ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

The following discussion and analysis of the Company's financial condition and results of operations should be read in conjunction with the Condensed Financial Statements (unaudited) and Notes thereto appearing elsewhere in this Form 10-QSB.

Results of Operations

Sales for the quarter ended March 31, 1999 increased 12 percent to $3,381,088 compared to $3,016,141 in the same period of the prior year. Sales for the nine months ended March 31, 1999 increased 36 percent to $12,312,019 compared to $9,044,568 in the prior year period. The increases in sales for the year are attributable to the introduction of the new Synergie Lifestyle System product line which began shipping in July 1998 together with a 34 percent year-to-date increase in sales of the Company's line of medical supplies and soft goods. However, the January 1, 1999 implementation of new Medicare reimbursement guidelines related to physical therapy services for patients in long-term care facilities had a greater effect on slowing sales growth during January and February than was anticipated. In comparison, sales in the months of March and April 1999 trended upward toward more traditional levels.

The Synergie AMS device, which is part of the Synergie Lifestyle System, provides non-invasive vacuum massage treatments to skin and subcutaneous tissues. During the reporting quarter, the Company received formal clearance from the U.S. Food and Drug Administration to expand labeling claims for the Synergie AMS device to include the claim of "temporary reduction in the appearance of cellulite." This claim is strongly supported by the Company's research study which revealed that 91 percent of the participants reported a favorable reduction in the appearance of cellulite.

Total gross profit for the quarter ended March 31, 1999 increased to $1,362,923 as compared to $1,255,281 in the prior year period. Gross profit for the nine-month period ended March 31, 1999 increased to $5,381,984 compared to $3,805,963 in the same period of the previous year. These increases are directly attributable to sales of the new Synergie product line and increased sales of medical supplies and orthopedic soft goods. Gross margins as a percentage of sales declined during the reporting quarter to 40.3 percent compared to 41.6 percent in the same quarter of the prior year due to a shift in product mix. Sales of the Company's lower margin orthopedic soft goods increased during the reporting quarter while higher margin sales of medical devices declined. The decline in device sales is the result of the previously mentioned Medicare reimbursement changes as well as increased competition among device manufacturers. Gross margin percentages increased during the nine-month period to 43.7 percent compared to 42.1 percent due to the higher margins associated with the Company's Synergie products which comprised a high percentage of overall sales in the first quarter of fiscal year 1999.

Selling, general and administrative (SG&A) expenses for the three- and nine-month periods ended March 31, 1999, increased to $1,086,862 and $3,606,931 respectively, as compared to $856,656 and $2,602,517 respectively in the prior year periods. Expenses associated with introducing and supporting the new Synergie product line account for a significant portion of increased SG&A expenses during the quarter and nine- month period. In addition, efforts at the Company's Columbia operations to

convert to new manufacturing methods resulted in increased operating expenses of approximately $223,000 for the nine months ended March 31, 1999. The majority of this conversion is now complete and is anticipated to increase capacity and improve operating efficiencies.

Research and development (R&D) expenses in the three months ended March 31, 1999 totaled $96,867, compared to $100,676 in the same period of the prior year. R&D expenses for the nine months ended March 31, 1999 were $436,412 compared to $345,592 in 1998. As a percentage of sales, R&D expenses in the three and nine months ended March 31, 1999 were 2.9 percent and 3.5 percent, respectively, compared to 3.3 percent and 3.8 percent for the same periods one year ago. R&D expenses for the reporting periods were associated primarily with development efforts on the new Synergie product line and upgrading the Company's ultrasound products. The Company expects R&D expenses as a percentage of sales to continue at current levels through the remainder of the year ending June 30, 1999.

Interest expense for the reporting quarter increased to $103,217 compared to $61,134 in the prior year period while interest expense for the nine- month period increased to $288,686 compared to $153,483 in 1998. These increases were associated with higher balances on the Company's line of credit due to increased inventories as well as new borrowings to finance capital improvement projects in fiscal 1998.

