LIFESTREAM TECHNOLOGIES INC, 10KSB40, 2000-09-28

LIFESTREAM TECHNOLOGIES INC
10KSB40, 2000-09-28
SURGICAL & MEDICAL INSTRUMENTS & APPARATUS

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-KSB

[X] ANNUAL REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
1934

FOR THE FISCAL YEAR ENDED JUNE 30, 2000

[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934

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

LIFESTREAM TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)

COMMISSION FILE NUMBER 000-29058

NEVADA 82-0487965
--------------------------- -------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

510 Clearwater Loop, Suite 101, Post Falls, ID 83854

(Address of principal executive offices)

(208) 457-9409

(Registrant's telephone number, including area code)

SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT:

None

SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:

Common Stock, $.001 par value

Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes [X] No [_ ]

Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]

State issuer's revenues for its most recent fiscal year was $141,262.

The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant was $48,467,851 as of September 22, 2000, based
upon the closing price of $3.77 on the Over-The-Counter Bulletin Board Market.
As of September 22, 2000, 19,424,086 shares of the registrant's $.001 par value
common stock were outstanding. Shares of common stock held by each executive
officer and director and by each person who beneficially owns more than 5% of
the outstanding common stock have been excluded in that such person may under
certain circumstances be deemed to be affiliates. This determination for
executive officer or affiliate status is not necessarily a conclusive
determination for other purposes.
<PAGE>

DOCUMENTS INCORPORATED BY REFERENCE

Part III incorporates by reference from the definitive proxy statement for the
registrant's 2000 Annual Meeting of Stockholders to be filed with the Commission
pursuant to Regulation 14A not later than 120 days after the end of the fiscal
year covered by this Form.

Transitional Small Business disclosure format. Yes [ ] No [X]

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LIFESTREAM TECHNOLOGIES, INC.

ANNUAL REPORT ON FORM 10-KSB FOR THE FISCAL YEAR ENDED JUNE 30, 2000

PART I

<S> <C>
Item 1. Business 4
Item 2. Properties 14
Item 3. Legal Proceedings 14
Item 4. Submission of Matters to a Vote of Security Holders 14

PART II

Item 5. Market for Common Equity and Related Stockholder Matters 15
Item 6. Management's Discussion and Analysis or Plan of Operation 16
Item 7. Consolidated Financial Statements 26
Item 8. Change in and Disagreements with Accountants or Accounting
and Financial Disclosures 26

PART III

Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act 27
Item 10. Executive Compensation 27
Item 11. Security Ownership of Certain Beneficial Owners and Management 27
Item 12. Certain Relationships and Related Transactions 27
Item 13. Exhibits and Reports on Form 8-K 27

Signatures 28

Exhibit Index
</TABLE>

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PART I

ITEM 1. OUR BUSINESS

This Annual Report on Form 10-KSB, including the information incorporated by
reference herein, includes certain forward-looking statements within the meaning
of the federal securities laws. Such forward-looking statements include, but are
not limited to, statements regarding our current business strategies, objectives
and plans that involve risks and uncertainties. When used in this discussion,
the words "anticipate," "believe," "estimate," "expect," and similar expressions
are intended to identify such forward-looking statements. These forward-looking
statements are based on our current expectations and our actual performance,
results and achievements could differ materially from those expressed in, or
implied by, these forward-looking statements. Factors, within and beyond our
control, that could cause or contribute to such differences include, among
others, the following: those associated with developing and marketing medical
diagnostic devices, including technological advancements and innovations,
identifying, recruiting and retaining highly qualified personnel, consumer
receptivity and preferences, availability, affordability and coverage terms of
private and public medical insurance, political and regulatory environments and
general economic and business conditions; competition; success of
capital-raising, operating, marketing and growth initiatives; development and
operating costs; advertising and promotional efforts; brand awareness; the
existence or absence of adverse publicity; changes in business strategies or
development plans; quality and experience of management; availability, terms and
deployment of capital; business abilities and judgment of personnel; labor and
employee benefit costs; as well as those factors discussed in "Item 1 -
Business," "Item 6 - Management's Discussion and Analysis," and elsewhere in
this Form 10-KSB.

On July 2, 1999, we changed our fiscal year-end from December 31st to June 30th,
beginning with and effective for the six-month transition period ended June 30,
1999. Accordingly, the accompanying consolidated financial statements are
presented as of June 30, 2000 and June 30, 1999, and for the fiscal year ended
June 30, 2000, six-month periods ended June 30, 1999 and June 30, 1998
(unaudited), and fiscal year ended December 31, 1998. We were considered a
development-stage company under United States generally accepted accounting
principles through December 31, 1998. References to a fiscal year refer to the
calendar year in which such fiscal year ends.

Our Company Overview

We are a healthcare information technology company primarily focused on
developing and marketing secure, Internet-based medical solutions through the
use of proprietary smart card-enabled medical diagnostic devices. Our current
diagnostic product line consists of two easy-to-use, hand-held, smart
card-enabled cholesterol monitors, one specifically designed for facility-use by
professional medical service providers and one specifically designed for at home
use by at-risk cholesterol patients and health conscious consumers. Both
monitors share certain core technological capabilities, primarily being the
ability to measure total cholesterol levels in the blood with proven clinical
laboratory accuracy in approximately three minutes and the ability to
cumulatively store the resulting cholesterol test results on an integrated smart
card. Using a complimentary feature unique to our professional-use monitor, the
medical professional operator can additionally input via the monitor's keypad
fifteen other cardiac risk factors (e.g., gender, age, weight, tobacco use,
etc.) identified by the Framingham Heart Disease Epidemiological Study
("Framingham Study") and determine the cardiac condition of the patient.

Both of our monitors have also been developed to ultimately take advantage of
our proprietary Internet technology, Privalink TM, which currently is in beta
testing. Once fully developed and available, our Privalink TM system will allow
for the cholesterol test results and any other patient medical data stored on
the smart card to be encryptically downloaded via the Internet to a secured
website we currently have under construction. This value-added capability will
allow both patients and their authorized medical providers to use the Internet
to conveniently retrieve this stored medical data, along with related scientific
literature, thereby promoting effective communication and coordination between
physician, pharmacist and patient. Although there can be no assurance of such,
we currently anticipate that our Privalink TM system will become available, on a
user fee or subscription basis, beginning in the second quarter of calendar
2001.

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In its recent "2000 Heart and Stroke Statistical Update", the American Heart
Association ("AHA") estimates that approximately 40 million American adults have
"high" total blood cholesterol levels (240 and higher milligrams per deciliter)
and approximately 60 million other Americans have "borderline-high" cholesterol
levels (200 - 239 milligrams per deciliter). The AHA, as well as the Framingham
Study, have identified elevated blood cholesterol as a primary contributor to
coronary heart disease ("CHD"), the single largest killer of American males and
females, as well as other forms of cardiovascular disease. Of the estimated
600,000 CHD-related deaths in the United States ("U.S.") during 1997, the AHA
estimates that about 225,000 died without ever being hospitalized and, in 50% of
the men and 63% of the women who died suddenly of CHD, there were no previous
symptoms of CHD. The AHA also sights CHD as the leading cause of premature,
permanent disability in the U.S. labor force, accounting for 19% of disability
allowances by the Social Security Administration. The AHA also estimates that
CHD prevention and treatment costs alone exceed $100 billion annually with more
than 750,000 new patients entering a cholesterol-lowering drug therapy programs
each month.

Because of the recognized medical importance of managing cholesterol and
preventing CHD, the National Cholesterol Education Program ("NCEP") was formed
to educate consumers and professionals about the importance of knowing an
individual's cholesterol level and to establish guidelines for the detection,
evaluation and treatment of high cholesterol in adults. To detect cholesterol
risk and aid in therapy compliance, the NCEP recommends a whole blood total
cholesterol test at least once every five years, and if cholesterol levels are
categorized as high, every three months.

Medical professionals have traditionally been the only source for cholesterol
testing and such testing has typically been performed with a bench top analyzer
requiring a considerable sample of whole blood and generally taking 24 to 48
hours to produce results. Although some bench top analyzers have more recently
evolved to utilize dry chemistry strip technology, such as that utilized in our
monitors, thereby eliminating the previously required and critical segregation
of red blood cells from serum/plasma for an accurate result, they continue to
require relatively large amounts of whole blood in precise measurements and
generally require a minimum of five minutes, excluding the time required for
blood drawing and centrifugation, to produce results. Additionally, as the cost
of a single bench top analyzer can approach $2,000, the resulting patient test
costs can also be a deterrent to routine cholesterol monitoring.

Accordingly, our efforts to date primarily have focused on meeting what we
perceive to be a continuing widespread need in the professional and consumer
markets for a more affordable, timely and convenient means of accurately testing
for blood cholesterol levels. We believe that our professional-use and
over-the-counter, consumer-use cholesterol monitors meet this widespread need,
providing easier to operate, more cost-effective and faster results-producing
alternatives to traditional bench top analyzers for use in routine cholesterol
testing, monitoring and treatment programs. We believe that the potential
societal benefits of our monitors will be earlier detection of high cholesterol
levels by at-risk individuals, more timely interventions by medical
professionals, more actively engaged and informed patients, and ultimately,
reductions in cholesterol-related disabilities and deaths.

Both our professional-use and over-the-counter, consumer use cholesterol
monitors have received market clearances from the U.S. Food and Drug
Administration ("FDA") and meet all NCEP guidelines for precision. Both monitors
operate on the power of a single nine-volt battery and are compact, lightweight
and portable. Either monitor can be easily and discreetly carried in a medical
bag, purse or briefcase. To perform a cholesterol test on either monitor, the
operator merely sticks the finger using a reusable lance device equipped with a
disposable lancet and deposits a single drop of blood on a dry chemistry strip,
which has been previously inserted into an opening at the optical head of the
monitor. The multi-layered strip then initiates a chroma-graphic reaction with
lipoprotein to produce a color change in direct proportion to the quantity of
total cholesterol in the blood sample. The resulting color change is "read" by
the monitor's integrated photometry system and converted electronically to a
quantitative digital read-out that is displayed within three minutes on an
integrated easy-to-read, liquid crystal display ("LCD") screen. Ongoing test
results may be stored on an integrated, encryption-based smart card thereby
maintaining a complete history of test results. We believe that there are no
other hand-held, quantitative cholesterol monitoring systems that are easier to
use, more accurate and quicker in obtaining results. Our professional-use
cholesterol monitor has been available since March 1999 and currently has a
suggested retail price of $299.95. With our July 25, 2000 receipt of market
clearance from the FDA, we currently plan to widely introduce our
over-the-counter, consumer-use cholesterol monitor with a suggested retail price
of $129.95 in the first quarter of calendar 2001, coinciding with the AHA's
"Heart Month" in February 2001.

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Our overriding corporate objective is to ultimately establish our proprietary
cholesterol monitors and complimentary Privalink TM system as the consumer
standard of care for personal health and wellness and the medical industry
standard for virtual patient record storage and retrieval. We plan to achieve
our objective by:

>> Achieving and maintaining market leadership through innovative
product introductions and extensions

>> Leveraging what we believe to be our superior technological
capabilities

>> Accelerating our penetration of targeted markets through key
strategic marketing alliances

>> Aggressively targeting the consumer channel with the
introduction of our FDA-approved, Over-The-Counter,
Consumer-Use Cholesterol Monitor

>> Obtaining and promoting independent third party endorsements
by leading healthcare authorities

>> Developing and introducing other proprietary, Internet-enabled
medical diagnostic devices to allow consumers to better manage
their health

>> Positioning our products as the preferred tools for personal
health management of chronic diseases

Our History

Our predecessor, Lifestream Development Partners ("LDP") was organized in 1989
by three investors as a general partnership for the purpose of developing
cholesterol-monitoring devices. Its efforts primarily were directed at
conducting product chemistry research and development, purchasing production and
distribution rights to certain technology and engaging in various pre-production
and pre-marketing programs. On June 1, 1992, the principals of LDP organized
Lifestream Diagnostics, Inc. ("Lifestream Diagnostics") as a Nevada corporation.
On August 7, 1992, LDP transferred its net assets, primarily consisting of
purchased patent rights to dry strip chemistry, to Lifestream Diagnostics in
exchange for 3,327,000 common shares.

On February 11, 1994, Lifestream Diagnostics completed a plan of legal
reorganization to become a public company whereby Lifestream Diagnostics
executed an exchange agreement with Utah Coal & Chemical ("UTCC"), a Nevada
corporation, pursuant to which Lifestream Diagnostics became a subsidiary
corporation of UTCC. Concurrent with this reorganization, UTCC changed its name
to our current name, Lifestream Technologies, Inc, and our common shares began
trading on the Over-The-Counter Bulletin Board Market under the ticker symbol
"LFST".

On June 1, 1996, we acquired an initial 20% ownership interest in Secured
Interactive Technologies, Inc. ("SITI") with whom we had previously established
a development alliance to jointly create and promote Privalink(TM). On September
1, 1999, we acquired the remaining 80% ownership interest in SITI by
effectuating a merger whereby each outstanding common share of SITI was
exchanged for one newly issued share of our common stock.

We currently operate through our two wholly owned subsidiaries, Lifestream
Diagnostics, Inc. and SITI. All of our operations are consolidated at 510
Clearwater Loop, Suite 101, Post Falls, Idaho 83854.

Our Current Products

OUR PROFESSIONAL-USE CHOLESTEROL MONITOR. Our professional-use cholesterol
monitor has a suggested retail price of $299.95. The monitor is compact,
portable and lightweight having dimensions of only 6.5" x 4.5" x 2" with an
approximate weight of one pound. The monitor has an integrated "user friendly"
keypad that is used to turn it on and to recalibrate it by use of a code unique
to each batch of chemistry strips. Using a feature unique to our professional-
use monitor, the medical professional operator can additionally input via the
keypad fifteen other cardiac risk factors (e.g., gender, age, weight, tobacco
use, etc.) identified by the Framingham Study and determine the cardiac
condition of the patient.

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OUR OVER-THE-COUNTER, CONSUMER-USE CHOLESTEROL MONITOR. On July 25, 2000, we
received FDA market clearance for our over-the-counter, consumer-use cholesterol
monitor. As such, we are now proceeding with its introduction to the retail
consumer market, which is currently planned for the first quarter of calendar
2001. The monitor will have a suggested retail price of $129.95 and a pack of
six disposable, dry chemistry test strips will have a suggested retail price of
$19.95. The monitor is compact, lightweight and portable having dimensions of
only 6.75" x 5.0" x 2.0" with an approximate weight of one pound. It has the
same cholesterol measuring capabilities as our professional-use monitor but will
not include the complimentary cardiac risk calculator.

Each of our cholesterol monitors is warranted for a period of one year from
defects of materials and workmanship.

