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                            A Roadmap for
                          Industry Leadership
                                 Annual Report 2004
                                    Year Ended May 31, 2004

                          Japan Medical Dynamic Marketing, INC.




 Maintaining...
                                                                        Profile
                         Japan Medical Dynamic Marketing, INC. (Japan MDM) has satisfied the
                         growing need for medical services by maintaining a balanced profile of
                         trading and manufacturing functions and developing high-value-added,
                         own-brand products. “Contributing to medical care,” is one of the guid-
                         ing principles of Japan MDM. The fiscal year ended May 31, 2004 proved
                         a challenging year for the company. The anticipated revision of Japan’s
                         Pharmaceutical Affairs Law next fiscal year and other developments
                         suggest that difficult industry conditions will continue in the near term.


                         To achieve stable growth in this challenging environment, Japan MDM
                         has formulated a new medium-term management plan, covering a five-
                         year period that began in the fiscal year ended May 31, 2004, built upon
                         five strategies. The plan positions these five years as a period that will
                         see us establish the strong operating infrastructure needed to deliver
                         stable growth.


                         Guided by the principle of “contributing to medical care,” we remain
                         committed to becoming a company worthy of your trust.




                                                                         Contents
                                                          Consolidated Financial Highlights 1
                                                                  To Our Stockholders 2
                                                        An Interview With Top Management 4
                                                                Corporate Governance 16
                                                                    Financial Section 17
                                                                 Investor Information 38
                                                                     Corporate Data 39




CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This annual report includes forward-looking statements based on a number of assumptions and beliefs in light of the information currently available to manage-
ment and subject to significant risks and uncertainties. Actual financial results may differ materially depending on a number of factors, including adverse economic
conditions, currency exchange rate fluctuations, adverse legislative and regulatory developments, delays in new product launches, the pricing and product
initiatives of competitors, the inability of the company to market existing and new products effectively, interruptions in production, infringements of the company’s
intellectual property rights and the adverse outcome of material litigation.
                             [    Consolidated Financial Highlights                                                              ]
                                                  Japan Medical Dynamic Marketing, INC. and its Subsidiary




                                                                                                                                              Thousands of
                                                                                                             Millions of yen                   U.S. dollars
Years ended May 31,                                                                          2002                2003                2004         2004

For the year:
Net sales                                                                                  ¥12,658             ¥13,944           ¥13,736       $124,817
Net income                                                                                    1,706               1,886               2,042       18,551


At year-end:
Total assets                                                                               ¥23,677             ¥23,487           ¥23,024       $209,213
Stockholders’ equity                                                                          9,883             11,192               12,521     113,772

                                                                                                                  Yen                          U.S. dollars

Per share:
Net income — primary                                                                       ¥101.26               ¥95.84          ¥106.38             $0.97
Cash dividends                                                                                20.00               25.00               25.00           0.23

Note: U.S. dollar figures have been calculated at the rate of ¥110.05=US$1, the approximate rate of exchange on May 31, 2004.




                    Net Sales                                          Net Income                                        Operating Profit Ratio
                   (Millions of yen)                                   (Millions of yen)                                               (%)




    15,000                                              2,500                                                       50



    12,000                                              2,000                                                       40



     9,000                                              1,500                                                       30



     6,000                                              1,000                                                       20



     3,000                                                500                                                       10



         0                                                   0                                                       0
                ’00 ’01 ’02 ’03 ’04                                 ’00 ’01 ’02 ’03 ’04                                        ’00 ’01 ’02 ’03 ’04




                                                                                                                                                              1
                                              [    To Our Stockholders                             ]




