other liabilities 89,120 138,036
Accounts payable 5,647 119,631
Deferred revenue (706,297) (468,555)
----------- -----------
Net cash used in operating activities (624,617) (919,376)
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment (67,310) (63,195)
Proceeds from sales of property and equipment 375 --
Patent and trademark costs (17,506) (20,783)
----------- -----------

Net cash used in investing activities (84,441) (83,978)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock 2,349,073 138,430
Payment of offering costs (15,642) (7,972)
Proceeds from notes payable, net of offering costs -- 458,334
Payment of notes payable (192,272) (172,381)
Proceeds from secured financing -- 319,813
----------- -----------
Payments under capital leases (12,660) (10,834)
----------- -----------
Net cash provided by financing activities 2,128,499 725,390
----------- -----------
Net increase (decrease) in cash and cash equivalents 1,419,441 (277,964)

Cash and cash equivalents, beginning of period 1,588,760 700,525
----------- -----------
Cash and cash equivalents, end of period $ 3,008,201 $ 422,561
=========== ===========

See accompanying notes to the consolidated financial statements.

F-28

1. BASIS OF PRESENTATION

The information as of September 30, 2004 and 2003 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 accounting principles generally accepted in the United
States of America 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, 2003, which were included as part of our Annual Report
on Form 10-KSB.

Our consolidated financial statements include the accounts of Neoprobe and
our wholly-owned subsidiary, Cardiosonix Ltd. (Cardiosonix). All
significant inter-company 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, 2004 and 2003.

F-29

3. 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.

THREE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, 2004 SEPTEMBER 30, 2003
--------------------------------------- ---------------------------------------
BASIC DILUTED BASIC DILUTED
EARNINGS EARNINGS EARNINGS EARNINGS
PER SHARE PER SHARE PER SHARE PER SHARE
----------------- ----------------- ----------------- -----------------

Outstanding shares 58,287,057 58,287,057 39,148,426 39,148,426
Effect of weighting changes
in outstanding shares (80,435) (80,435) (463,165) (463,165)
Contingently issuable shares (130,000) (130,000) (130,000) (130,000)
----------------- ----------------- ----------------- -----------------
Adjusted shares 58,076,622 58,076,622 38,555,261 38,555,261
================= ================= ================= =================

NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2004 SEPTEMBER 30, 2003
--------------------------------------- ---------------------------------------
BASIC DILUTED BASIC DILUTED
EARNINGS EARNINGS EARNINGS EARNINGS
PER SHARE PER SHARE PER SHARE PER SHARE
----------------- ----------------- ----------------- -----------------
Outstanding shares 58,287,057 58,287,057 39,148,426 39,148,426
Effect of weighting changes
in outstanding shares (1,866,172) (1,866,172) (563,980) (563,980)
Contingently issuable shares (130,000) (130,000) (130,000) (130,000)
----------------- ----------------- ----------------- -----------------
Adjusted shares 56,290,885 56,290,885 38,454,446 38,454,446
================= ================= ================= =================

There is no difference in basic and diluted loss per share related to the
three-month and nine-month periods ended September 30, 2004 and 2003. 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. INVENTORY

The components of inventory are as follows:

SEPTEMBER 30, DECEMBER 31,
2004 2003
(UNAUDITED)
---------- ----------

Materials and component parts $ 608,713 $ 747,788
Work in process 59,415 --
Finished goods 278,536 260,538
---------- ----------
$ 946,664 $1,008,326
========== ==========

F-30

5. INTANGIBLE ASSETS

The major classes of intangible assets are as follows:

SEPTEMBER 30, 2004 DECEMBER 31, 2003
(UNAUDITED)
--------------------------------------------------
GROSS CARRYING GROSS CARRYING
AMOUNT ACCUMULATED AMOUNT ACCUMULATED
AMORTIZATION AMORTIZATION
---------- ---------- ---------- ----------
Patents and trademarks $3,173,608 $ 868,115 $3,156,101 $ 678,160
Non-compete agreements 584,516 403,875 584,516 295,486
Acquired technology 237,271 94,010 237,271 68,727
---------- ---------- ---------- ----------
Total $3,995,395 $1,366,000 $3,977,888 $1,042,373
========== ========== ========== ==========