Our Current Major Customers

Carepoint Group and Bergen Brunswig accounted for 12.69% and 8.38%,
respectively, of our consolidated net sales for the fiscal year ended June 30,
2000. We believe that these two modest revenue concentrations are merely a
consequence of our overall limited sales to date and not the result of any
conscious marketing effort by us.

Our Current Product Development Efforts

OUR PRIVALINK TM, SMART CARD-ENABLED, SOFTWARE TECHNOLOGY. We perceive five
basic information flow requirements common to the treatment of patients by
physicians:

>> diagnostic testing

>> patient diagnosis

>> prognosis

>> specific recommendation

>> medical recording

We believe that a major issue currently facing the healthcare industry is the
functional integration of these information flow requirements with the advanced
communication technologies (e.g., smart cards, the Internet, etc.) commonly
being utilized by many other industries. The logistics of many primary physician
practices currently require disruptive, off-site and time-consuming laboratory
tests often taking up to 48 hours for delivery of results. The consequence of
such is that the primary physician is temporarily removed from the information
flow thereby delaying the physician's making of specific and meaningful patient
recommendations at the time of the initial office visit.

Our proposed technological solution to the aforementioned problem is based on
two assumptions that we believe to be reasonable:

>> the Internet will ultimately become the preeminent
communications platform for transferring, storing and
retrieving medical records and information, and

>> encrypted, integrated circuit ("IC") smart cards will become
commonly used as Internet security access keys and medical
identification cards.

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As such, we perceive an emerging demand for smart card-enabled, point-of-care
diagnostic instruments throughout the medical industry. So as to optimally
position ourselves to meet this anticipated demand, we proactively incorporated
smart card-enabling technologies into the planning, development and marketing of
our cholesterol monitors. We believe that our Privalink(TM) system, currently
planned for release during the second quarter of calendar 2001, will enable
users of our cholesterol monitors, as well as users of other future smart
card-enabled medical diagnostic devices, to easily and securely download test
results and other patient medical data to the proprietary web site we currently
have under construction. Storing this data on our secured web site will allow
for convenient subsequent retrieval, along with related scientific literature,
by patients and their authorized medical providers. As such, we believe that our
value-added PrivalinkTM system will help fulfill and expedite these five basic
information flow requirements by linking patients, physicians, pharmacists, and
scientific literature.

Our Current and Anticipated Research and Product Development Expenditures

During the fiscal year ended June 30, 2000, the transitional six month period
ended June 30, 1999 and fiscal year ended December 31, 1998, we incurred
directly related research and product development expenses of $118,972, $28,922
and $304,432, respectively. It should be noted that our other operating expense
categories for the above periods also reflect significant costs indirectly
related to our research and product development efforts. We anticipate that we
will continue to incur significant direct and indirect costs in connection with
our research and product development for the foreseeable future.

Our Current Patents and Trademarks

We currently have one U.S. patent, granted August 4, 1992, that covers the
invention of the direct measurement of HDL cholesterol with dry chemistry
strips. In September 1999, we submitted U.S. and European Community patent
applications related to the utility and product design of our Privalink(TM)
software and business model. We also have numerous other U.S. and European
Community patent submissions under review for various other technological
applications, none of which we consider critical to our future success. The
above U.S. patent will expire seventeen years from grant date unless an
extension is applied for and granted. There can be no assurances that any of our
other pending patent submissions will be approved.

On June 1, 2000, we filed suit against Polymer Technology Systems, Inc.
("Polymer") in the United States District Court for the District of Idaho (Coeur
d'Alene Division) asserting that Polymer is infringing upon our U.S. Patent No.
5,135,716 which covers the invention of the direct measurement of HDL
cholesterol with dry chemistry strips. We seek the removal of the infringing
product from the market as well as damages, interest, costs and attorney fees.

We currently have the following U.S. trademarks: Lifestream Technologies TM;
Lifestream TM; Cholestron TM; Privalink TM; Personal Data Key TM; Personal
Document Key TM; Personal Financial Key TM; Personal Health Key TM; The Data
Concern TM; and Know It For Life TM. We also have pending U.S. trademark
submissions for our Lifestream Technologies and logo design and our Privalink
and logo design, the latter of which has been objected to by a European firm.

Our Product Assembly Operations

We currently perform the final assembly of our cholesterol monitor products at
our Post Falls, Idaho location. Our assembly processes are designed to conform
with Good Manufacturing Guidelines ("GMP") standard operating procedures and
factory work instructions as well as an ISO-9001 based quality system. We
believe that our current assembly facility provides sufficient productive
capacity for the foreseeable future although expansion or outsourcing may be
necessitated by any rapid escalation in the demand for our products.

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Our Strategic Vendor Relationships

ROCHE DIAGNOSTICS AND LRE TECHNOLOGY PARTNER. In November 1997, we entered into
a five-year contract with Roche Diagnostics ("Roche") whereby Roche exclusively
licenses, manufactures and supplies the diagnostic modules, dry chemistry test
strips and calibration keys required for our cholesterol monitors. Roche
currently manufactures the dry chemistry test strips and calibration keys at its
facility in Mannheim, Germany. LRE Technology Partner ("LRE"), on Roche's
behalf, manufactures the diagnostic modules at its facility in Munich, Germany.
LRE is part of Leach Medical, which owns United Medical Manufacturing, which in
turn supports certain Roche requirements in the U.S. Although our current focus
is on assembling and marketing our cholesterol monitors, our agreement with
Roche provides us with the option to pursue development and commercialization of
our own proprietary chemistry should future capability enhancements to our
monitors include HDL cholesterol, triglycerides or glucose testing requiring
chemistry different from that used in the Roche licensed and manufactured test
strips. We have recently entered into discussions with Roche aimed at revising
certain provisions of the above contract as well as extending its term. There
can be no assurance that a revised and extended contract will be obtained.

We currently conduct a final quality assurance inspection of all out-sourced
components at our production facility in Post Falls, Idaho. We currently are not
materially dependent upon any other vendors as all other product components are
sourced and readily available from a number of vendors.

Marketing and Distribution

The markets we are currently primarily targeting for our professional-use
cholesterol monitor are domestic pharmacies and wellness centers that offer
convenient on-site cholesterol testing to their customers, health maintenance
organizations ("HMOs"), distribution companies that sell medical devices and
pharmaceutical companies that sell cholesterol-lowering drugs. According to
Frost & Sullivan, an international marketing, consulting and research firm,
there are an estimated 200,000 pharmacists in the U.S. alone, working in more
than 52,000 pharmacies located in independent and chain drug stores, grocery
supermarkets and other retail establishments. Pharmacists are playing an
increasingly key role in the growth of the diagnostic testing market by
utilizing the pharmacy environment as a health screening site and increasingly
positioning the pharmacy as a primary location for purchasing home diagnostic
equipment. Also, due to thinning margins being realized on pharmaceutical sales
due to competitive pressures, the latest trend among pharmacies has been the
creation of wellness centers that provide certain disease screening and
monitoring, as well as consumer education. To this end, we have entered in to a
number of non-exclusive supply and distribution agreements with D&K Healthcare
Resources, Inc., Bergen Brunswick, Inc., Carepoint Group and National
Distribution and Contracting, Inc.

We currently are planning to commence limited retail distribution of our
FDA-cleared over-the-counter, consumer-use cholesterol monitor beginning in the
fourth quarter of calendar 2000 with significant escalation planned for the
first quarter of calendar 2001. We intend to sell into high profile retailers,
including direct mail catalogers and department stores, in order to benefit from
the umbrella of advertising support these channels can provide us. We anticipate
that the majority of our consumer-use cholesterol monitors ultimately will be
sold through high volume, multiple location drug chains, mass merchants,
specialty retailers and retailers with a pharmacy venue currently scripting
lipid lowering drugs.

The markets we are currently primarily targeting for our Privalink(TM)
technology are manufacturers, distributors and high-volume users of medical
diagnostic devices. Our current efforts are primarily directed at educating
these firms on the benefits of adding smart card and Privalink(TM) technology to
their diagnostic instruments. Through this effort, we hope to establish our
smart card and Privalink(TM) technology as the industry standard for patient
data storage and retrieval as well as patient education

Our Governmental Regulatory Environment

Our current focus on developing and marketing diagnostic medical devices
subjects us to the oversight of the FDA in the U.S. and similar governmental
regulatory agencies abroad. The FDA Act provides for comprehensive regulation of
all stages of development, manufacture, distribution and promotion of "medical
devices" in the U.S. Products intended for use in the collection, preparation,
and examination of specimens taken from the human body, such as our cholesterol
monitors, are considered a subcategory of "medical devices." The same
regulations apply to home diagnostic devices as apply to professional diagnostic
devices.

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There are two primary routes by which to bring a medical device to market in the
U.S: the Premarket Approval Application ("PMA") and the Premarket Notification
("510(k) Notification"). The PMA requires a comprehensive review of specified
pre-clinical and clinical data, which results in a finding that a device is safe
and effective for its designated use. The 510(k) Notification permits marketing
upon a demonstration to the FDA's satisfaction that the device is substantially
equivalent to an approved device already in commercial distribution. Generally,
the clearance process can require extended periods of testing, both prior to and
after submissions to the FDA. FDA review of submissions by a company can entail
significant amounts of time and money. There can be no assurance that the FDA or
any similar governmental regulatory agency abroad will grant market clearance
for any particular medical device.

The FDA uses a classification system, i.e., Class I, II or III, to determine the
level of regulation a product will require and the approval process that applies
to the device. The classification system is based on the "potential risk to the
user" with Class III being "high risk," Class II being "moderate risk" and Class
I being "low risk." Because all new products to the marketplace after 1976 are
automatically classified as Class III devices (unless they have been
reclassified) in any 510(k) Notification, the applicant must, among other
things, demonstrate that the product to be marketed is "substantially
equivalent" to another legally marketed device in performance, design, safety
and intended use to avoid the more rigorous approval process associated with
Class III devices.

The FDA also requires the integration of their quality system into any facility
it registers as a "medical device facility". The quality system requirement
("QSR") encompasses product development ("GDP") and manufacturing, customer
service, incident reporting and labeling control ("GMP"). Our assembly facility
is registered with the FDA and operates under the quality provisions of the FDA
as well as under those of the ISO-9001 quality system.

On April 13, 1998, upon completing clinical studies of our professional-use
cholesterol monitor, we filed 510(k) Notification claiming substantial
equivalence to Boehringer Mannheim's Accu-Trend Instant Plus home diabetes test,
a Class II instrument already in commercial distribution. On October 5, 1998, we
received the FDA's order of "substantial equivalence" and market clearance of
our professional-use cholesterol monitor as a point-of-care, in-vitro diagnostic
device for the measurement of total cholesterol in fingerstick whole blood
samples.

On February 24, 1999, the Centers for Disease Control and Prevention ("CDC")
granted our professional-use cholesterol monitor a waiver from the requirements
of the Clinical Lab Improvement Amendments of 1988 ("CLIA"). A CLIA-waiver is
granted by the CDC to products that meet strict ease-of-use, accuracy and
precision guidelines. The significance of the CLIA-waiver was that it allowed us
to market our professional-use cholesterol monitor to healthcare professionals
in medical clinics, hospitals, pharmacies and other settings without meeting
extensive CDC regulatory requirements.

On June 7, 1999, we submitted 510(k) Notification for our PrivalinkTM software
accessory, which allows a regulated medical device with an integrated smart card
containing patient data to be encryptically linked via the Internet to a secured
web-site. On December 20, 1999, we received the FDA's market clearance allowing
us to proceed with beta site testing of the PrivalinkTM system in professional
healthcare settings.

On February 21, 2000, upon completing clinical studies, we submitted 510(k)
Notification for our over-the-counter, consumer-use cholesterol monitor. On July
25, 2000, we received the FDA's market clearance.

On March 6, 2000, the American Medical Association ("AMA") granted a revision to
their Conventional Procedural Code ("CPT") to include a total cholesterol finger
stick test, regardless of the instrument type or sample collection. This
revision was granted on the basis of our submission proving widespread use and
medical utility to the AMA's CPT Editorial Panel. As a result, a total
cholesterol test performed with one of our cholesterol monitors is now cleared
for public and private health plan reimbursements under the CPT coding system.

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Our primary focus for the foreseeable future will be on the development and
marketing of other medical devices that require no more than 510(k) Notification
clearance. However, if we cannot establish that a proposed technology is
substantially equivalent to a legally marketed device, we will be required to
seek pre-market approval from the FDA through the submission of a PMA
application. If a future product were to require submission of a PMA
application, regulatory approval of such product would involve a much longer and
more costly process than a 510(k) Notification clearance. A PMA application
generally must be supported by extensive data, including laboratory,
pre-clinical and clinical data to demonstrate safety and efficacy, as well as a
complete description of the device and its components and a detailed description
of the methods, facilities and controls used to manufacture the device. In
addition, the PMA submission must include the proposed labeling, advertising
literature and training methods. We do not believe that any of our products
currently under development will require the submission of a PMA application.

All products manufactured or distributed by us pursuant to FDA clearances or
approvals remain subject to pervasive and continuing regulation by the FDA and
certain state agencies, including record keeping requirements and reporting of
adverse experience with the use of the device. In addition, labeling and
promotional activities remain subject to scrutiny by the FDA.

We have no material environmental compliance requirements and we have not
incurred any material costs in connection with such.

Our Competition

We compete with firms using equivocal, non-instrument-based, single-use
cholesterol screening tests and with firms using quantitative cholesterol tests
employing instrument and disposable strip technology. We believe that no other
instrument-based cholesterol test on the market today offers the capability of
storing test results and other medical data on an integrated, encrypted smart
card, and in the case of our professional-use model, combining these test
results and other inputted lifestyle data to calculate an individual's risk
profile of stroke and cardiac disease. We also believe that no other product on
the market today has the capability of encryptically downloading stored test
results and medical data via the Internet to a secured web site. This data
storage and retrieval capability allows a consumer or their authorized medical
providers to readily access past test results and medical histories, along with
relevant scientific literature, for use in treatment planning, treatment
evaluation, and individualized patient education materials.

EQUIVOCAL, NON-INSTRUMENT-BASED, SINGLE-USE DISPOSABLE CHOLESTEROL SCREENING
TESTS. We compete with several companies that have introduced or are working on
equivocal, non-instrument-based, single-use disposable cholesterol screening
tests for the consumer-use market. These competing product entries are very
basic color-metric tests where a user takes a blood sample, drops it on a test
card and visually compares the result with a reference table. When used by
consumers, these tests require user interpretation and comparison to a
conversion or look up table. Also, the cholesterol test results are measured in
ranges and are not specific enough to accurately place individuals in high,
medium or low risk categories. Because of the lack of precision and the cost of
these products (approximately $15.00 per test), they are primarily limited to
use as crude screening tools. The lack of precise quantitative results required
by the professional market limits the use of such tests to consumers only.