Income before tax for the quarter ended March 31, 1999 decreased to $87,113 compared to $257,738 during the same period of the prior year. Income before tax for the nine months ended March 31, 1999 increased to $1,076,128 compared to $768,619 in the prior year period. The decrease in pre-tax profits for the quarter ended March 31, 1999 was a result of lower margins associated with the shift in product mix, higher sales and marketing expenses related to the Synergie product line, and higher labor costs and operating expenses at the Columbia operation. Pre-tax income for the nine- month period increased due to sales of the new Synergie products and improved sales volumes of medical supplies and soft goods, together with the higher gross margins associated with the Synergie product line.

Income tax expense for the three and nine months ended March 31, 1999 was $31,634 and $419,668, respectively, as compared to $34,128 and $218,506, respectively in the prior year periods. The effective tax rate for the 1999 quarter was 36.3 percent compared to 13.2 percent for the same quarter last year. The effective tax rate for the nine months ended March 31, 1999 was 39.0 percent compared to 28.4 percent in 1998. The lower effective tax rates in the prior year periods reflect an adjustment of the valuation allowance for deferred tax assets which was reduced to -0- as of June 30, 1998 as detailed in the Company's annual report on Form 10-KSB as of that date.

Net income for the quarter ended March 31, 1999 decreased to $55,479 compared to $223,610 in the prior year period. Net income for the nine months ended March 31, 1999 increased to $656,460 compared to $550,113 in the same period of the previous year.

Liquidity and Capital Resources

The Company expects revenues from operations, together with amounts available under the Company's bank line of credit will be adequate to meet its working capital needs related to its business and its planned capital expenditures for the upcoming operating year.

The Company's current ratio at March 31, 1999 was 1.93 to 1. Current assets represent 59 percent of total assets.

Trade accounts receivable are from the Company's dealer network and are generally considered to be within term. All accounts payable are within term with the Company continuing its policy of taking advantage of any and all payment discounts available.

The Company has a revolving line of credit with a commercial bank with a maximum lending amount of $3,500,000 based on 30 percent of inventory (up to a lending amount of $1 million) and up to 80 percent of eligible accounts receivable. The outstanding balance on the line of credit at March 31, 1999 was $2,464,591. The line is secured by the Company's inventory and accounts receivable and bears interest at the bank's "Prime Rate," which was 7.75 percent per annum at March 31, 1999. The Company may also elect to lock in fixed rates on this agreement for 30 to 90 day periods at a rate equal to the London Interbank Offered Rate (LIBOR) plus 2.70% per annum. This line is subject to annual renewal and matures on November 30, 1999. Accrued interest is payable monthly.

Inventory levels, net of reserves, at March 31, 1999 totaled $4,621,937 while net accounts receivable were $2,943,136. During the current fiscal year, inventories and receivables increased significantly to support the Company's introduction of the Synergie Lifestyle System. In addition, management has made a stronger effort to reduce backorders by increasing inventory quantities. Financing for these increases has been provided through cash flow from operations together with the Company's line of credit facility.

Long-term debt excluding current installments at March 31, 1999 totaled $2,300,395 comprised primarily of the mortgage loans on the Company's office and manufacturing facilities. The principal balance on the mortgage loans is approximately $2.2 million with monthly principal and interest payments of $26,900.

Business Plan

With the introduction of the new Synergie Lifestyle System product line, the Company is expanding its distribution network and opening new markets for products directed at the fields of plastic surgery, dermatology, and related non-medical aesthetic markets. The first direct mail piece advertising the new product line generated over 4,000 requests for information. This level of interest, coupled with strong indications of interest from the dealer network, led management to anticipate significantly more sales than were initially realized. As a result, inventory levels are currently higher than they would normally be. As sales of the new Synergie products increase, the Company expects inventories to decrease to more traditional levels. The Company believes the main reason sales of the Synergie products have not reached expected levels is the newness of the technology, the public's lack of experience with or exposure to the Synergie AMS or similar products, and the need for expansion and refinement of distribution channels. Interest in the product line remains strong, however, as sales continue to increase month by month. As the market becomes more familiar with this new product line, the Company believes that sales will continue to show steady improvement.