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

ESTIMATED
AMORTIZATION
EXPENSE
-----------
For the year ended 12/31/2004 $ 427,285
For the year ended 12/31/2005 427,285
For the year ended 12/31/2006 282,770
For the year ended 12/31/2007 214,545
For the year ended 12/31/2008 204,002

6. 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. Our primary marketing partner,
Ethicon Endo-Surgery, Inc. (EES), a Johnson and Johnson company, also
reimburses us for a portion of warranty expense incurred on our gamma
detection devices based on end customer sales they make during a given
fiscal year. Payments charged against the reserve are disclosed net of
EES' reimbursement.

The activity in the warranty reserve account for the three-month and
nine-month periods ended June 30, 2004 and 2003 is as follows:

THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
2004 2003 2004 2003
-------- -------- -------- --------
Warranty reserve at
beginning of period $ 46,000 $ 58,000 $ 53,000 $ 35,000
Provision for warranty claims and
changes in reserve for
warranties (1,000) (4,914) (8,000) 31,615
Payments charged against the
reserve -- (86) -- (13,615)
------- -------- -------- --------
Warranty reserve at end of period $ 45,000 $ 53,000 $ 45,000 $ 53,000
======== ======== ======== ========

F-31

7. NOTES PAYABLE

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. In consideration for the loan, we issued a note to Mr. Bupp
in the principal amount of $250,000. The note is secured by general assets
of the company, excluding accounts receivable. In addition, we issued Mr.
Bupp 375,000 warrants to purchase common stock at an exercise price of
$0.13 per share, expiring in April 2008. The per share value of these
warrants was $0.10 on the date of issuance using the Black-Scholes option
pricing model with the following assumptions: an average risk-free
interest rate of 2.9%, volatility of 139% and no expected dividend rate.
Interest accrues on the note at 8.5% per annum, payable monthly, and the
note was originally due on June 30, 2004. On March 8, 2004, at the request
of the Board of Directors, Mr. Bupp agreed to extend the due date of the
note from June 30, 2004 to June 30, 2005. In exchange for extending the
due date of the note, we issued Mr. Bupp an additional 375,000 warrants to
purchase our common stock at an exercise price of $0.50 per share,
expiring in March 2009. The per share value of these warrants was $0.46 on
the date of issuance using the Black-Scholes option pricing model with the
following assumptions: an average risk-free interest rate of 2.7%,
volatility of 152% and no expected dividend rate. The total estimated fair
values for the warrants issued to Mr. Bupp in April 2003 and March 2004
were $31,755 and $171,801, respectively. These amounts were recorded as
discounts on the note and are being amortized over the period of the note.
At September 30, 2004, the unamortized discounts related to Mr. Bupp's
note totaled $101,520.

During April 2003, we also completed a bridge loan agreement with an
outside investor for an additional $250,000. In consideration for the
loan, we issued a note to the investor in the principal amount of
$250,000. The note was secured by general assets of the company, excluding
accounts receivable. In addition, we issued the investor 500,000 warrants
to purchase common stock at an exercise price of $0.13 per share. The per
share value of these warrants was $0.10 on the date of issuance using the
Black-Scholes option pricing model with the following assumptions: an
average risk-free interest rate of 2.9%, volatility of 139% and no
expected dividend rate. The total estimated fair value for the warrants
issued to the outside investor was $40,620. Under the terms of the
agreement, the note bore interest at 9.5% per annum, payable monthly, was
convertible into common stock and was due on June 30, 2004. Fifty percent
of the principal and accrued interest of the note was convertible into
common stock at a 15% discount to the closing market price on the date of
conversion, subject to a floor conversion price of $0.10. The remaining
50% of the principal and accrued interest was convertible into common
stock based on a 15% discount to the closing market price on the date of
conversion, subject to a floor conversion price of $0.10 and a ceiling
conversion price of $0.20. The intrinsic value of the conversion feature
of the note to the outside investor was estimated at $40,620 based on the
effective conversion price at the date of issuance and was recorded as an
additional discount on the note. The estimated fair value of the warrants
and the intrinsic value of the conversion feature were recorded as
discounts on the note and were amortized over the term of the note. During
January 2004, the outside investor converted the entire balance of the
note into 1.1 million shares of common stock according to the conversion
terms of the agreement. The total value of the shares issued in conversion
of the note was $378,955 based on the closing market prices for our common
stock on the dates of conversion. The discount remaining at conversion
totaling $27,604 was recorded as interest expense.