A primary competitor in this area is ChemTrak, a publicly traded company that
distributes a single-use disposable product named CholesTrak which generally
retails for about $11.95. The ChemTrak test is somewhat complicated with several
steps and takes about 15 minutes before the results can be read. Because the
ChemTrak test uses color-metric readings, test results lack precision and can be
difficult to interpret. We do not believe that ChemTrak has been successful in
maintaining a sustainable customer base although it has achieved fairly
widespread retail distribution in drug stores.

QUANTITATIVE, CHOLESTEROL-MEASURING INSTRUMENTS USING DISPOSABLE TEST STRIPS. We
compete with several companies that have introduced or are working on
quantitative, cholesterol-measuring instruments for the professional-use market
that use disposable, dry chemistry test strips.

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Cholestech, a publicly traded company, develops and manufactures diagnostic
screening and therapeutic monitoring products for the risk assessment of certain
chronic diseases and is a primary competitor of ours in the professional market.
Its blood-testing unit generally retails for about $2,295.00 and its testing
cassettes for full-lipid panels, which require refrigeration and have only a 6
months shelf life, generally retail for about $9.95 each. Although Cholestech
has been very successful penetrating corporate wellness programs, we believe
that it has only realized modest success in penetrating physicians' offices,
especially cardiology clinics. Although providing a full lipid panel does
increase the usefulness of the product in the hands of physicians, and
particularly cardiologists, it does come with limitations due to the requirement
of 12-hour patient fasting. The Cholestech unit can generate inaccurate results
if patients do not fast before testing with very limited accuracy for LDL as a
result of calculations versus direct measurement

Polymer Technology Systems, Inc. ("Polymer"), a privately owned company based in
Indianapolis, Illinois, develops and markets point-of-care diagnostic devices.
Its Bioscanner 2000 Test System is a handheld multiple testing device retailing
for $199.95 that utilizes whole blood samples on test strips to measure multiple
blood chemistries, including cholesterol, with results produced in less than one
minute. Although Polymer has been successful in gaining FDA clearance for their
Bioscanner 2000, we believe that its lack of a data storage and communication
system, such as that provided by our integrated smart card and pending
PrivalinkTM software system, will limit their market acceptance.

We believe that our professional-use cholesterol monitor is considerably more
affordable and convenient, especially for screening and regular monitoring since
fasting is not necessary for accurate results. For those who test "high" (levels
of 240 or above), a visit to their doctors is generally recommended for a full
lipid panel.

Other companies having a significant presence in the professional market for
diagnostic screening and therapeutic monitoring, such as Abbott Laboratories,
Clinical Diagnostic Systems (a division of Johnson & Johnson) and Boehringer
Mannheim GmbH (a subsidiary of Roche Holdings Ltd.), have developed or are
developing analyzers designed for preventive care testing. These competitors
have substantially greater financial, technical, research and other resources
and larger, more established marketing, sales, distribution and service
organizations than us. However, we believe that we currently have a competitive
advantage due to the design and cardiac risk factor analysis capabilities of our
professional-use cholesterol monitor as a hand-held, quantitative, affordable
and regulatory approved instrument. There can be no assurance that our
cholesterol monitor will be able to compete with these other analyzers and
testing devices or that our competitors will not succeed in obtaining further
government approvals or in developing or marketing technologies or products that
are more commercially attractive than our current or future products.

Our Primary Business Strategies

Our primary business objectives are as follows:

ACHIEVING AND MAINTAINING MARKET LEADERSHIP THROUGH INNOVATIVE PRODUCT
INTRODUCTIONS AND EXTENSIONS. It is our intention over time to develop a more
extensive line of easy-to-use, cost-effective, accurate and timely medical
diagnostic instruments, particularly for consumer home-use. It is also our
intent to include technological capabilities similar to those integrated into
our current line of cholesterol monitors such as the ability to store test
results and other data on an integrated IC smart card. Once available, our
Privalink TM system will allow for the data stored on the smart card to be
encryptically downloaded to our secured web site currently under construction,
thereby allowing consumers and their authorized medical providers to
subsequently retrieve this data along with related scientific literature. We
currently anticipate that any product line extensions in the foreseeable future
will initially be directed towards the monitoring of triglycerides, glucose and
high-density lipoprotein ("HDL") cholesterol levels for individuals at-risk for
hypertension and diabetes.

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LEVERAGING WHAT WE BELIEVE TO BE OUR SUPERIOR TECHNOLOGICAL CAPABILITIES. We
believe our smart card-enabled devices set us apart from our competitors and
will allow us to accelerate our market penetration once consumers understand the
benefits of remote medical data storage and effective communication between them
and their medical providers. It is our intention to actively persuade other
medical device manufacturers to adapt their diagnostic devices to include our
smart card-enabled technology, thereby further providing the foundation for
establishing our Privalink TM system as the industry standard for medical
patient data storage and communication.

ACCELERATING OUR PENETRATION OF TARGETED MARKETS THROUGH KEY STRATEGIC MARKETING
ALLIANCES. It is our intention to continue to develop additional strategic
relationships to create extensions of our existing product line and to improve
our penetration of target markets. This effort would include cultivating
relationships with pharmacy retail chains, physicians, specialty retail
operators, pharmaceutical companies who manufacture and wholesale cholesterol
lowering drugs and computer and information technology companies that perceive
the value of our novel smart card technology

AGGRESSIVELY TARGETING THE CONSUMER CHANNEL WITH THE INTRODUCTION OF OUR
FDA-APPROVED OVER-THE-COUNTER, CONSUMER-USE CHOLESTEROL MONITOR. With our recent
July 25, 2000 receipt of FDA market clearance for our over-the-counter,
consumer-use cholesterol monitor, we seek to aggressively penetrate the consumer
channel with a widespread introduction of this monitor in the first quarter of
calendar 2001, coinciding with the AHA's "Heart Month" in February 2001. As part
of consumers' general health and wellness programs, our consumer-use cholesterol
monitor offers consumers a fast, inexpensive and accurate way to screen and
monitor themselves in the convenience and privacy of their own homes in between
regular doctor visits. Consumers may store their test results on the integrated
smart card, and once our Privalink TM system is complete and available,
encryptically download this stored data via the Internet to the secured web site
we currently have under construction for subsequent retrieval by the consumer
and their authorized medical providers.

OBTAINING AND PROMOTING INDEPENDENT THIRD PARTY ENDORSEMENTS BY LEADING
HEALTHCARE AUTHORITIES. We intend to develop and maintain a medical advisory
board whereby respected authorities within the medical community will promote
and endorse our products and technologies. We intend for our Privalink TM
system, when fully developed and available, to provide authoritative medical
content to consumers via a personalized "Health Evaluation" booklet and create
an Internet database on cardiovascular disease. All medical content will be
licensed and/or provided by respected independent third parties.

DEVELOPING AND INTRODUCING OTHER PROPRIETARY INTERNET-ENABLED MEDICAL DIAGNOSTIC
DEVICES TO ALLOW CONSUMERS TO BETTER MANAGE THEIR HEALTH. As previously
mentioned, it is the our intent to develop other smart card-enabled diagnostic
medical devices initially aimed at monitoring triglycerides, glucose and HDL
cholesterol levels. In conjunction with developing additional devices, it is our
intention to further develop the medical smart card to include, not only test
results from medical devices, but other pertinent medical information such as
allergies, prescription drug information, medical history, physicians, health
insurance and so forth. By educating consumers on the value of smart
card-enabled medical devices, we intend to establish and promote our Privalink
TM system as the industry standard in data storage and communication, thereby
potentially allowing the use of a single medical smart card across multiple
monitoring devices.

POSITIONING OUR PRODUCTS AS THE PREFERRED TOOLS FOR PERSONAL HEALTH MANAGEMENT
OF CHRONIC DISEASE. With the planned completion and commercialization of our
Privalink TM system, physicians, pharmacists and patients will have an effective
and efficient means of communication, thereby allowing constant monitoring of a
patient's progress by all involved. By eventually incorporating respected
authoritative literature into a personalized "Health Evaluation" booklet for the
patient, we will enable the patient to take a more proactive role in his or her
own healthcare. Between their physician visits, a patient will be able to
monitor, store results, and communicate these results to their medical
professionals, thereby allowing for ongoing assessment of the patient's medical
condition.

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Our Employees

As of June 30, 2000, we employed 17 full-time employees and no part-time
employees. The distribution of these employees within our functional areas was
as follows:

Number
------

Research and Development 2
Product Development 3
Sales 3
Accounting 3
Administrative 6

None of our employees currently are parties to collective bargaining agreements.
We consider our employees relations to be good.

ITEM 2. OUR PROPERTIES

All of our operations are currently located in leased premises at 510 Clearwater
Loop, Suite 101, Post Falls, Idaho 83854. We leased a total of 7,600 square feet
at this location throughout fiscal 2000, and in order to accommodate our current
and anticipated near-term growth, we began leasing an additional 6,500 adjacent
square feet on September 1, 2000. These leases have annual rent escalators equal
to the greater of (i) five percent over the base rent charged for the
immediately preceding twelve month period or (ii) the percentage increase during
the preceding twelve month period in the "U.S. Bureau of Labor Statistics
Consumer Price Index for Urban Wage Earners and Clerical Workers, Seattle Area
(1967 = 100), All Items". Our 7,600 and 6,500 square foot leases expire on May
31, 2003 and August 30, 2001, respectively, with any desired extensions to be
negotiated on or before such dates. We believe that suitable alternative lease
space is available in proximity to our current location should such become
necessary.

We currently do not have, nor do we anticipate making, any investments in real
estate or related securities within the foreseeable future.

ITEM 3. OUR LEGAL PROCEEDINGS

We are periodically involved in litigation and administrative proceedings
primarily arising in the normal course of our business. We believe that our
gross liability, if any and without any consideration given to the availability
of indemnification or insurance coverage, under pending or existing litigation
or administrative proceedings would not materially affect our financial
position, results of operations or cash flows.

ITEM 4. OUR SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

We brought no matters to a vote of our stockholders during the fourth quarter of
our fiscal year ended June 30, 2000.

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PART II

ITEM 5. OUR MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

OUR STOCK PRICE HISTORY

Since February 11, 1994, our common shares have traded on the Over-The-Counter
Bulletin Board Market ("OTC-BB") under the ticker symbol "LFST". At June 30,
2000, we had approximately 2,250 stockholders of record and 19,210,304 shares of
$.001 par value common stock outstanding.

The following table sets forth high and low bid prices for the calendar quarters
indicated as reported by the National Quotations Bureau Incorporated ("NQBI").
NQBI prices reflect inter-dealer quotations without adjustments for retail
markup, markdown or commission, and do not necessarily represent actual
transactions.

Calendar
Year Period High Low
---- ------ ---- ---

2000 First Quarter $6.94 $1.19
Second Quarter $7.00 $2.00

1999 First Quarter $2.44 $1.06
Second Quarter $1.32 $0.81
Third Quarter $1.47 $0.91
Fourth Quarter $1.44 $0.84

1998 First Quarter $1.00 $ .50
Second Quarter $6.13 $ .94
Third Quarter $4.38 $2.50
Fourth Quarter $4.38 $1.59

OUR DIVIDEND POLICY

We do not pay regular dividends and do not anticipate the declaration of a cash
dividend in the foreseeable future. We currently have no contractual dividend
restrictions.

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OUR RECENT SALES OF UNREGISTERED SECURITIES

In April 1998, we agreed to issue 2,000 shares of common stock to each of the
five directors elected to our Board of Directors as compensation for each month
such individual serves as a director. Pursuant to this agreement, an aggregate
50,000 common shares were issued to these directors in January 2000 for the
previous six-month period ended December 31, 1999. An aggregate 48,000 common
shares will be issued to the directors for the six-month period beginning
January 1, 2000 and ending June 30, 2000.

On September 1, 1999, we issued 1,944,000 shares of common stock in connection
with the merger of SITI.

In October 1999, we issued 95,500 shares of common stock to four individuals who
provided us with short-term financing during the three month period ended
September 30, 1999.

In October 1999, we issued 450,000 shares of common stock to three individual
investors who participated in our private placement offering completed on
September 15, 1999.

In December 1999, we issued 325,000 shares of common stock to three investors
pursuant to our $3,000,000 private placement offering, as amended, which
commenced in October 1999.

On December 15, 1999, we issued 540,000 shares of common stock to three
individuals who provided us with $270,000 in short-term financing during July
1999.

In December 1999, we issued 20,000 shares of common stock to two financial
consultants and 10,030 shares of common stock to a partnership in exchange for
rent on our corporate facilities.

In February 2000, we issued 3,340,000 shares of common stock to twelve investors
pursuant to our $3,000,000 private placement offering, as amended, which
commenced in October 1999.

In January 2000, we issued 50,000 shares of common stock to Gruntal LLC, our
investment banker. We also issued 5,000 shares of common stock to an individual
in connection with the common stock issued to Gruntal LLC.

In May 2000, we issued 2,475 shares of common stock to a public relations
consultant in exchange for $7,500 in consulting services.

In June 2000, we issued 15,000 shares of common stock to a foreign partnership
in exchange for certain distribution rights in Australia valued at $50,000.

In June 2000, we issued 51,000 shares of common stock to one investor pursuant
to our $3,000,000 private placement offering which commenced June 20, 2000.

From January 1, 2000 through June 30, 2000, 81,638 common shares were issued in
connection with the exercise of outstanding stock options by eight individuals
at prices ranging from $.20 to $1.25 per share.

ITEM 6. OUR MANAGEMENT'S DISCUSSION AND ANALYSIS

The following discussion includes certain forward-looking statements within the
meaning of the federal securities laws. Such forward-looking statements include,
but are not limited to, statements regarding our current business strategies,
objectives and plans that involve risks and uncertainties. When used in this
discussion, the words "anticipate," "believe," "estimate," "expect," and similar
expressions are intended to identify such forward-looking statements. These
forward-looking statements are based on our current expectations and our actual
performance, results and achievements could differ materially from those
expressed in, or implied by, these forward-looking statements. Factors, within

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and beyond our control, that could cause or contribute to such differences
include, among others, the following: those associated with developing and
marketing medical diagnostic devices, including technological advancements and
innovations, identifying, recruiting and retaining highly qualified personnel,
consumer receptivity and preferences, availability, affordability and coverage
terms of private and public medical insurance, political and regulatory
environments and general economic and business conditions; competition; success
of capital-raising, operating, marketing and growth initiatives; development and
operating costs; advertising and promotional efforts; brand awareness; the
existence or absence of adverse publicity; changes in business strategies or
development plans; quality and experience of management; availability, terms and
deployment of capital; business abilities and judgment of personnel; labor and
employee benefit costs; as well as those factor spreviously discussed in "Item 1
- Business," and elsewhere in this Form 10-KSB.

