Cancer of the skin (nonmelanoma and melanoma skin cancers combined) is the most common of all cancers, projected to be over 1.3 million cases in 2005 and estimated to account for more than 50% of all cancers. There are three significant forms of skin cancer: basal cell, accounting for approximately 75% of skin cancer; squamous cell, totaling approximately 20%; and melanoma, which accounts for an estimated 4% of skin cancer cases, but is responsible for approximately 80% of all deaths from skin cancer. The American Cancer Society projects 10,600 deaths from skin cancer in 2005 — 7,800 from melanoma and 2,800 from other skin cancers. Since 1973, the mortality rate for melanoma has increased by 50%. Since approximately 62% of melanomas and 45% of melanoma deaths occur prior to age 65, melanoma places significant burdens on the healthcare system well beyond Medicare.

Melanoma is currently the subject of significant attention in the medical community. In part, this attention is due to the fact that it is the fastest growing cancer. It is also the most common cancer in young adults ages 20-30, and currently there are more new cases of melanoma than HIV/ AIDS. In women ages 20-29, melanoma is the primary cause of cancer death. In women ages 30-35, melanoma is the second leading cause of death after breast cancer. Recent published papers identify a strong correlation between breast cancer and melanoma.

Because early detection is critical to survival, the American Cancer Society recommends that individuals 40 years and older have complete skin examinations on an annual basis. The 2000 US Census indicates that there are over 100 million Americans over the age of 40 in the US. Furthermore, there are more than 20 million individuals in the US who have dysplastic nevi, a type of pigmented skin lesion that when present is associated with an increased risk of melanoma. Such individuals warrant more frequent observation.

The key components of the MelaFind® system are a hand-held imagin device, proprietary database of pigmented skin lesions, leison classifiers, which are sophisticated mathematical algorithms, and central server. A hand-held imaging device is comprised of several components: an illuminator that shines 10 different specific wavelengths of light, including near infra-red bands; a lens system composed of nine elements that creates images of the light reflected from the lesions; a photon (light) sensor; and an image processor employing proprietary algorithms to extract many discrete characteristics or features from the images. The Company’s proprietary database of pigmented skin lesions includes in vivo MelaFind® images and corresponding histopathological results of over 5,000 biopsied lesions from over 3,500 patients. The Company’s lesion classifiers are sophisticated mathematical algorithms that analyze the MelaFind® images and extract lesion feature information from the images; the features are used to classify the lesions as either suspicious for melanoma or not suspicious for melanoma. A central server located in the Company’s offices is intended to perform quality control functions and provide diagnostic reports to the physician.

The “brain” of the MelaFind® system, the Lesion Classifier, distinguishes melanoma from non-melanoma using the lesion features extracted and measured by the hand-held imaging device. The Lesion Classifiers are developed from the Company’s proprietary database of pigmented skin lesions and sophisticated mathematical algorithms. The mathematical formulas and algorithms used by the Lesion Classifiers are devised and optimized through the process of “classifier training” using lesions from the Company’s proprietary database. Lesion Classifier development and training is an iterative process involving: selection of the lesion features that provide for optimal lesion discrimination; optimization of the mathematical formulas to differentiate benign lesions from melanoma; and expansion of the size and diversity of the Company’s proprietary lesion database.

Gross profit increased by $9 to $80 for the three months ended March 31, 2005 from $71 for the three months ended March 31, 2004.

Research and development expense increased by $329 to $636 for the three months ended March 31, 2005 from $307 for the three months ended March 31, 2004.

Selling, general and administrative expense increased by $180 to $713 for the three months ended March 31, 2005 from $533 for the three months ended March 31, 2004.

Interest income for the three months ended March 31, 2005 was $26 compared to interest expense of $1 for the three monts ended March 31, 2004.