8. STOCK OPTIONS AND RESTRICTED STOCK

During the first nine months of 2004, the Board of Directors granted
options to consultants, employees and certain non-employee directors to
purchase 1.7 million shares of common stock, exercisable at an average
price of $0.42 per share, vesting over three years. We recognized $129,000
of research and development expense related to options granted to
consultants in the first nine months of 2004. As of September 30, 2004, we
have 4.3 million options outstanding under three stock option plans. Of
the outstanding options, 2.0 million options have vested as of September
30, 2004, at an average exercise price of $0.60 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 Statement of Financial Accounting Standards
(SFAS) No. 123, Accounting for Stock-Based Compensation:

F-32

THREE MONTHS ENDED
SEPTEMBER 30,
------------------------
2004 2003
--------- -----------

Net loss, as reported $(238,758) $ (659,114)
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards
(78,228) (39,997)
--------- -----------
Pro forma net loss $(316,986) $ (699,111)
========= ===========
Loss per common share:
As reported (basic and diluted) $ (0.00) $ (0.02)
Pro forma (basic and diluted) $ (0.01) $ (0.02)

NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
2004 2003
----------- -----------
Net loss, as reported $(1,257,208) $(1,217,054)
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 (186,363) (164,970)
----------- -----------
Pro forma net loss $(1,443,571) $(1,342,034)
=========== ===========
Loss per common share:
As reported (basic and diluted) $ (0.02) $ (0.03)
Pro forma (basic and diluted) $ (0.03) $ (0.03)

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.

9. STOCK WARRANTS

In November 2003, we completed a $2.8 million placement of common stock
and warrants for net proceeds of $2.4 million. In the placement, 12.2
million shares of common stock were issued at $0.23 per share, and Series
R warrants were issued to purchase an additional 6.1 million shares of
common stock at $0.28 per share. In addition, we paid $291,000 in cash and
issued 1.4 million Series S warrants to purchase common stock at $0.28 per
share as fees to the placement agents. All warrants issued in connection
with the placement expire in October 2008. The per share value of these
warrants was $0.31 on the date of issuance using the Black-Scholes option
pricing model with the following assumptions: an average risk-free
interest rate of 3.2%, volatility of 151% and no expected dividend rate. A
registration statement registering for resale the common stock and
warrants issued in the private placement was declared effective on
December 17, 2003. During the first nine months of 2004, 3,308,327 of
these warrants were exercised and we realized net proceeds of $865,563.

F-33

During 2003, an investment banking firm, Alberdale Capital LLC
(Alberdale), assisted us in arranging an accounts receivable financing
transaction. In exchange for Alberdale's services, we issued them warrants
to purchase 78,261 shares of our common stock. During the first quarter of
2004, Alberdale exercised these warrants on a cashless basis in exchange
for 53,500 shares of common stock.

At September 30, 2004 there are 5.6 million warrants outstanding to
purchase our common stock. The warrants are exercisable at prices ranging
from $0.13 to $0.75 per share with a weighted average exercise price per
share of $0.28.

10. COMMON STOCK PURCHASE AGREEMENT

11. SEGMENT AND SUBSIDIARY INFORMATION

We own or have rights to intellectual property related to gamma detection
drugs. We also 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. Prior to
2004, gamma detection drugs and devices were reported as one segment.
Certain 2003 amounts have been reclassified to conform to the 2004
presentation.

F-34

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.