Other opportunities in the aesthetic market have been identified and plans are underway to develop other products and treatments. As the Aesthetic Division continues to grow and gain momentum, efforts will be focused on establishing a distribution network distinct from current distribution to allow greater sales focus and effort in both the rehab and aesthetic markets.

In recent years the popularity of nutritional supplements has grown significantly. It is estimated by industry sources that sales of nutritional supplements in the United States this year will reach 25 billion dollars with an annual growth rate estimated at 15-20%. In conjunction with knowledgeable consultants in the field of nutritional supplements, the Company has developed a line of 19 nutritional supplements. These supplements, which were initially developed as an integral part of the Synergie Lifestyle System, include such products as a multivitamin/mineral compound, a St John's Wort formulation, an antioxidant complex, an herbal calmative, and a calcium formula. The Company is now exploring ways to market these products directly to consumers including establishing an Internet presence to facilitate direct ordering. With currently high public interest in nutritional supplements, the Company believes that the high quality of the Synergie nutritional supplements will attract consumers as well as professional practitioners who in the past have not made nutritional supplements a part of their practice.

Since the acquisition of Superior Orthopaedic Supplies in May 1996, the Company has nearly tripled sales of medical products and supplies compared to pre-acquisition levels. The start-up of the treatment table and rehabilitation products manufacturing operation in South Carolina has further broadened the Company's product line. The Company believes that offering a broad product line is of strategic importance as clinics continue to consolidate and develop centralized purchasing policies that favor single source suppliers for their medical device and supplies needs. To capitalize on its broader product line, the Company published its first full-line catalog in January 1997. In February 1998, the Company introduced a new version of its catalog with twice the number of products as the first catalog. The Company has just finished its 1999-2000 catalog with over 800 products and is in the process of distributing it through its distribution network to practitioners. This new catalog is expected to continue to stimulate sales growth of the Company's products.

The Company continues to evaluate acquisition opportunities that would further expand manufacturing operations and add new products to a growing line of existing products. The established criteria for such acquisitions is relatively narrow to protect against an acquisition that may be detrimental to shareholder value. Furthermore, the Company's ability to successfully negotiate an acquisition may depend in part on the market price of the Company's common stock. A higher stock price may facilitate acquisitions. There can be no assurance that any acquisition or disposition of a business, products or technologies by the Company will not result in substantial charges or other expenses that may cause fluctuations in the Company's operating results. The use of the Company's common stock or securities convertible to common stock for an acquisition or the offer and sale of such securities to raise capital to fund an acquisition would result in immediate and perhaps substantial dilution to existing shareholders. In addition, the stock market is subject to volatility and rapid increases and decreases in share price, which may not necessarily be reflective of or bear a direct relationship to the actual book value of the Company's common stock or of the Company.

Current economic conditions in many Pacific Rim countries have hurt sales not only to Japan, but to other countries including Korea and Taiwan. However, with sustained marketing efforts combined with improved economic stability, the Company anticipates sales will improve in this part of the world. Initial marketing efforts in Europe are expected to be undertaken in fiscal year 2000, continuing the Company's international expansion. As a prerequisite to this effort, the Company is in the process of qualifying its "50 Series Plus" products for the CE Mark which will allow these devices to be marketed in all European Union member states. The Company believes it will complete the CE Mark registration in early fiscal year 2000. In addition, the Company is making progress in its efforts to meet the requirements for ISO 9001 certification which is a validation of the Company's quality manufacturing practices. This certification is also expected to be completed within the next six months. International markets are more difficult to develop and subject to risks such as currency fluctuations, political and economic instability and regulatory barriers to entry by foreign governments.

The Company recognizes the need to continually upgrade and re-engineer existing products as well as introduce new products if it is to remain competitive. The Company believes its continuing commitment to research and development enables it to be a technological leader in the market. New products and engineering improvements are constantly being evaluated and developed.