                                                                                                          Trends in Japan’s Medical
                                                                                                          Device Industry
                                                                                                          Japan’s amended Pharmaceutical
                                                                                                          Affairs Law will go into effect on April
                                                                                                          1, 2005. Under the revised law,
                                                                                                          companies that hold permission to
                                                                                                          manufacture or import and sell
    Review of Fiscal 2004, Ended                                                                          medical products will be required to
    May 31, 2004                                                                                          obtain permission in each product
    Fiscal 2004 was the most difficult                                                                    category to manufacture and sell
    year Japan MDM has ever experi-                                                                       products by March 31, 2005.
    enced. In September 2003, a defect                                                                        As of April 2004, all new medical
    forced us to suspend sales of tro-                                                                    products must be examined by an
    chanteric nails, a new product that was expected to make a strong      independent administrative agency for approval. When compared
    contribution to fiscal 2004 results. The defect occurred in just one   to the previous system, the examination and approval process
    in approximately 3,000 cases. However, top management decided          has been simplified. However, to guarantee safety controls after
    to suspend sales of the product on the grounds that safety is the      manufacturing and sales, companies are now required to establish
    most important requirement of medical devices. This decision had       a team responsible for safety management in accordance with Good
    a significant impact on our earnings. Sales growth in mainstay         Vigilance Practice (GVP) standards. In addition, to ensure product
    orthopedic trauma devices and joint replacement products alone         quality, as a condition of obtaining permission to engage in manu-
    were not enough to enable us to reach our sales targets and achieve    facturing and sales, companies are required to designate an individual
    a recovery in earnings.                                                and a special team responsible for product quality assurance in
                                                                           accordance with Good Quality Practice (GQP) standards.
       Operating highlights of fiscal 2004 were as follows:                    To ensure that Japan MDM meets the provisions of the
    • Consolidated net sales were ¥13,736 million, down 1.5% from          amended Pharmaceutical Affairs Law, we will appoint a qualified
      the previous fiscal year.                                            person as the compliance officer, and we are also planning to
    • Operating profit fell 8.7% year on year to ¥3,713 million.           establish a special team to supervise compliance.
    • The operating profit ratio was 27.0%, down 2.2 percentage
      points.
    • ROE was 17.2%.
    • Earnings per share was ¥106.38.
    • We paid a dividend of ¥25.00 per share for fiscal 2004, the
      same level as in the previous fiscal year.




2
                                                                             On the global expansion front, we will also step up marketing
                                                                         activities in North America, Europe and Asia to steadily raise sales
                                                                         in these regions. Japan MDM will devote resources to orthope-
                                                                         dics, focusing on the thriving North American market. This focus
                                                                         will enable us to shift more rapidly from an investment phase to
                                                                         recouping those investments in the North American market. As
Background to the Medium-term Management Plan                            part of this effort, we anticipate that Ortho Development Corpora-
As explained in our fiscal 2003 annual report, our EMF System,           tion will contribute greatly to business operations and earnings.
which had been positioned as a strategic global product, struggled           Overall, I’m confident that by reinforcing existing businesses
in North America, leading to a disappointing performance. Then,          developed so far, while steadily executing our global strategy, we
in fiscal 2004, we voluntarily suspended sales of our new tro-           can rebuild a strong Japan MDM.
chanteric nail product, which also impacted sales.
    Two successive years of disappointment for stockholders and          Restoring Trust in Japan MDM
investors is a serious matter. Management held discussions on            By implementing our five strategies, we aim to assemble a pow-
what course Japan MDM should pursue, particularly in light of our        erful operating structure that can deliver consistent growth with-
vision of contributing to medical care. We came to the conclusion        out relying on any single product. I believe that Japan MDM has
that we must first explain to stakeholders where we aim to take          the unwavering vision and potential required to succeed and that
Japan MDM in the future, in the form of a new five-year medium-          we are following the right course. Japan MDM will become a pow-
term management plan.                                                    erful organization that will not be swayed by economic conditions
                                                                         or developments in the medical care industry. Every effort will be
Building a Strong Japan MDM—Overview of Our                              made to attain the numerical targets in our management plan.
Medium-term Management Plan                                                  We will endeavor to build a Japan MDM that can achieve stable
Our plan has five strategies: (1) a domestic sales strategy; (2) a       growth even 10 to 15 years from now, to ensure that we remain a
domestic marketing strategy; (3) an overseas marketing strategy;         company worthy of the trust of stockholders and all other investors.
(4) product development; and (5) new alliances. Our main goal is             The support and guidance of all stakeholders, including stock-
to build a strong Japan MDM that can deliver steady long-term growth,    holders, will be vital to achieving our goals.
even 10 to 15 years from now. Executives responsible for each area
will explain the details of the five strategies in this annual report.
    During the five years covered by the medium-term manage-             September 2004
ment plan, we intend to move aggressively to strengthen our trading
functions. We will fully utilize our powerful marketing network to
offer new product proposals to existing customers. To offer a wider
variety of products, we plan to roll out third and fourth product
lines, which do not overlap with those of DePuy Orthopaedics,            Kenichi Higashi, President
Inc. and Ortho Development Corporation, as quickly as possible.