BLOOD
($ AMOUNTS IN THOUSANDS) GAMMA GAMMA FLOW DEVICES
THREE MONTHS ENDED SEPT. 30, 2004 DETECTION DRUGS DETECTION DEVICES UNALLOCATED TOTAL
------------------------------------------------------- ---------------- -------------- ----------------- --------------

Net sales:
United States1 $ - $ 1,474 $ - $ - $ 1,474
International - 24 27 - 51
License and other revenue - 200 - - 200
Research and development expenses 83 54 451 - 588
Selling, general and administrative
expenses - - - 695 695
Income (loss) from operations2 (83) 1,039 (463) (695) (202)
Other income (expenses) - - - (37) (37)

THREE MONTHS ENDED SEPT. 30, 2003
----------------------------------------
Net sales:
United States1 $ - $ 900 $ - $ - $ 900
International - 4 24 - 28
License and other revenue - 258 - - 258
Research and development expenses 8 150 351 - 509
Selling, general and administrative
expenses - - - 755 755
Income (loss) from operations2 (8) 524 (337) (755) (576)
Other income (expenses) - - - (83) (83)
BLOOD
($ AMOUNTS IN THOUSANDS) GAMMA GAMMA FLOW DEVICES
THREE MONTHS ENDED SEPT. 30, 2004 DETECTION DRUGS DETECTION DEVICES UNALLOCATED TOTAL
------------------------------------------------------- ---------------- -------------- ----------------- --------------
Net sales:
United States1 $ - $ 3,970 $ - $ - $ 3,970
International - 64 65 - 129
License and other revenue - 600 - - 600
Research and development expenses 310 335 1,121 - 1,766
Selling, general and administrative
expenses - - - 2,362 2,362
Income (loss) from operations2 (310) 2,713 (1,163) (2,362) (1,122)
Other income (expenses) - - (136) (136)

NINE MONTHS ENDED SEPT. 30, 2003
----------------------------------------
Net sales:
United States1 $ - $ 3,636 $ - $ - $ 3,636
International - 8 225 - 233
License and other revenue - 746 - - 746
Research and development expenses 19 327 1,019 - 1,365
Selling, general and administrative
expenses - - - 2,231 2,231
Income (loss) from operations2 (19) 1,996 (840) (2,231) (1,094)
Other income (expenses) - - - (123) (123)

F-35

12. SUPPLEMENTAL DISCLOSURE FOR STATEMENTS OF CASH FLOW

During the first nine months of 2004, we purchased equipment under capital
leases totaling $27,000. During the first nine months of 2004 and 2003, we
transferred $10,000 and $14,000, respectively, in inventory to fixed
assets related to the maintenance of a pool of service loaner equipment.

F-36

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 expected to be incurred in
connection with the issuance and distribution of the securities being
registered.

SEC Registration............................................ $ 2,056.11
Legal Fees and Expenses*.................................... $ 65,000
Accounting Fees*............................................ $ 5,000
Miscellaneous*.............................................. $ 10,000
Total....................................................... $82,056.11

------------------
* Estimated

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 July 2004, March 2003 and March 2002, our Board of Directors authorized the
issuance of 91,086 100,327 and 53,116 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.

II-1

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 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 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 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
second half of 2003, we sold Fusion a total of 473,869 shares of common stock
and realized net proceeds of $143,693. In addition, we issued Fusion another
6,462 shares of common stock for commitment fees due to Fusion related to the
sales of our common stock to them during the second half of 2003. During the
first nine months of 2004, we sold Fusion a total of 2,350,000 shares of common
stock and realized net proceeds of $1,468,874. We also issued Fusion 66,129
shares of common stock for commitment fees related to the sales of our common
stock to them during the first nine months of 2004. The issuances of the shares
of common stock to Fusion pursuant to the common stock purchase agreement were
exempt from registration under Sections 4(2) and 4(6) of the Securities Act and
Regulation D.

On December 31, 2001, we acquired 100 percent of the outstanding common shares
of Cardiosonix Ltd. (Cardiosonix), formerly Biosonix Ltd., an Israeli company
limited by shares, 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. 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. As
required under the terms of the Stock Purchase Agreement, in June 2003 we filed
a registration statement under which the Cardiosonix selling shareholders may
resell their common stock to the public.

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. In consideration for the loan, we issued Mr. Bupp 375,000 warrants,
expiring in April 2008, to purchase shares of our common stock at an exercise
price of $0.13 per share. Interest accrues on the note at the rate of 8.5% per
annum, payable monthly, and the note was due on June 30, 2004. On March 8, 2004,
the due date of the note to Mr. Bupp was extended to June 30, 2005. In exchange
for extending the due date of the note, we issued Mr. Bupp an additional 375,000
warrants, expiring in March 2009, to purchase our common stock at an exercise
price of $0.50 per share. The issuances of the note and warrants to Mr. Bupp
were exempt from registration under Sections 4(2) and 4(6) of the Securities Act
and Regulation D.