Our Company Overview

We are a healthcare information technology company primarily focused on
developing and marketing secure, Internet-based medical solutions through the
use of proprietary smart card-enabled medical diagnostic devices. Our current
diagnostic product line consists of two easy-to-use, hand-held, smart
card-enabled cholesterol monitors, one specifically designed for facility-use by
professional medical service providers and one specifically designed for at home
use by at-risk cholesterol patients and health conscious consumers. Both
monitors share certain core technological capabilities, primarily being the
ability to measure total cholesterol levels in the blood with proven clinical
laboratory accuracy in approximately three minutes and the ability to
cumulatively store the resulting cholesterol test results on an integrated smart
card. Using a complimentary feature unique to our professional-use monitor, the
medical professional operator can additionally input via the monitor's keypad
eight other cardiac risk factors (e.g., gender, age, weight, tobacco use, etc.)
identified by the Framingham Heart Disease Epidemiological Study ("Framingham
Study") and determine the cardiac condition of the patient.

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Both our professional-use and over-the-counter, consumer use cholesterol
monitors have received market clearances from the U.S. Food and Drug
Administration ("FDA") and meet all NCEP guidelines for precision. Both monitors
operate on the power of a single nine-volt battery and are compact, lightweight
and portable. Either monitor can be easily and discreetly carried in a medical
bag, purse or briefcase. To perform a cholesterol test on either monitor, the
operator merely sticks the finger using a reusable lance device equipped with a
disposable lancet and deposits a single drop of blood on a dry chemistry strip.
The dry chemistry strip is then inserted into an opening at the optical head of
the monitor. The multi-layered strip then initiates a chroma-graphic reaction
with lipoprotein to produce a color change in direct proportion to the quantity
of total cholesterol in the blood sample. The resulting color change is "read"
by the monitor's integrated photometry system and converted electronically to a
quantitative digital read-out that is displayed within three minutes on an
integrated easy-to-read, liquid crystal display ("LCD") screen. Ongoing test
results may be stored on an integrated, encryption-based smart card thereby
maintaining a complete history of test results. We believe that there are no
other hand-held, quantitative cholesterol monitoring systems that are easier to
use, more accurate and quicker in obtaining results. Our professional-use
cholesterol monitor has been available since March 1999 and currently has a
suggested retail price of $299.95. With our July 25, 2000 receipt of market
clearance from the FDA, we currently plan to widely introduce our
over-the-counter, consumer-use cholesterol monitor with a suggested retail price
of $129.95 in the first quarter of calendar 2001, coinciding with the AHA's
"Heart Month" in February 2001.

Both our professional-use and over-the-counter, consumer use cholesterol
monitors have received market clearances.

>> Achieving and maintaining market leadership through innovative
product introductions and extensions

>> Leveraging what we believe to be our superior technological
capabilities

>> Accelerating our penetration of targeted markets through key
strategic marketing alliances

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>> Aggressively targeting the consumer channel with the
introduction of our FDA-approved, Over-The-Counter,
Consumer-Use Cholesterol Monitor

>> Obtaining and promoting independent third party endorsements
by leading healthcare authorities

>> Developing and introducing other proprietary, Internet-enabled
medical diagnostic devices to allow consumers to better manage
their health

>> Positioning our products as the preferred tools for personal
health management of chronic diseases

Our Results of Operations

Our revenues for the fiscal year ended June 30, 2000 were $141,262, as compared
to $51,229 for the six months ended June 30, 1999 (none for the comparative six
months ended June 30, 1998) and $9,610 for the fiscal year ended December 31,
1998. On January 1, 1999, we commenced revenue-generating operations related to
our professional-use cholesterol monitor and ceased being a development-stage
company. In March 1999, we recognized our first revenues from the
professional-use cholesterol monitor in connection with initial customer
shipments. However, the revenue-generating potential of our professional-use
monitor has been severely constrained to date by our continued lack of available
capital to fund our initially planned sales and marketing efforts for this
monitor. Faced with a lack of sufficient capital for the immediate future, we
elected to forego the possibility of realizing modestly increased sales in the
shorter-term from further capital depleting marketing efforts of our
professional-use cholesterol monitor and instead elected to deploy our limited
capital resources into the development of our over-the-counter, consumer-use
cholesterol monitor for which we envisioned, and continue to envision,
significantly larger market and revenue potential. The modest increase in net
sales realized during the fiscal year ended June 30, 2000 was primarily
attributable to sustaining, yet constrained, cost-recovery marketing of our
professional-use cholesterol monitor. We currently anticipate that initial
shipments of our over-the-counter, consumer-use cholesterol monitors, which
recently received FDA market clearance on July 25, 2000, will commence during
the second fiscal quarter ending December 31, 2000. However, it must be noted
that our ultimate ability to effectively introduce and broadly market our
over-the-counter, consumer-use cholesterol monitor will also be constrained
should we be unsuccessful in our current raising additional funding - See
Liquidity and Capital Resources below. As such, there can be no assurance that
the revenue-generating potential we perceive for either of our cholesterol
monitors will be fully realized.

Cost of sales includes direct labor, direct material, and overhead. Our cost of
sales for the fiscal year ended June 30, 2000 were $229,278 as compared to
$60,889 for the six months ended June 30, 1999 (none for the comparative six
months ended June 30, 1998) and $6,167 for the fiscal year ended December 31,
1998. We realized a negative gross margin of 62.3% for the fiscal year ended
June 30, 2000 as compared to a negative gross margin of 18.9% during the six
months ended June 30, 1999 and a positive gross margin of 35.8% during the
fiscal year ended December 31, 1998. The limited unit sales to date of our
professional-use cholesterol monitor and incentive introductory discounting
granted to initial customers has resulted in reductions to our gross revenues
and negative gross profits and margins. We expect to continue discounting the
prices of our cholesterol monitors until these products receive more widespread
market exposure and acceptance. As a result, we anticipate negative or modest
positive gross margins until we are successful in realizing significant
increased unit sales thereby allowing us to begin to benefit from increased
economies of scale.

Operating expenses include those costs incurred to bring our products to market
relative to research and development, sales and marketing, and general
administration. Our operating expenses were $4,114,897 for the fiscal year ended
June 30, 2000 as compared to $2,208,697 for the six months ended June 30, 1999
($993,219 for the comparative six months ended June 30, 1998) and $3,045,721 for
the fiscal year ended December 31, 1998.

Historically, our single largest operating expense component has been salaries
and wages, including non-cash compensation charges incurred in connection with
the granting of stock and stock options. Salaries and wages were $1,218,294
(inclusive of $298,845 non-cash charges) for the fiscal year ended June 30, 2000
as compared to $1,371,158 (inclusive of $799,974 non-cash charges) for the six
months ended June 30, 1998 ($177,499 for the comparative six months ended June
30, 1998 with no non-cash charges) and $1,189,482 (inclusive of $475,202

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non-cash charges) for the fiscal year ended December 31, 1998. On an annualized
basis, salaries and wages were 55.6% lower for the fiscal year ended June 30,
2000 than that incurred for the six months ended June 30, 1999. Our lower
incurrence rate primarily was attributable to our curtailment of many planned
operations due to limited capital, and to a lesser extent, our incurring of
lower non-cash compensation charges in connection with recruiting and retaining
essential personnel. Annualized salaries and wages for the six months ended June
30, 1999 were 130.5% higher than that incurred during the fiscal year ended
December 31, 1998 primarily as a result of the initial hiring of essential
personnel to develop and market our professional-use cholesterol monitor.

Selling, general and administrative expenses ("SG&A") generally have been our
second largest operating expense component. SG&A expenses were $1,007,343 for
the fiscal year ended June 30, 2000 as compared to $243,582 for the six months
ended June 30, 1999 ($216,370 for the comparative six months ended June 30,
1998) and $644,295 for the fiscal year ended December 31,1998. On an annualized
basis, SG&A expenses were incurred at a rate 106.8% higher for the fiscal year
ended June 30, 2000 than that incurred during the six months ended June 30,
1999. This higher incurrence rate primarily was attributable to increased trade
show related expenses, increased director fees, and increased consulting
services. Annualized SG&A expenses for the six months ended June 30, 1999 were
24.4% lower than that incurred during the fiscal year ended December 31, 1998
primarily as a result of our physical consolidation of previously dispersed
company functions at our Post Falls, Idaho facility and the curtailing of
certain operations to preserve capital.

Non-cash depreciation and amortization expense ("D&A") was our third largest
operating expense component during the fiscal year ended June 30, 2000. On an
annualized basis, non-cash D&A expenses were incurred at a rate 231.0% higher
for the fiscal year ended June 30, 2000 than that incurred during the six months
ended June 30, 1999. This higher incurrence rate primarily was attributable to
the amortization of software technology acquired in our September 3, 1999
acquisition of SITI. On an annualized basis, the increase in non-cash D&A
expenses for the six months ended June 30, 1999 from that incurred for the
fiscal year ended December 31, 1998 was inconsequential.

Professional fee expenses were the only other significant operating expense
component for the fiscal year ended June 30, 2000. Professional fee expenses,
which relate mainly to our investor relations and capital raising efforts, were
incurred at a relatively constant rate between the fiscal year ended June 30,
2000 and the six months ended June 30, 1999. Annualized professional fee
expenses for the six months ended June 30, 1999 were 28.4% higher than that
incurred during the fiscal year ended December 31, 1998 primarily as a result of
our engaging various investor relation firms and individuals.

Non-operating expenses and income primarily consist of interest income, interest
expense and other miscellaneous income and expense items. Net non-operating
income was $221,924 for the fiscal year ended June 30, 2000 as compared to net
non-operating expenses of $1,245,834 for the for the six months ended June 30,
1999 ($16,274 for the comparative six months ended June 30, 1998) and $79,840
for the fiscal year ended December 31, 1998, respectively.

Interest expense was $652,472 for the fiscal year ended June 30, 2000 as
compared to $390,983 for the six months ended June 30, 1999 ($27,823 for the
comparative six months ended June 30, 1998) and $112,436 for the fiscal year
ended December 31, 1998. On an annualized basis, interest expense decreased
16.6% during the fiscal year ended June 30, 2000 from that incurred during the
six months ended June 30, 1999. This lower incurrence rate primarily was
attributable to the June 30, 1999 conversion of outstanding notes payable to
common stock as more fully discussed below. Annualized interest expense for the
six months ended June 30, 1999 was 595.5% higher than that incurred for the
fiscal year ended December 31, 1998 primarily as a result of our issuance of
convertible notes payable to fund ongoing operations and related non-cash
finance charges incurred for the issuance of common shares to the note holders.

We realized net non-operating other income of $838,181 for the fiscal year ended
June 30, 2000 as compared to net non-operating other expense of $871,337 for the
six months ended June 30, 1999. The net non-operating other income for the
fiscal year ended June 30, 2000 primarily resulted from our reversal into income
of an $867,000 liability previously recorded during the six months ended June
30, 1999. We were required under U.S. generally accepted accounting principles
to recognize at June 30, 1999 the full potential cost of an inducement made to
convertible promissory note holders to exercise their common stock conversion
rights. As our common stock price at June 30, 2000 exceeded the inducement's
"make-whole" minimum market price guarantee, we were required under U.S.
generally accepted accounting principles to reverse the previously recorded
liability into income.

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Primarily as a result of the foregoing, we incurred net losses of $3,980,989
($0.25 per basic and diluted share) for the fiscal year ended June 30, 2000,
$3,464,191 ($0.12 per basic and diluted share) for the six months ended June 30,
1999 ($1,009,493, and $0.12 per basic and diluted share, for the comparative six
months ended June 30, 1998) and $3,122,118 ($0.32 per basic and diluted share)
for the fiscal year ended December 31, 1998.

Our Liquidity and Capital Resources

We have incurred significant operating losses since our inception and, as a
result, have a substantial accumulated deficit at June 30, 2000. Our ability to
effectively market our existing professional-use cholesterol monitor has been
constrained by continuing capital constraints and, as a consequence, we have
realized limited revenues to date. On July 25, 2000, we received FDA market
clearance for our new over-the-counter, consumer-use cholesterol monitor, which
we believe has a significantly larger market and revenue potential than our
existing professional-use cholesterol monitor. We currently anticipate that
initial shipments of our consumer-use cholesterol monitor will commence during
the first quarter of calendar 2001. However, it must be noted that our ultimate
ability to effectively introduce and broadly market our consumer-use cholesterol
monitor will likely also be constrained should we be unsuccessful in our current
capital raising efforts as described below. As such, there can be no assurance
that the revenue-generating potential we perceive for our cholesterol monitors
will ever be fully realized.

We have undertaken certain actions aimed at improving our current liquidity and
capital resource positions. These actions include seeking new sources of capital
or funding to allow us to continue production and marketing of our products.
Since June 30, 2000, we have raised an aggregate of approximately $625,000 from
the sale of common stock under an ongoing $3.0 million private placement and the
exercising of previously outstanding stock options by certain individuals. The
private placement commenced on June 20, 2000 and allows qualified investors to
purchase an aggregate one million common shares at $3.00 per share. For every
two shares of common stock purchased, the investor will also receive a warrant,
expiring on October 30, 2002, entitling them to purchase one additional share
for $5.00. We recently received non-binding letters of intent from two of our
existing principal investors each indicating their current intent to
individually purchase approximately $500,000 of common shares pursuant to the
private placement offering. It is our current intention to keep this private
placement open until the full $3.0 million has been irrevocably subscribed to by
investors, although there can be no assurance that such level will be achieved.
We have also in our possession an irrevocable letter of credit for $500,000 in
contingency funding from an existing principal investor. Additionally, we have
recently employed certain professionals with extensive backgrounds in the
medical products industry that we believe will assist us in executing our
business plan. There can be no assurances that we will be successful in our
ongoing capital-raising efforts or in the execution of our business plan. Any
failure by us to raise sufficient funds or to execute our business plan will
have a material adverse impact on our business, results of operations, liquidity
and cash flows.

Operating activities used $2,863,194 in cash and cash equivalents during the
fiscal year ended June 30, 2000 as compared to $1,102,403 during the six months
ended June 30, 1999 and $1,983,289 during the fiscal year ended December 31,
1998. On an annualized basis, the rate at which cash and cash equivalents were
consumed by operating activities was 29.9% higher during the fiscal year ended
June 30, 2000 than that during the six months ended June 30, 1999. This
increased consumption rate for the fiscal year ended June 30, 2000 primarily was
attributable to a lower annualized net loss rate being more than offset by a
significant annualized decrease in the aggregate amount of non-cash compensatory
and financing charges being added back to operating cash flows. On an annualized
basis, the rate at which cash and cash equivalents were consumed by operating
activities was 11.2% higher during the six months ended June 30, 1999 than that
during the fiscal year ended December 31, 1998. This increased consumption rate
for the six months ended June 30, 1999 primarily was attributable to a higher
annualized net loss rate being only partially offset by a significant annualized
increase in the aggregate amount of non-cash compensatory and financing charges
being added back to operating cash flows. We have historically financed our
operations through issuances of common stock and debt securities.