Y2K Disclosure

The Company is aware of the risks associated with the operation of information technology and non-information technology systems as the new century approaches. The "Year 2000" problem is pervasive and complex, with the possibility that it will affect many technology systems, including computer programs and imbedded microprocessor technology. The Year 2000 problem is the result of the rollover of the two digit year value from "99" to "00". Such systems that have date-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to complete manufacturing, process transactions, send invoices, collect payments, or engage in similar normal business activities.

The Company has carefully assessed its state of readiness, and is in the process of assessing the readiness of third parties with which the Company interacts, with respect to the Year 2000 problem. The Company intends to use both internal and external resources to reprogram, or replace and test its software for Year 2000 modifications as needed. However, if such modifications or conversions are not made, or are not completed timely, the Year 2000 problem could have a material impact on the operations of the Company. The Company has initiated formal communications with all of its significant suppliers to determine the extent to which the Company is vulnerable to those third parties' failure to remediate their own Year 2000 problems.

The Company is presently not aware of any Year 2000 issues that have been encountered by the Company or any third party which could materially affect the Company's operations. Based on the most recent assessment, the Company believes that with modifications to existing software and conversions to new software, any Year 2000 problems that it may have with

its own systems can be mitigated without significant expense. Notwithstanding the foregoing, there can be no assurance that the Company will not experience operational difficulties as a result of Year 2000 issues, either arising out of internal operations, or caused by third-party service providers, which individually or collectively could have an adverse impact on business operations or require the Company to incur unanticipated expenses to remedy any problems.

Forward-Looking Statements and Risks Affecting the Company

The statements contained in this Report on Form 10-QSB that are not purely historical are "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act. These statements regard the Company's expectations, hopes, beliefs, anticipations, commitments, intentions and strategies regarding the future. They may be identified by the use of words or phrases such as "believes," "expects," "anticipates," "should," "plans," "estimates," "intends," and "potential," among others. Forward- looking statements include, but are not limited to, statements contained in Management's Discussion and Plan of Operation regarding the Company's financial performance, revenue and expense levels in the future and the sufficiency of its existing assets to fund future operations and capital spending needs. Actual results could differ materially from the anticipated results or other expectations expressed in such forward-looking statements for the reasons detailed in the Company's Annual Report on Form 10-KSB under the headings "Description of Business" and "Risk Factors." The fact that some of the risk factors may be the same or similar to the Company's past reports filed with the Securities and Exchange Commission means only that the risks are present in multiple periods. The Company believes that many of the risks detailed here and in the Company's other SEC filings are part of doing business in the industry in which the Company operates and competes and will likely be present in all periods reported. The fact that certain risks are endemic to the industry does not lessen their significance.

The forward-looking statements contained in this Report are made as of the date of this Report and the Company assumes no obligation to update them or to update the reasons why actual results could differ from those projected in such forward-looking statements. Among others, risks and uncertainties that may affect the business, financial condition, performance, development, and results of operations of the Company include:

- market acceptance of the Company's technologies, particularly the new Synergie Lifestyle System product line and other new or re-designed products;
- the ability to hire and retain the services of trained personnel at cost-effective rates;
- rigorous government scrutiny or the possibility of additional government regulation of the industry in which the Company markets its products;
- potential effects of adverse publicity regarding nutritional supplements;
- reliance on key management personnel;
- foreign government regulation of the Company's products and manufacturing practices that may bar or significantly increase the expense of expanding to foreign markets;
- economic and political risks related to the Company's expansion into international markets;

- failure of the Company to sustain or manage growth including the failure to continue to develop new products or to meet demand for existing products;
- the Company's reliance on information technology;
- the timing and extent of research and development expenses;
- the Company's ability to keep pace with technological advances, which can occur rapidly;
- the loss of product market share to competitors;
- potential adverse effect of taxation;
- the ability of the Company to obtain required financing to meet changes or other risks described above; or
- the Company's inability or failure to identify and to manage its Year 2000 risks