During April 2003, we also completed a convertible bridge loan agreement with
Donald E. Garlikov for an additional $250,000. In consideration for the loan, we
issued Mr. Garlikov 500,000 warrants, expiring in April 2008, to purchase shares
of our common stock at an exercise price of $0.13 per share. Under the terms of
the agreement, the note bore interest at 9.5% per annum, payable monthly, and
was due on June 30, 2004. During January 2004, Mr. Garlikov converted the entire
balance of the note into 1.1 million shares of common stock according to the
conversion terms of the agreement. Mr. Garlikov's 500,000 warrants remain
outstanding. The issuances of the note and warrants to Mr. Garlikov were exempt
from registration under Sections 4(2) and 4(6) of the Securities Act and
Regulation D. As further consideration for the loans, we agreed to file a
registration statement under which Mr. Bupp and Mr. Garlikov could resell to the
public shares of common stock issuable on exercise of the warrants and
conversion of Mr. Garlikov's note. The shares were included in a registration
statement filed in December 2003.

II-2

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, Inc. (Trautman Wasserman). In
exchange for Alberdale's services, we agreed to pay them a monthly retainer of
$10,000, half payable in cash and half payable in common stock, and we agreed to
pay them 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 them a total of 150,943 shares
of common stock in payment for one half of their retainer, plus warrants to
purchase 78,261 shares of common stock 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 issued Trautman Wasserman a
total of 27,199 shares of common stock in payment for one half of their
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 $2.4 million. In addition, we
issued the purchasers warrants to purchase 6,086,959 shares of common stock at
an exercise price of $0.28 per share and issued the placement agents warrants to
purchase 1,354,348 shares of our common stock on similar terms. All warrants
issued in connection with the transaction expire in October 2008. The issuances
of the shares and warrants to the purchasers and the placement agents were
exempt from registration under Sections 4(2) and 4(6) of the Securities Act and
Regulation D. As required under terms of the stock purchase agreements, in
December 2003 we filed a registration statement under which the investors and
placement agents may resell the shares of common stock to the public.

During 2004 we engaged the services of two investment banking firms to assist us
in raising capital, Roth Capital Partners, LLC (Roth) and Laidlaw & Co.
(Laidlaw). In exchange for the services of Roth, we agreed to pay $320,000 in
cash, plus warrants to purchase 800,000 shares of our common stock. In exchange
for the services of Laidlaw, we agreed to pay $320,000 in cash, plus warrants to
purchase 800,000 shares of our common stock. The warrants have an exercise price
of $0.46 per share.

II-3

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 Restated Certificate of Incorporation of Neoprobe
Corporation, as corrected February 18, 1994 and amended
June 27, 1994, June 3 1996, March 17 1999, May 9, 2000,
June 13, 2003 and July 27, 2004.*

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).

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).

II-4

Exhibit
Number Exhibit Description
------- --------------------------------------------------------

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 January 1, 2004. (incorporated by reference
to Exhibit 10.12 of the Company's March 30, 2004 Form
10-KSB)

10.13 Employment Agreement between the Company and Carl M.
Bosch, dated January 1, 2004. (incorporated by reference
to Exhibit 10.13 of the Company's March 30, 2004 Form
10-KSB).

10.14 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).

10.15 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
filed October 15, 1992).

10.16 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).

10.17 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).

10.18 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).

10.19 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).

10.20 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).

II-5

Exhibit
Number Exhibit Description
------- --------------------------------------------------------

10.21 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).

10.22 Product Supply Agreement between the Company and
TriVirix International, Inc., dated February 5, 2004
(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 10.22 of the Company's March 30,
2004 Form 10-KSB).

10.23 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).

10.24 8.5% Senior Note dated April 2, 2003 between the Company
and David C. Bupp, as amended March 8, 2004
(incorporated by reference to Exhibit 10.24 of the
Company's March 30, 2004 Form 10-KSB).