21
<PAGE>

Investing activities used $226,494 in cash and cash equivalents during the
fiscal year ended June 30, 2000 as compared to $74,808 during the six months
ended June 30, 1999 and $620,501 during the fiscal year ended December 31, 1998.
The increase in cash and cash equivalents used in investing activities during
the fiscal year ended June 30, 2000, as compared to the six months ended June
30, 1999, primarily was attributable to increased capital expenditures. The
decrease in cash and cash equivalents used in investing activities during the
six months ended June 30, 1999, as compared to the fiscal year ended December
31, 1998, primarily was attributable to decreased capital expenditures and
advances to a related party company.

Financing activities provided $4,067,669 in cash and cash equivalents during the
fiscal year ended June 30, 2000 as compared to $1,167,312 during the six months
ended June 30, 1999 and $2,689,185 during the fiscal year ended December 31,
1998. The increase in cash and cash equivalents provided by financing activities
during the fiscal year ended June 30, 2000, as compared to the six months ended
June 30, 1999, primarily was attributable to a significant increase in proceeds
from sales of common stock partially offset by decreased proceeds from the
issuance of convertible debt and increased repayments of notes payable and
convertible debt. The decrease in cash and cash equivalents provided by
financing activities during the six months ended June 30, 1999, as compared to
the fiscal year ended December 31, 1998, primarily was attributable to a
significant decrease in proceeds from sales of common stock partially offset by
increased proceeds from issuances of convertible debt.

As a result of the foregoing, we had cash and cash equivalents of $1,059,637 and
$81,656 at June 30, 2000 and June 30, 1999, respectively. We had working capital
of $1,213,020 at June 30, 2000 as compared to a working capital deficiency of
$1,206,507 at June 30, 1999.

We currently have no material commitments for capital equipment. We do
anticipate the need over the next twelve months for certain assembly tooling and
equipment, a dry room and computer hardware, all of which we believe will be
obtainable as needed through conventional leases.

Our Other Matters

YEAR 2000 COMPLIANCE

Our operations experienced no material adverse events or consequences in
connection with the arrival of the Year 2000. We received no reports of any
material adverse effects experienced by any of our sold products. Our
expenditures directly related to Year 2000 compliance and monitoring programs
were immaterial.

SEASONAL AND INFLATIONARY INFLUENCES

We currently are not materially impacted by seasonal or inflationary influences.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We currently are not exposed to financial market risks from changes in foreign
currency exchange rates and are only minimally impacted by changes in interest
rates. However, in the future, we may enter into transactions denominated in
non-U.S. currencies or increase the level of our borrowings, which could
increase our exposure to these market risks. We have not used, and currently do
not contemplate using, any derivative financial instruments.

RECENTLY ISSUED ACCOUNTING STANDARDS NOT YET ADOPTED

In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standard No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 requires that every
derivative instrument (including certain derivative instruments embedded in
other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value. In June 1999, the FASB issued Statement of
Financial Accounting Standard No. 137, "Accounting for Derivative Instruments
and Hedging Activities - Deferral of the Effective Date of FASB Statement No.
133" delaying the effective date of SFAS No. 133. SFAS No. 133, as amended, is
effective for our fiscal 2001 quarterly and annual financial statements. As we
currently are not a party to any derivative financial instruments and do not
anticipate becoming a party to any derivative instruments, we do not currently
expect the adoption of SFAS No. 133 to have a material impact on our
consolidated financial statements.

22
<PAGE>

Risk Factors

HISTORY OF OPERATING LOSSES AND NEED FOR ADDITIONAL CAPITAL/FUNDING TO FULLY
EXECUTE OUR BUSINESS PLAN. We have incurred significant operating losses since
our inception and, as a result, have a substantial accumulated deficit at June
30, 2000. Our ability to effectively market our existing professional-use
cholesterol monitor has been constrained by continuing capital constraints and,
as a consequence, we have realized limited revenues to date. On July 25, 2000,
we received FDA market clearance for our new over-the-counter, consumer-use
cholesterol monitor, which we believe has a significantly larger market and
revenue potential than our existing professional-use cholesterol monitor. We
currently anticipate that initial shipments of our consumer-use cholesterol
monitor will commence during the first quarter of calendar 2001. However, it
must be noted that our ultimate ability to effectively introduce and broadly
market our consumer-use cholesterol monitor will likely also be constrained
should we be unsuccessful in our current capital raising efforts as described
below. As such, there can be no assurance that the revenue-generating potential
we perceive for our cholesterol monitors will ever be fully realized.

LACK OF MARKETING EXPERIENCE AND UNCERTAIN MARKET ACCEPTANCE OF PRODUCTS. While
certain members of our management team have brought relevant marketing
experience to us, we as a company have limited experience marketing our existing
professional-use cholesterol monitor and minimal experience marketing our new
over-the-counter, consumer-use cholesterol monitor. We currently intend on
retaining and relying upon third party medical product distributors to market
our cholesterol monitors. While we have identified several potential
distributors, we have only engaged in preliminary discussions with certain of
these distributors to date. In the event that we are unsuccessful in retaining
suitable distributors, we will be required to make significant incremental
investments to recruit, develop and deploy a direct sales force and a
substantial delay in our current marketing plan will likely be incurred. Even if
we are successful in retaining suitable distributors, or alternatively,
establishing a qualified sales force, there can be no assurance that we or our
distributors will be successful in further introducing our cholesterol monitors
into the marketplace and achieving widespread market acceptance. Furthermore,
although our initial marketing plan does not focus on such, it should be noted
that we have no experience as a company in marketing our products in foreign
countries.

LACK OF ASSEMBLY EXPERIENCE AND DEPENDENCE ON CERTAIN SOURCES OF SUPPLY. We have
limited experience to date in assembling our professional-use cholesterol
monitor and minimal experience in assembling our over-the-counter, consumer-use

23
<PAGE>

cholesterol monitor. Prior to any significant increase in the current production
of our cholesterol monitors, we will have to select and qualify various sources
of supply and remain able to manufacture in compliance with regulatory
requirements, in sufficient quantity, with appropriate quality and at acceptable
costs. There also can be no assurance that we would be able to pass through any
incremental costs incurred to our customers. We are also highly dependent upon
Roche and LRE as the sole supplier of the diagnostic modules, dry chemistry test
strips and calibration keys required for our cholesterol monitors. Should any
party be unable to meet its respective continuing obligations under the contract
or should we be unable to obtain a renewal of such contract at the end of its
five-year term in November 2002, we will be forced to either find another
suitable supplier for these critical items or make substantial capital and
personnel investments to allow us to internally produce these critical items.
Although we have recently entered into discussions with Roche and LRE aimed at
revising certain provisions of the above contract and extending its term, there
can be no assurance that a revised and extended contract will be obtained.
Although we believe that suitable alternative sources are available for our
other components, any interruptions in our supply of components or raw materials
would likely have at least a short-term material adverse effect on our business,
financial position, results of operations and cash flows.

DEPENDENCE ON KEY PERSONNEL. We believe that our future success is highly
dependent upon the continued services of Christopher Maus, our Chairman, Chief
Executive Officer and President. We believe that the loss of Mr. Maus' services
would likely have a material adverse effect on our business, results of
operations, liquidity and cash flows. We currently maintain a key man life
insurance policy on the life of Mr. Maus in the amount of $5,000,000. There can
be no assurances that we would be able to replace Mr. Maus in the event his
services become unavailable or that the proceeds from the above insurance policy
would sufficiently compensate us for the loss of Mr. Maus' services.

We are also highly dependent upon the principal members of our current
management team. Furthermore, our successful recruiting and retaining of certain
additional key personnel will be critical to our future success. Although we
believe that we have successful to date in recruiting and retaining skilled and
experienced management, marketing and scientific personnel, there can be no
assurance that we continue to be successful in recruiting and retaining key
personnel on acceptable terms, particularly given the current intensely
competitive environment for highly-qualified and experienced individuals.

COMPETITION. The development and marketing of medical products is intensely
competitive. There are other companies that are currently marketing, or are
seeking to market, diagnostic products that compete with our professional-use
and over-the-counter, consumer-use cholesterol monitors. Some of these competing
products have received the prerequisite FDA marketing clearances for competing
with our monitors. Furthermore, several companies offering products similar to
ours have substantially greater financial, marketing and technological resources
than us. As such, there can be no assurance that our products will be able to
successfully compete with these existing or future products.

Our cholesterol monitors compete, and will continue to compete, with established
medical laboratories that have traditionally performed most blood analysis.
Certain of our laboratory competitors currently offer services that may be
perceived by some individuals as being priced lower than the costs of utilizing
our cholesterol monitors. We also can not currently provide the same range of
tests provided by these laboratories. In addition, certain health care providers
may choose not to change their established means for such tests or make the
necessary capital investment to purchase our products. We also face competition
in the alternate-site market from makers of bench top multi-test blood analyzers
and other point-of-care blood analyzers.

While we believe that our products will be able to successfully compete with
clinical laboratories, bench top multi-test analyzers and other point-of-care
blood analyzers on the basis of ease of use, portability, the ability to conduct
tests without a skilled technician, cost effectiveness and quality of results,
there can be no assurance that we will be able to compete successfully. Blood
analysis is a well-established field in which there are a number of competitors
that have substantially greater financial resources and larger, more established
marketing, sales and service organizations than us. As such, there can be no
assurance that our products will be competitive with the existing or future
products or services of our competitors.

24
<PAGE>

Mannheim GmbH (a subsidiary of Roche Holdings Ltd.), have developed or are
developing analyzers designed for preventive care testing. These competitors
have substantially greater financial, technical, research and other resources
and larger, more established marketing, sales, distribution and service
organizations than us. However, we believe that we currently have a competitive
advantage due to the design and cardiac risk factor analysis capabilities of our
professional-use cholesterol monitor as a hand-held, quantitative, affordable
and regulatory approved instrument. However, there can be no assurance that our
professional-use cholesterol monitor will be able to compete with these other
analyzers and testing devices or that our competitors will not succeed in
obtaining further government approvals or in developing or marketing
technologies or products that are more commercially attractive than our current
or future products.

GOVERNMENT REGULATION. In the past, we have been successful in obtaining all
required U.S. regulatory approvals, however, the process of obtaining marketing
clearances or approvals can be costly and time-consuming and there can be no
assurance that further clearances or approvals will be granted to us with
respect to any future products or that FDA review will not involve delays
adversely affecting the marketing and sale of any new products developed by us.
Moreover, our current approvals as well as any future approvals remain subject
to continual review and the subsequent discovery of previously unknown problems
may result in certain marketing restrictions or a complete withdrawal of the
product from the market. We also remain subject to FDA regulations with respect
to various other matters, including our manufacturing practices, record-keeping
and reporting. For instance, the FDA requires the integration of their quality
system into any facility it registers as a "medical device facility". The
quality system requirement ("QSR") encompasses product development ("GDP") and
manufacturing, customer service, incident reporting and labeling control
("GMP"). Our assembly facility in Post Falls, Idaho is registered with the FDA
and operates under the quality provisions of the FDA as well as under those of
the ISO-9001 quality system. Our assembly facility as well as our production
processes will remain subject to periodic audits on an ongoing basis by the FDA.
In addition, the use of our products may be regulated by various state agencies.
Although we believe that we will be able to comply with all applicable
regulations of the FDA, including QSR, GMP and GDP guidelines, current FDA
regulations and state regulations depend heavily on administrative
interpretations. As such, there can be no assurance that future interpretations
made by the FDA or other regulatory bodies, with possible retroactive effect,
will not adversely affect our business, results of operations, liquidity and
cash flows.

Although our primary marketing focus for the foreseeable future will be the
domestic U.S. market, we anticipate eventually attempting to market our products
overseas. Regulatory requirements pertaining to cholesterol monitors, as well as
other medical diagnostic devices, vary widely from country to country and can
range from simple product registrations to detailed submissions such as those
required by the U.S. FDA. There can be no assurance that we will be successful
in obtaining the requisite regulatory clearances in any foreign market.

POTENTIAL IMPACT OF MEDICARE REIMBURSEMENT REGULATIONS. Third party payers can
affect the pricing and the relative attractiveness of our products by regulating
the maximum amount of reimbursement they will provide for blood testing
services. For example, the reimbursement of fees for blood testing services for
Medicare patients in the hospital is included under Medicare's prospective
payment system diagnosis-related group regulations. If the reimbursement amounts
for blood testing services are decreased in the future, it may decrease the
amount which physicians and hospitals are able to charge Medicare patients for
such services and consequently the price we can charge for our products.

DEPENDENCE ON AND PROTECTION OF PATENTS AND PROPRIETARY TECHNOLOGY. Our
commercial success is dependent, in part, upon our trade secrets, know-how,
patents and other proprietary rights. There can be no assurance that our current
and pending patents will not be challenged by third parties, invalidated or
designed around, or that they will provide protection that has commercial
significance. There can also be no assurance that any current or future patent
applications will result in the actual issuance of a patent. Litigation, which
would likely be costly and time-consuming, may be necessary to protect our
intellectual property. The invalidation of any of our current or future patents
could permit increased competition, with potential material adverse effects on
our business, results of operations, liquidity and cash flows. In addition,
there can be no assurance that our technological applications will not infringe
upon the patents or proprietary rights of others or that licenses that might be
required for our processes or products will be available to us on commercially
reasonable terms, if at all. Furthermore, there can be no assurance that others
may not develop or acquire trade secrets or know-how similar to ours.

25
<PAGE>

PRODUCT LIABILITY AND INSURANCE; POSSIBLE EXPOSURE TO CLAIMS. The clinical
testing, marketing and manufacturing of our products necessarily involves the
risk of product liability. Although we maintain product liability insurance, the
amount and scope of any current and future insurance coverage may not be
adequate to protect us in the event of a product liability claim.

CONTINUING RESEARCH AND DEVELOPMENT EXPENDITURES. We anticipate that will
continue to expend significant funds on our research and product development
efforts. There can be no assurance that these costs will ultimately be recovered
through the successful development, introduction and marketing of resulting
products.