10.25 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).

10.26 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).

10.27 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).

10.28 Warrant to Purchase Common Stock of Neoprobe Corporation
dated March 8, 2004 between the Company and David C.
Bupp. (incorporated by reference to Exhibit 10.28 of the
Company's March 30, 2004 Form 10-KSB).

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. (Incorporated by
reference to Exhibit 10.32 to the Company's registration
statement on Form SB-2 filed December 2, 2003).

II-6

Exhibit
Number Exhibit Description
------- --------------------------------------------------------

10.33 Registration Rights Agreement dated October 22, 2003
between the Company and Bridges & Pipes, LLC
(Incorporated by reference to Exhibit 10.33 to the
Company's registration statement on Form SB-2 filed
December 2, 2003).

10.34 Series R Warrant Agreement dated October 22, 2003
between the Company and Bridges & Pipes, LLC
(Incorporated by reference to Exhibit 10.34 to the
Company's registration statement on Form SB-2 filed
December 2, 2003).

10.35 Series S Warrant Agreement dated November 21, 2003
between the Company and Alberdale Capital, LLC
(Incorporated by reference to Exhibit 10.35 to the
Company's registration statement on Form SB-2 filed
December 2, 2003).

10.36 Securities Purchase Agreement, dated as of December 13,
2004, among Neoprobe Corporation, Biomedical Value Fund,
L.P. Biomedical Offshore Value Fund, Ltd. and David C.
Bupp (Incorporated by reference to Exhibit 10.1 to the
Company's Current Report on Form 8-K filed December 16,
2004).

10.37 Form of Neoprobe Corporation 8% Series A Convertible
Promissory Note. This is the form of three substantially
identical agreements. A schedule identifying the other
omitted agreements, and setting forth the material
details in which such agreements differ from the form
filed herewith, is filed herewith as Exhibit 10.39
(Incorporated by reference to Exhibit 10.2 to the
Company's Current Report on Form 8-K filed December 16,
2004).

10.38 Form of Neoprobe Corporation Common Stock Purchase
Warrant. This is the form of three substantially
identical agreements. A schedule identifying the other
omitted agreements, and setting forth the material
details in which such agreements differ from the form
filed herewith, is filed herewith as Exhibit 10.39
(Incorporated by reference to Exhibit 10.3 to the
Company's Current Report on Form 8-K filed December 16,
2004).

10.39 Schedule Identifying Omitted Documents (Incorporated by
reference to Exhibit 10.4 to the Company's Current
Report on Form 8-K filed December 16, 2004).

10.40 Security Agreement, dated as of December 13, 2004, made
by Neoprobe Corporation in favor of Biomedical Value
Fund, L.P., Biomedical Offshore Value Fund, Ltd. and
David C. Bupp (Incorporated by reference to Exhibit 10.5
to the Company's Current Report on Form 8-K filed
December 16, 2004)

23.1 Consent of Independent Registered Public Accounting
Firm.*

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-7

(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-8

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 for 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 December 27, 2004.

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 December 27, 2004
David C. Bupp and Director
(principal executive officer)

/s/ Brent L. Larson*
-------------------------------- Vice President, Finance and Chief December 27, 2004
Brent L. Larson Financial Officer
(principal financial officer and
principal accounting officer)

/s/ Julius R. Krevans*
-------------------------------- Chairman of the Board of December 27, 2004
Julius R. Krevans Directors

/s/ Carl J. Aschinger, Jr.*
-------------------------------- Director December 27, 2004
Carl J. Aschinger, Jr.

/s/ Reuven Avital*
-------------------------------- Director December 27, 2004
Reuven Avital

/s/ Kirby I. Bland*
-------------------------------- Director December 27, 2004
Kirby I. Bland

/s/ Nancy E. Katz*
-------------------------------- Director December 27, 2004
Nancy E. Katz

/s/ Fred B. Miller* Director December 27, 2004
--------------------------------
Fred B. Miller

/s/ Frank Whitley, Jr.* Director December 27, 2004
--------------------------------
J. Frank Whitley, Jr.

*By: /s/ David C. Bupp
--------------------------------
David C. Bupp, Attorney-in fact

II-9