LIMITED MARKET FOR OUR COMMON SHARES. Our common stock is currently traded on
the Over-The-Counter, Electronic Bulletin Board, which is a limited market and
subject to substantial restrictions and limitations. As a result, our common
stock may be covered by a U.S. Securities and Exchange Commission rule that
imposes additional sales practice requirements on broker-dealers who sell such
securities to persons other than established customers and accredited investors
(generally institutions with assets in excess of $5,000,000 or individuals with
net worth in excess of $1,000,000 or annual incomes exceeding $200,000, or
$300,000 jointly with their spouses). For transactions covered by the rule, the
broker-dealer must make a special suitability determination for the purchaser
and receive the purchaser's written agreement to the transaction prior to the
sale. Consequently, this rule may adversely affect the ability of broker-dealers
to sell our securities and may also adversely affect the ability of shareholders
to sell their shares in the secondary market.

ITEM 7. CONSOLIDATED FINANCIAL STATEMENTS

The Company's consolidated financial statements and notes thereto appear
beginning on page F-1 of this Form 10-KSB.

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

No matters for inclusion herein.

26
<PAGE>

PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS,
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

The information required by this Item is incorporated herein by reference to the
Company's Proxy Statement for its Annual Meeting of Stockholders, to be held on
December 15, 2000, to be filed with the Commission pursuant to Regulation 14A.

ITEM 10. EXECUTIVE COMPENSATION

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits are listed in the Exhibit Index of this
Form 10-KSB, which is incorporated herein by reference.

(b) Reports on Form 8-K.

We filed no reports on Form 8-K during our fourth fiscal
quarter ended June 30, 2000.

27
<PAGE>

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned hereunto duly
authorized.

LIFESTREAM TECHNOLOGIES, INC.

BY: /s/ Christopher Maus
------------------------------------------------------------
President, Chief Executive Officer and Chairman of the Board

DATE: September 28, 2000
------------------------------------------------------------

BY: /s/ Brett Sweezy
------------------------------------------------------------
Chief Financial and Accounting Officer

DATE: September 28, 2000
------------------------------------------------------------

28
<PAGE>

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>

Lifestream Technologies, Inc. and Subsidiaries
<S> <C>
Report of Independent Certified Public Accountants...................................................F-2
Consolidated Balance Sheets..........................................................................F-3 to F-4
Consolidated Statements of Loss......................................................................F-5
Consolidated Statements of Changes in Stockholders' Equity...........................................F-6 to F-7
Consolidated Statements of Cash Flows................................................................F-8 to F-9
Summary of Accounting Policies.......................................................................F-10 to F-12
Notes to Consolidated Financial Statements........................................................ F-13 to F-20
</TABLE>

F-1
<PAGE>

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To The Board of Directors and Stockholders of
Lifestream Technologies, Inc. and Subsidiaries
Post Falls, Idaho

We have audited the accompanying consolidated balance sheets of Lifestream
Technologies, Inc. and Subsidiaries, as of June 30, 2000 and 1999, and the
related consolidated statements of loss, changes in stockholders' equity and
cash flows for the year ended June 30, 2000, the six month period ended June 30,
1999, and the year ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated 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 consolidated financial position of
Lifestream Technologies, Inc. and Subsidiaries as of June 30, 2000 and 1999, and
the results of their operations and their cash flows for the year ended June 30,
2000, the six month period ended June 30, 1999, and the year ended December 31,
1998, in conformity with generally accepted accounting principles.

/s/ BDO Seidman, LLP
--------------------

Spokane, Washington
August 11, 2000

F-2

<PAGE>

LIFESTREAM TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

ASSETS (Note 1)
<TABLE>
<CAPTION>

June 30,
-----------------------
2000 1999
---------- ----------
<S> <C> <C>
Current assets:
Cash ......................................................................... $1,059,637 $ 81,656
Accounts receivable .......................................................... 13,786 27,829
Inventories (Note 2) ......................................................... 445,767 235,418
Prepaid expenses (Note 12) ................................................... 8,419 2,132
---------- ----------
Total current assets ............................................................ 1,527,609 347,035
---------- ----------
Equipment and leasehold improvements, net (Notes 3 and 9) ....................... 480,308 412,033
---------- ----------
Other assets:
Patent and license rights, net of accumulated amortization of
$807,683 and $683,072 (Note 5) ............................................. 1,312,113 1,436,724
Purchased software technology, net of accumulated amortization of
$611,955 (Note 13) ......................................................... 1,591,083 --
Note receivable, officer (Note 4) ............................................ 18,836 25,531
Note receivable, related company (Note 4) .................................... -- 416,372
Other ........................................................................ 16,380 42,472
---------- ----------
Total other assets .............................................................. 2,938,412 1,921,099
---------- ----------
Total assets .................................................................... $4,946,329 $2,680,167
========== ==========
</TABLE>

See accompanying report of independent certified public accountants, summary of
accounting policies and notes to consolidated financial statements.

F-3
<PAGE>

LIFESTREAM TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>

June 30,
----------------------------
2000 1999
------------ ------------
<S> <C> <C>
Current liabilities:
Accounts payable ................................................ $ 158,036 $ 416,666
Accrued wages and payroll taxes ................................. 89,174 122,125
Interest payable ................................................ 863 16,521
Current maturities of note payable (Note 6) ..................... 36,330 36,330
Current maturities of capital lease obligations (Note 10) ....... 30,186 17,830
Convertible debt (Note 7) ....................................... -- 250,000
------------ ------------
Total current liabilities .......................................... 314,589 859,472
Note payable, less current maturities (Note 6) ..................... 69,632 105,962
Capital lease obligations, less current maturities (Note 10) ....... 20,216 47,146
Contingent stock liability (Note 7) ................................ -- 867,000
Convertible debt (Note 7) .......................................... 50,000 --
------------ ------------
Total liabilities .................................................. 454,437 1,879,580
------------ ------------
Commitments and Contingencies (Notes 10 and 12)

Stockholders' equity (Notes 8, 9, 12 and 13):
Preferred stock, $.001 par value; 5,000,000 shares authorized; no
shares issued or outstanding .................................. -- --
Common stock, $.001 par value; 50,000,000 shares authorized;
19,210,304 and 12,187,661 shares issued and outstanding ....... 19,210 12,188
Additional paid-in capital ...................................... 17,445,275 9,780,003
Accumulated deficit ............................................. (12,972,593) (8,991,604)
------------ ------------
Total stockholders' equity ......................................... 4,491,892 800,587
------------ ------------
Total liabilities and stockholders' equity ......................... $ 4,946,329 $ 2,680,167
============ ============
</TABLE>

See accompanying report of independent certified public accountants, summary of
accounting policies and notes to consolidated financial statements.

F-4

<PAGE>

LIFESTREAM TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF LOSS
<TABLE>
<CAPTION>

Six Months Ended
Year Ended June 30, Year Ended
June 30, ---------------------------- December 31,
2000 1999 1998 1998
------------ ------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C>
Revenues ................................. $ 141,262 $ 51,229 $ -- $ 9,610
Cost of sales ............................ 229,278 60,889 -- 6,167
------------ ------------ ------------ ------------
Gross profit (loss) ...................... (88,016) (9,660) -- 3,443
------------ ------------ ------------ ------------
Operating expenses:
Advertising and promotion ........... 128,576 47,295 -- --
Depreciation and amortization ....... 916,183 138,398 117,034 223,898
Professional fees ................... 658,877 331,911 249,209 516,808
Travel .............................. 66,652 47,431 55,442 166,806
Research and development ............ 118,972 28,922 177,665 304,432
Salaries and wages (including noncash
charges of $298,845,
$799,974, $0 and $475,202) ........ 1,218,294 1,371,158 177,499 1,189,482
Selling, general and administrative . 1,007,343 243,582 216,370 644,295
------------ ------------ ------------ ------------
Total operating expenses ................. 4,114,897 2,208,697 993,219 3,045,721
------------ ------------ ------------ ------------
Loss from operations ..................... (4,202,913) (2,218,357) (993,219) (3,042,278)
------------ ------------ ------------ ------------
Other income (expense):
Interest income ..................... 36,215 16,486 11,549 32,596
Interest expense .................... (652,472) (390,983) (27,823) (112,436)
Other, net .......................... 838,181 (871,337) -- --
------------ ------------ ------------ ------------
Total other income (expense) ............. 221,924 (1,245,834) (16,274) (79,840)
------------ ------------ ------------ ------------
Net loss ................................. $ (3,980,989) (3,464,191) (1,009,493) (3,122,118)
============ ============ ============ ============

Net loss per share - Basic and diluted ... $ (0.25) $ (0.12) $ (0.12) $ (0.32)
============ ============ ============ ============

Weighted average number of shares -
Basic and diluted ..................... 15,983,136 8,343,371 8,343,371 9,812,680
============ ============ ============ ============
</TABLE>

See accompanying report of independent certified public accountants, summary of
accounting policies and notes to consolidated financial statements.

F-5
<PAGE>

LIFESTREAM TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional
Common Stock Paid-in
Shares Amount Capital
----------- ----------- -----------
<S> <C> <C> <C>
Balance, January 1, 1998 .................... 8,041,500 $ 8,041 $ 3,773,536

Exercise of stock options ................... 326,867 327 46,454

Common stock issued for services ............ 242,589 242 467,564

Common stock issued for cash ................ 1,721,055 1,721 2,100,508

Common stock issued for cash and matching
employee purchase at $4.12 per share ..... 178,000 178 732,410

Common stock issued for cash and matching
employee purchase at $1.00 per share ..... 12,500 13 12,487

Common stock issued as compensation ......... 15,000 15 37,485

Common stock issued with convertible debt ... 158,750 159 215,829

Common stock issued on conversion of debt ... 381,065 381 391,923

Unearned compensation, net of amortization of
$138,308 ................................. -- -- --

Compensatory stock options issued ........... -- -- 117,772

Stock subscription receivable ............... -- -- --

Net loss .................................... -- -- --
----------- ----------- -----------

Balances as of December 31, 1998 ............ 11,077,326 11,077 7,895,968

Common stock issued for cash ................ 200,000 200 199,800

Common stock issued with convertible debt ... 95,250 95 123,167

Common stock issued on conversion of debt and
accrued interest ......................... 398,328 399 995,191
</TABLE>

[RESTUBBED]
<TABLE>
<CAPTION>
Stock Unearned
Subscription Stock Accumulated
Receivable Compensation Deficit Total
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance, January 1, 1998 .................... $ -- $ -- $(2,405,295) 1,376,282

Exercise of stock options ................... -- -- -- 46,781

Common stock issued for services ............ -- -- -- 467,806

Common stock issued for cash ................ -- -- -- 2,102,229

Common stock issued for cash and matching
employee purchase at $4.12 per share ..... -- -- -- 732,588

Common stock issued for cash and matching
employee purchase at $1.00 per share ..... -- -- -- 12,500

Common stock issued as compensation ......... -- -- -- 37,500

Common stock issued with convertible debt ... -- -- -- 215,988

Common stock issued on conversion of debt ... -- -- -- 392,304

Unearned compensation, net of amortization of
$138,308 ................................. -- (610,442) -- (610,442)

Compensatory stock options issued ........... -- -- -- 117,772

Stock subscription receivable ............... (1,230) -- -- (1,230)

Net loss .................................... -- -- (3,122,118) (3,122,118)
----------- ----------- ----------- -----------

Balances as of December 31, 1998 ............ (1,230) (610,442) (5,527,413) 1,767,960

Common stock issued for cash ................ -- -- -- 200,000

Common stock issued with convertible debt ... -- -- -- 123,262

Common stock issued on conversion of debt and
accrued interest ......................... -- -- -- 995,590
</TABLE>

See accompanying report of independent certified public accountants, summary of
accounting policies and notes to consolidated financial statements.

F-6
<PAGE>
LIFESTREAM TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional
Common Stock Paid-in
Shares Amount Capital
------------ ------------ ------------

<S> <C> <C> <C>
Common stock issued for services ............. 312,007 312 336,269

Common stock issued on bridge loan extensions 90,750 91 107,596

Expiration of stock subscription ............. (2,000) (2) (7,728)

Common stock issued as compensation .......... 16,000 16 41,584

Compensatory stock options issued ............ -- -- 88,156

Amortization of deferred compensation ........ -- -- --

Net loss ..................................... -- -- --
------------ ------------ ------------

Balances as of June 30, 1999 ................. 12,187,661 12,188 9,780,003

Exercise of stock options .................... 81,638 82 62,311

Common stock issued for cash ................. 3,858,000 3,858 3,854,142

Common stock issued for purchase of business . 1,944,000 1,944 1,796,198

Common stock issued with convertible debt .... 54,000 54 68,256

Common stock issued for services ............. 667,005 666 752,983

Common stock issued as compensation .......... 98,000 98 218,964

Common stock issued on conversion of debt .... 320,000 320 419,680

Compensatory stock options issued to employees -- -- 79,783

Compensatory stock options issued for services -- -- 412,955

Net loss ..................................... -- -- --
------------ ------------ ------------

Balances as of June 30, 2000 ................. 19,210,304 $ 19,210 $ 17,445,275
============ ============ ============
</TABLE>
[RESTUBBED]

<TABLE>
<CAPTION>
Stock Unearned
Subscription Stock Accumulated
Receivable Compensation Deficit Total
------------ ------------ ------------ ------------
<S> <C>
Common stock issued for services ............. -- -- -- 336,581

Common stock issued on bridge loan extensions -- -- -- 107,687

Expiration of stock subscription ............. 1,230 6,500 -- --

Common stock issued as compensation .......... -- -- -- 41,600

Compensatory stock options issued ............ -- -- -- 88,156

Amortization of deferred compensation ........ -- 603,942 -- 603,942

Net loss ..................................... -- -- (3,464,191) (3,464,191)
------------ ------------ ------------ ------------

Balances as of June 30, 1999 ................. -- -- (8,991,604) 800,587

Exercise of stock options .................... -- -- -- 62,393

Common stock issued for cash ................. -- -- -- 3,858,000

Common stock issued for purchase of business . -- -- -- 1,798,142

Common stock issued with convertible debt .... -- -- -- 68,310

Common stock issued for services ............. -- -- -- 753,649

Common stock issued as compensation .......... -- -- -- 219,062

Common stock issued on conversion of debt .... -- -- -- 420,000

Compensatory stock options issued to employees -- -- -- 79,783

Compensatory stock options issued for services -- -- -- 412,955

Net loss ..................................... -- -- (3,980,989) (3,980,989)
------------ ------------ ------------ ------------

Balances as of June 30, 2000 ................. $ -- $ -- $(12,972,593) $ 4,491,892
============ ============ ============ ============
</TABLE>

See accompanying report of independent certified public accountants, summary of
accounting policies and notes to consolidated financial statements.

F-7
<PAGE>

LIFESTREAM TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Increase (Decrease) in Cash
<TABLE>
<CAPTION>

Six Months Ended
Year Ended June 30, Year Ended
June 30, -------------------------- December 31,
2000 1999 1998 1998
----------- ----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss ................................... $(3,980,989) $(3,464,191) $(1,009,493) $(3,122,118)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization ............ 916,183 138,398 117,034 223,898
Issuance of common stock and options for
services ............................... 1,166,604 336,581 154,720 467,806
Issuance of common stock with
convertible debt ....................... 68,310 107,687 -- 215,988
Issuance of compensatory stock and options
for employee services .................. 298,845 733,698 35,345 104,409
Contingently issuable stock .............. (867,000) 867,000 -- --
Noncash compensation ..................... -- 69,455 -- --
Loss on disposal of fixed assets ......... 26,050 -- -- --
Provision for inventory obsolescence ..... 28,735 11,000 -- --
Changes in assets and liabilities, net of
business acquired:
Accounts receivable ...................... 14,043 (27,582) (12,577) (247)
Inventories .............................. (239,584) (117,278) -- (98,338)
Prepaid expenses ......................... (5,787) 20 (9,039) (84)
Other .................................... 26,092 149,043 125,632 (7,015)
Accounts payable ......................... (266,087) 48,903 7,135 138,410
Other current liabilities ................ (48,609) 44,863 26,189 94,002
----------- ----------- ----------- -----------
Net cash used in operating activities ......... (2,863,194) (1,102,403) (565,054) (1,983,289)
----------- ----------- ----------- -----------
Cash flows from investing activities:
Capital expenditures ....................... (237,160) (1,290) (144,538) (313,099)
Proceeds from sale of fixed assets ......... 3,893 51,334 -- --
Advances to related party company .......... -- (126,956) (50,318) (289,416)
Repayments from (advances to) officer ...... 6,695 2,104 (2,777) (17,986)
Cash in business acquired .................. 78 -- -- --
----------- ----------- ----------- -----------
Net cash used in investing activities ......... (226,494) (74,808) (197,633) (620,501)
----------- ----------- ----------- -----------
Cash flows from financing activities:
Proceeds from issuance of note payable ..... 270,000 -- -- --
Proceeds from issuance of convertible debt . 470,000 1,000,000 275,000 500,000
Proceeds from exercise of stock options .... 62,393 -- 32,326 46,781
Payments on capital lease obligations ...... (36,394) (11,430) -- (2,520)
Payments on notes payable .................. (306,330) (21,258) (7,553) (8,006)
Payment of convertible debt ................ (250,000) -- -- --
Proceeds from sale of common stock ......... 3,858,000 200,000 2,058,031 2,152,930
----------- ----------- ----------- -----------
Net cash provided by financing activities ..... 4,067,669 1,167,312 2,357,804 2,689,185
----------- ----------- ----------- -----------
Net increase (decrease) in cash ............... 977,981 (9,899) 1,595,117 85,395
Cash at beginning of period ................... 81,656 91,555 6,160 6,160
----------- ----------- ----------- -----------
Cash at end of period ......................... $ 1,059,637 $ 81,656 $ 1,601,277 $ 91,555
=========== =========== =========== ===========
</TABLE>

See accompanying report of independent certified public accountants, summary of
accounting policies and notes to consolidated financial statements.

F-8
<PAGE>

LIFESTREAM TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>

Six Months Ended
Year Ended June 30, Year Ended
June 30, ---------------------- December 31,
2000 1999 1998 1998
----------- ----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C>
Supplemental schedule of non-cash investing
Note payable for leasehold improvements . $ -- $ -- $ 249,148 $ 249,148
Issuance of common stock in exchange for:
Business acquired ..................... 1,798,142 -- -- --
Reduction of note payable ............. -- -- -- 41,144
Reduction of accrued interest ......... -- 20,590 -- --
Conversion of debt .................... 420,000 975,000 375,000 375,000
Deferred financing costs .............. -- 123,262 59,738 59,738

Supplemental schedule of cash activities:
Interest paid in cash ................... $ 27,071 $ 12,938 $ 5,680 $ 3,128
</TABLE>

See accompanying report of independent certified public accountants, summary of
accounting policies and notes to consolidated financial statements.

F-9

<PAGE>

LIFESTREAM TECHNOLOGIES, INC. AND SUBSIDIARIES

SUMMARY OF ACCOUNTING POLICIES

(Information for the six month period ended June 30, 1998 is unaudited)

Nature of Business

Lifestream Technologies, Inc. ("Lifestream Technologies" or "the Company") holds
exclusive manufacturing and marketing rights in the United States for the
Lifestream Cholesterol Monitor, a hand held instrument that measures cholesterol
levels as well as other components in blood. The Company was incorporated
pursuant to the laws of the state of Nevada in June 1992. On July 2, 1999, the
Company changed its fiscal year end to June 30.

Basis of Presentation

The consolidated financial statements include the operations of the Company and
its two wholly owned subsidiaries, Lifestream Diagnostics, Inc. and Secured
Interactive Technologies, Inc. All intercompany accounts and transactions have
been eliminated on consolidation.

Cash Equivalents

For financial reporting purposes, the Company considers all highly liquid
investments purchased with an original maturity of three months or less to be a
cash equivalent. Financial instruments which potentially subject the Company to
a concentration of credit risk consist of cash and cash equivalents. Cash and
cash equivalents consist of funds deposited with various high credit quality
financial institutions.

Inventories

Inventories consists of supplies, component parts and assembled devices.
Inventories are stated at the lower of cost (first-in, first-out method) or
market.

Equipment and Leasehold Improvements

Equipment and leasehold improvements are recorded at cost. Depreciation and
amortization are provided using the straight-line method over the useful lives
or lease term of the respective assets. Major additions and betterments are
capitalized. Upon retirement or disposal, the cost and related accumulated
depreciation or amortization are removed from the accounts and any gain or loss
is reflected in operations.

Intangible Assets

The costs associated with acquiring purchased software technology and the
patented technology have been capitalized and are being charged to expense using
the straight line method of amortization over a period of three years and
seventeen years, respectively. These amortization periods were determined based
on the estimated useful lives of the respective assets.

Management of the Company reviews the carrying value of its intangible assets on
a regular basis. Estimated undiscounted future cash flows from the intangible
assets are compared with the current carrying value. Reductions to the carrying
value are recorded to the extent the net book value of the property exceeds the
estimate of future discounted cash flows.

F-10

<PAGE>
LIFESTREAM TECHNOLOGIES, INC. AND SUBSIDIARIES

SUMMARY OF ACCOUNTING POLICIES

(Information for the six month period ended June 30, 1998 is unaudited)

Income Taxes

Income taxes are provided based on the liability method of accounting pursuant
to Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for
Income Taxes." Under this approach, deferred income taxes are recorded to
reflect the tax consequences on future years of differences between the tax
basis of assets and liabilities and their financial reporting amounts at each
year end. A valuation allowance is recorded against deferred tax assets if
management does not believe the Company has met the "more likely than not"
standard imposed by SFAS 109 to allow recognition of such an asset.

Revenue Recognition

Revenue from sales of diagnostic units and accessories are recorded at the time
goods are shipped. During the year ended June 30, 2000 the Company had net sales
of approximately $18,000 or 13% to a significant customer.

Research and Development

Research and development costs are charged to expense as incurred.

Estimates

The preparation of financial statements in conformity with generally accepted
accounting principles 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 dates of the financial statements and
the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates.

Fair Value of Financial Instruments

The carrying amounts reported in the consolidated balance sheets as of June 30,
2000 and 1999 for cash equivalents, accounts receivable, accounts payable and
accrued expenses approximate fair value because of the immediate or short-term
maturity of these financial instruments. The fair value of the note receivable
from an officer cannot be determined. The fair value of long-term debt and note
payable approximate carrying value as the stated or discounted rates of the debt
reflect recent market conditions.

Stock Based Compensation

SFAS No. 123, "Accounting for Stock-Based Compensation," encourages, but does
not require, companies to record compensation cost for stock-based employee
compensation plans at fair value. The Company has chosen to continue to account
for stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations and to furnish the pro forma disclosures
required under SFAS No. 123, if material. Accordingly, compensation cost for
stock options is measured as the excess, if any, of the quoted market price of
the Company's stock at the date of the grant over the amount an employee must
pay to acquire the stock.

F-11
<PAGE>
LIFESTREAM TECHNOLOGIES, INC. AND SUBSIDIARIES

SUMMARY OF ACCOUNTING POLICIES

(Information for the six month period ended June 30, 1998 is unaudited)

Net Loss Per Share

Basic earnings per share ("EPS") is computed as net income divided by the
weighted average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur from common shares issuable
through stock options, warrants and other convertible securities. As the
Company's stock options, warrants, and convertible debt, which cover 3,651,262,
1,967,398, 1,007,165, and 807,165 shares of the Company's common stock at June
30, 2000 and 1999, December 31, 1998 and June 30, 1998 respectively, are
antidilutive only basic EPS is presented. These securities could potentially
dilute future EPS calculations.

Unaudited Consolidated Financial Statements

In the opinion of the Company's management, the unaudited consolidated
statements of loss and cash flows for the six month period ended June 30, 1998,
contain all adjustments (consisting of only normal recurring accruals and
adjustments) necessary to present fairly the information set forth therein.

F-12
<PAGE>
LIFESTREAM TECHNOLOGIES, INC. AND SUBSIDIARIES

SUMMARY OF ACCOUNTING POLICIES

(Information for the six month period ended June 30, 1998 is unaudited)

1. Financial Condition and Liquidity

The Company has incurred operating losses since inception and, at June 30, 2000,
has a substantial accumulated deficit. In addition, the Company has limited
revenues to date and a product for which the market acceptance remains generally
untested.

Management of the Company has undertaken certain actions to address these
conditions. These actions include seeking new sources of capital or funding to
allow the Company to continue production and marketing of its products.
Subsequent to year end, the Company has raised approximately $625,000 from both
the sale of common stock, under an ongoing $3.0 million private placement, and
from certain employees exercising stock options. The Company intends to hold
open the private placement until all $3.0 million of common stock has been
subscribed. In addition, the Company has obtained approval from the Federal Drug
Administration to allow for sale of the Company's consumer model, and intends to
begin sales of this product in the second quarter of fiscal 2001. Finally, the
Company has employed certain professionals with extensive backgrounds in the
medical products industry. It is management's belief that these individuals will
assist the Company in executing the Company's business plan. There can be no
assurances that the Company will be successful in executing its plans.

2. Inventories

Inventories consist of the following:

June 30,
------------------
2000 1999
-------- -------
Raw materials ...................... $421,397 $199,963
Work in process .................... 54,792 42,767
Finished goods ..................... 9,313 3,688
Provision for inventory obsolescence (39,735) (11,000)
-------- --------
Total inventories .................. $445,767 $235,418
======== ========

3. Equipment and Leasehold Improvements

Equipment and leasehold improvements consist of the following:

June 30,
------------------
2000 1999
-------- -------
Office and data processing equipment ......... $526,552 $314,445
Vehicles ..................................... 33,800 33,800
Leasehold improvements ....................... 250,438 250,438
-------- --------
810,790 598,683
Less accumulated depreciation and amortization 330,482 186,650
-------- --------
Equipment and leasehold improvements, net .... $480,308 $412,033
======== ========

F-13

<PAGE>

LIFESTREAM TECHNOLOGIES, INC. AND SUBSIDIARIES

SUMMARY OF ACCOUNTING POLICIES

(Information for the six month period ended June 30, 1998 is unaudited)

4. Note Receivable

The Company's Chief Executive Officer has received various cash advances
pursuant to terms of an unsecured promissory note. In June 1999, the Company
issued a non-cash bonus of $69,455 to the Officer, which was recorded as a
direct reduction to the note receivable. Advances under the note accrue interest
at 8% and have no stated maturity date.

Prior to the acquisition of Secured Interactive Technologies, Inc. (See Note
13), the Company advanced funds totaling $32,035 during the six month period
ending June 30, 1999. Advances under the note accrued interest at a rate of 8%
and had no stated maturity date. Interest accrued on the note totaled $16,005 at
June 30, 1999. The Company also paid certain direct expenses and shared certain
facilities and resources with this related party company. As of June 30, 1999,
approximately $277,050 was owed to the Company as the agreed-upon estimate of
the fair value of the benefits received.

5. Patent and License Rights

In 1992, the Company acquired all of the assets and liabilities of a related
party partnership in exchange for 3,327,000 shares of the Company's common
stock. The net assets acquired, which were recorded on the Company's books at
the historical cost basis of the partnership, by the Company primarily included
license and distribution rights which had been previously acquired by the
partnership from an unrelated company. In 1993, the Company acquired the patents
and technology from this same unrelated company to complete the asset
acquisition. The patent and technology were acquired through the issuance of
470,000 shares of common stock, valued at $1,410,000. The patent and related
assets relate to a dry chemistry process used to measure cholesterol levels in
blood samples which will be used in the Company's product.

6. Note Payable

During May 1998, the Company executed a note payable for certain costs incurred
in connection with leasehold improvements which were a prerequisite to the
Company signing an operating lease for office and production space located in
Post Falls, Idaho. The note is payable in monthly installments of $3,028.

Scheduled annual principal maturities of the note payable at June 30, 2000 are
as follows:

Years ending June 30, Amount
------------------------------------------------------------

2001........................................ $ 36,330
2002........................................ 36,330
2003........................................ 33,302
-----------
Total note payable 105,962
Less current maturities..................... 36,330
-----------
Note payable, less current maturities....... $ 69,632
===========

F-14

<PAGE>
LIFESTREAM TECHNOLOGIES, INC. AND SUBSIDIARIES

SUMMARY OF ACCOUNTING POLICIES

(Information for the six month period ended June 30, 1998 is unaudited)

7. Convertible Debt

During 1998 the Company commenced an offering of convertible promissory notes
pursuant to which it received proceeds of $225,000 in 1998 and $635,000 in 1999.
A director of the Company purchased $150,000 of these notes. The promissory
notes were unsecured, matured two years after issuance and bore interest at
prime plus 2%. The notes were convertible at any time subsequent to issuance at
a per share rate of $2.50, which price exceeded the then fair value of the
Company's common stock. In connection with the issuance of the notes, the
Company issued each noteholder 7,500 shares of its common stock for each $50,000
of debt. A total of 129,000 shares, valued at approximately $183,000, were
issued and recorded as debt financing costs.

During 1999, in order to induce conversion, the Company guaranteed each
converting noteholder that the per share value of their shares would be at least
$3.50 on the one year anniversary date of their conversion or the Company would
issue additional shares to achieve that value. As a result of the offer,
$860,000 of notes and $15,780 accrued interest thereon were converted into
350,312 shares of the Company's common stock in June 1999.

During 1999, the Company received $115,000 from a director pursuant to terms of
two convertible promissory notes. The notes were unsecured, bore interest at 10%
and were convertible into shares of the Company's common stock at a per share
rate of $2.50. The notes had an initial maturity date of thirty days, with
provisions for two additional thirty day extensions. In connection with the
issuance and maturity extension of the notes, the Company issued 15,750 shares
of its common stock, valued at approximately $26,000, to the director. During
June 1999, the notes, together with accrued interest thereon of approximately
$5,000, were converted into 48,016 shares of the Company's common stock. The
noteholder was provided with the same guaranteed share price as noted above. As
a result of the share value guarantees offer of $3.50 per share and based on the
market price of the Company's common stock of $0.98 per share at June 30, 1999,
the Company recorded an estimated liability of $867,000. This amount was
calculated as the difference in per share price multiplied by the number of
shares as if these shares would have been issued as of June 30, 1999. The share
value on the one year anniversary date of the conversion of the notes exceeded
$3.50; therefore the estimated liability was reversed during the year ended June
30, 2000.

During February 1999, the Company received $250,000 from an investor pursuant to
terms of a convertible promissory note. The note bore interest at 18% and was
secured by the pledge of stock held by the Company's chairman of the board. The
note had an original maturity date of thirty days, with provisions for the
extension of the maturity date for two additional thirty day periods. In
connection with the origination and extension of the note, the Company issued to
the noteholder 75,000 shares of its common stock, valued at approximately
$81,000. The note and $20,000 of accrued interest thereon, was repaid in July
1999 with funds received pursuant to a short-term advance. In connection with
this advance, the Company issued 25,000 shares of its common stock to the
lender. This advance was repaid in July 1999 with proceeds from three separate
convertible notes totaling $270,000, including $70,000 from a director. On
December 15, 1999, the $270,000 debt was converted into 540,000 shares of the
Company's common stock. The Company recorded a $270,000 financing expense
associated with this conversion as the conversion rate of $0.50 per share was
below the fair value of the Company's stock.

F-15
<PAGE>
LIFESTREAM TECHNOLOGIES, INC. AND SUBSIDIARIES

SUMMARY OF ACCOUNTING POLICIES

(Information for the six month period ended June 30, 1998 is unaudited)

As consideration for these convertible notes, the Company issued the convertible
debt holders 54,000 shares of common stock.

On February 28, 2000, the Company commenced a private offering of convertible
promissory notes, pursuant to which it received proceeds of $200,000. A director
of the Company purchased $150,000 of these notes. The promissory notes are
unsecured, mature two years from the date of issuance, and bear interest at 9%.
The notes are convertible at any time subsequent to issuance at a per share rate
of $3.00. On June 30, 2000, $150,000 of the debt and accrued interest thereon
was converted into 51,000 shares of the Company's common stock.

8. Equity

In June 1999, the Company commenced a private offering of 500,000 shares of the
Company's common stock at $1.00 per share with a warrant to purchase one
additional share of the Company's common stock at $1.25 per share. The Company
received $300,000 and $200,000 pursuant to the terms of this offering during the
year ended June 30, 2000 and the six month period ended June 30, 1999,
respectively.

The Company commenced a $2,000,000 private offering in October 1999. The terms
of this offering consisted of 2,000,000 shares of the Company's common stock
offered at $1.00 per share with warrants to purchase 666,667 shares of the
Company's common stock at $2.50 per share. On January 21, 2000 the Company
increased this offering by $1,000,000 with additional warrants to purchase
333,333 shares of the Company's common stock at $2.50 per share. The Company
closed this offering to further investments on February 22, 2000 after receiving
$3,558,000 under the terms of the offering.

On June 20, 2000 the Company commenced a private offering of 1,000,000 shares of
the Company's common stock at $3.00 per share. One warrant to purchase a share
of the Company's stock at $5.00 per share is being issued to subscribers for
every two common shares purchased, for a total of 500,000 warrants. As of June
30, 2000 the Company had not received any money under the terms of the offering.

9. Stock Options and Warrants

The Company has an Employee Stock Option Plan (the "Plan") which provides for
the grant of options to purchase shares of the Company's common stock at
exercise prices determined by the Board of Directors. As of June 30, 2000,
1,330,000 options originally made available under the Plan remain available for
grant. The Company grants from time to time stock options to directors, vendors
and others to purchase shares of the Company's common stock at exercise prices
as determined by the Chief Executive Officer and approved by the Board of
Directors. These options are granted as payment of services or as an inducement
to provide the Company funds to further develop and market the Company's
product.

F-16

<PAGE>
LIFESTREAM TECHNOLOGIES, INC. AND SUBSIDIARIES

SUMMARY OF ACCOUNTING POLICIES

(Information for the six month period ended June 30, 1998 is unaudited)

The following table summarizes the stock option and stock warrant activity:

Weighted
Average
Options/ Exercise
Warrants Price
------------- -----------

Options/warrants outstanding at January 1, 1998 . 591,745 $ 0.19
Granted ......................................... 831,665 2.04
Expired ......................................... (179,378) (0.21)
Exercised ....................................... (326,867) (0.14)
----------
Options/warrants outstanding at December 31, 1998 917,165 1.76
Granted ......................................... 570,233 1.22
Expired ......................................... (20,000) (0.20)
----------
Options/warrants outstanding at June 30, 1999 ... 1,467,398 1.59
Granted ......................................... 2,429,533 1.92
Expired ......................................... (180,698) (1.05)
Exercised ....................................... (81,638) (0.76)
---------
Options/warrants outstanding at June 30, 2000 ... 3,634,595 $ 1.85
=========

The fair value of option grants is estimated on the date of grant utilizing the
Black-Scholes option pricing model with the following weighted average
assumptions as to option grants: expected life of option of five years, expected
volatility of 40% for the years ended June 30, 2000 and December 31, 1998, and
58% for the six month period ended June 30, 1999, risk-free interest rate of 6%
and a dividend yield of 0%.

The per share fair value at the date of grant of the options granted was
approximately $0.83 for the year ended June 30, 2000, $1.02 for the six month
period ended June 30, 1999, and $1.56 for the year ended December 31, 1998.

If compensation cost for the Company's Plan had been determined based on the
fair value at the grant dates for awards under the Plans consistent with SFAS
123, the Company's net loss and net loss per share as reported would have been
increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>

Year Ended Six Months Ended Year Ended
June 30, 2000 June 30, 1999 December 31, 1998
--------------------------- ---------------------------- ---------------------------
As Pro As Pro As Pro
Reported Forma Reported Forma Reported Forma
------------ ------------ ------------ ------------ ------------ ------------

<S> <C> <C> <C> <C> <C> <C>
Net loss ............. $ (3,980,989) $ (4,399,802) $(3,464,191) $(3,932,571) $(3,122,118) $ (3,841,121)
============= ============= =========== =========== =========== =============

Net loss per share -
basic and diluted . $ (0.25) $ (0.28) $ (0.30) $ (0.34) $ (0.32) $ (0.39)
============= ============= =========== =========== =========== =============
</TABLE>

F-17
<PAGE>
LIFESTREAM TECHNOLOGIES, INC. AND SUBSIDIARIES

SUMMARY OF ACCOUNTING POLICIES

(Information for the six month period ended June 30, 1998 is unaudited)

The following table summarizes information about outstanding stock options and
warrants at June 30, 2000:
<TABLE>
<CAPTION>

Options/Warrants Options/Warrants
Outstanding Exercisable
------------------------------------------ -----------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life (YRS) Price Exercisable Price
-----------------------------------------------------------------------------------

10. Lease Commitments

The Company leases a vehicle and computer equipment under capital leases that
expire in 2002. In addition, during the six month period ended June 30, 1999,
the Company sold to a financing company certain computer equipment and then
executed a capital lease for this same equipment.

The Company leases its primary corporate and manufacturing office space in Post
Falls, Idaho pursuant to an operating lease which includes a provision which
allows for increasing monthly payments. During the year ended June 30, 2000, the
Company terminated its office lease relative to its previous corporate
headquarters in Ft. Collins, Colorado. In connection therewith, the Company paid
a one-time lease termination fee of $16,000.

Future minimum lease payments required under these lease agreements are as
follows:
<TABLE>
<CAPTION>

Capital Operating
Years ending June 30, Lease Leases
-------------------------- ------------- ------------

<S> <C> <C>
2001.............................................. $ 36,987 $ 60,114
2002.............................................. 24,264 69,834
2003.............................................. -- 64,015
----------- ----------
Total lease payments.............................. 61,251 $ 193,963
==========
Less imputed interest............................. 10,849
-----------
Present value of net minimum lease payments....... 50,402

Less current maturities........................... 30,186
-----------
Total long-term capital lease obligation.......... $ 20,216
===========
</TABLE>

F-18
<PAGE>
LIFESTREAM TECHNOLOGIES, INC. AND SUBSIDIARIES

SUMMARY OF ACCOUNTING POLICIES

(Information for the six month period ended June 30, 1998 is unaudited)

The capital leases are collateralized by fixed assets having a book value of
$53,627 at June 30, 2000. Rent expense for the years ended June 30, 2000 and
December 31, 1998 was $52,429 and $41,832. Rent expense for the six month period
ended June 30, 1999 was $24,083.

11. Income Taxes

At June 30, 2000 and 1999, the Company had deferred tax assets of approximately
$5,400,000 and $3,759,000 principally arising from net operating loss
carryforwards for income tax purposes. The total net operating loss carryforward
includes IRC Section 382 losses, which restricts the total amount of loss that
can be used for tax purposes in any one year. As management of the Company
cannot determine that it is more likely than not that the Company will realize
the benefit of the deferred tax asset, a valuation allowance equal to the
deferred tax asset has been established for all periods presented.

At June 30, 2000, the Company has net operating loss carryforwards totaling
approximately $12,603,000 which expire in the years 2006 through 2020.

12. Commitments and Contingencies

In April 1999, the Company executed employment agreements with substantially all
of its employees. The employment agreements contain terms, which specified a
reduced salary for a 90 day period and granted the employees options to purchase
101,000 shares of the Company's common stock at a per share price of $1.25. At
conclusion of this 90 day period, employees who remained in the employment of
the Company were to receive a cash bonus based on a percentage of the employee's
annualized salary, totaling, in aggregate approximately $69,000. On July 9,
1999, the Company did not have adequate funds to pay the bonus, and the
employees received options to purchase, in aggregate, an additional 94,000
shares of the Company's common stock at a per share price of $1.25. The cash
bonus was paid during the fiscal year ended June 30, 2000.

In January 1998, the Company entered into a license and supply agreement with a
third party foreign manufacturer pursuant to which the manufacturer will supply
the Company with cholesterol measurement modules, which incorporate the
Company's technology. During the year ended June 30, 2000 and the six-month
period ended June 30, 1999, the Company purchased $285,000 and $100,000 from
this manufacturer. As of June 30, 2000 the Company had advanced the supplier
$314,500 for inventory not yet received. This manufacturer remains the Company's
sole supplier of certain key components necessary in the production of the
Cholestron as of June 30, 2000.

13. Acquisition of Secured Interactive Technologies, Inc.

On September 1, 1999, the Company acquired Secured Interactive Technologies,
Inc. ("Secured Interactive"), a software and products development company which
created the Privalink System. The Privalink System is a suite of secure Internet
medical software and information services for healthcare data management of
personal medical records. This acquisition was effected by the Company issuing
1,944,000 shares of common stock, valued at approximately $1,798,000, in
exchange for all of the issued and outstanding shares of common stock of Secured
Interactive. The results of operations from Secured

F-19
<PAGE>

Interactive have been reflected in the consolidated results of the Company for
the fiscal year ended June 30, 2000.

This transaction has been accounted for in accordance with Accounting Principles
Board Opinion No. 16, as a purchase transaction. Accordingly, the assets and
liabilities acquired were recorded at estimated fair value. The total
consideration paid to acquire Secured Interactive was $1,798,142 and is based on
the value of the common stock issued by the Company. The total purchase price of
$2,203,142 includes the negative net book value of Secured Interactive as of the
date of acquisition, of $405,000. The purchase price has been capitalized onto
the books of the Company as purchased software technology, and is being
amortized to expense over a 3-year period, the estimated useful life.

The following unaudited pro forma consolidated results of operations are
presented as if the Secured Interactive acquisition had been made as of the
beginning of each period presented. The unaudited pro forma information is not
necessarily indicative of either the results of operations that would have
occurred had the purchase been made during the periods presented or the expected
future results of the combined operations.

Year Ended Six Months Ended
June 30, 2000 June 30, 1999
------------- -----------------

Net loss $ (4,321,597) $ (4,326,513)

Net loss per share $ (0.27) $ (0.52)

The acquisition of Secured Interactive had previously been reported in the
Company's fiscal 2000 interim financial statements as a combination of entities
under common control. During the fourth quarter of fiscal 2000, it was
determined that the acquisition should be accounted for as a purchase. The
impact of this change on previously reported amounts is as follows:

<TABLE>
<CAPTION>
Quarter Ended
September 30, December 31, March 31,
1999 1999 2000
---------------- ---------------- ------------
<S> <C> <C> <C>
As previously reported:
Net Loss $ (696,435) $ (798,238) $ (532,393)
Net Loss Per Share $ (0.05) $ (0.05) $ (0.03)

As revised:
Net Loss $ (757,631) $ (981,826) $ (715,981)
Net Loss Per Share $ (0.06) $ (0.06) $ (0.04)
</TABLE>

F-20
<PAGE>

EXHIBIT INDEX
-------------

<S> <C>
3.1 Articles of Incorporation of Lifestream Technologies, Inc., dated April 6, 1979.(1)
3.2 Amended Articles of Incorporation of Lifestream Technologies, Inc., dated February 11, 1994.(1)
3.3 By-laws of Lifestream Technologies, Inc.(1)
10.1 Exchange Agreement and Plan of Reorganization dated February 11, 1994.(1)
10.2 Lease between Jacklin Land Company Limited Partnership and Lifestream Diagnostics, Inc., a
wholly-owned subsidiary of Lifestream Technologies, Inc. dated as of May 19, 1998.(2)
10.3 License and Supply Agreement between Lifestream Diagnostics, Inc. and Boehringer Mannheim GmbH.(1)
10.4 Agreement and Plan of Merger by and among Lifestream Technologies, Inc., Secured Interactive
Technologies, Inc. and the Stockholders of Secured Interactive Technologies, Inc. dated June 24,
1999.(2)
21.1 Subsidiaries of the Registrant
</TABLE>

--------
1 Filed as an Exhibit to the Company's Form 10-SB on December 26, 1996 and
incorporated herein by reference.

2 Filed as an exhibit to the Company's Form 8-K on September 1, 1999 and
incorporated herein by reference.