                                                                                                                                                3
                           [   An Interview With Top Management                                                           ]

    A Roadmap for Medium-term Success




                                                            Kenichi Higashi, President
                                                            Japan Medical Dynamic Marketing, INC.



     Question >
     Japan MDM announced its new five-year medium-term management
     plan in January 2004. Please tell us the story behind the development
     of this plan.
     Answer >
     We deeply regret the fact that our results have fallen short of the expectations of stockholders and other investors
     over the past two fiscal years. In the fiscal year ended May 31, 2003, the EMF System, a strategic product for global
     expansion, suffered setbacks. Then in the fiscal year under review, we voluntarily withdrew our new trochanteric
     nail product from the market, which impacted sales and resulted in a lackluster performance on the whole. Taking
     this situation seriously, we formulated a new five-year medium-term management plan. Executives responsible for
     key strategies will explain the numerical targets of the plan in greater detail later. In drafting this plan, our deepest
     concern was to ensure that we would stay true to our guiding principle of “contributing to medical care,” and win
     back the trust of our stockholders and all other stakeholders.


     Question >
     Please summarize the main points of your new medium-term management
     plan.
     Answer >
     The new medium-term management plan runs through the May 2008 fiscal year. The plan positions these five
     years as a period for building the operating base needed to deliver consistent growth 10 to 15 years down the
     road, no matter what the business environment will be.
         Our three pillars of earnings are (1) trading functions; (2) R&D-driven manufacturing functions; and (3) global
     expansion. I’d like to take on new challenges in each of these areas.
         First, we will build on our existing customer relationships and marketing network to import and sell new
     orthopedic products in Japan. We plan to strengthen our trading functions by meeting the challenge of creating
     new marketing channels. Next, we will pursue the goal of becoming an R&D-driven manufacturer in step with our
     global expansion drive. Since Ortho Development Corporation is a major supplier of orthopedic devices to the U.S.
     market, we must market products overseas that do not overlap with their product development and sales activities.
     Capital investments and R&D will be key priorities for developing a steady stream of own-brand products.




4
                                                        19,500


                                                          The medium-term management
                                                          plan aims to see Japan MDM achieve
                                                          the following four primary numerical



Performance
                                                          targets:
                                                          (1) Increase consolidated net sales
                                                          to ¥19.5 billion, from ¥13.9 billion
                                                          in fiscal 2003.



Targets
                                                          (2) Generate sales of ¥16.5 billion
                                                          in Japan and ¥3.0 billion overseas,
                                                          mainly in North America.
                                                          (3) Hold on to a 25% share of the
Millions of yen                                           orthopedics trauma devices market
                                                          and increase our share of the joint
                                                          replacements market from 3% to 6%.
                                                          (4) Increase operating profit to ¥5.0
                                                          billion, from ¥4.0 billion in fiscal
                  13,900
                                                          2003.




                                                                            5,000


                                                         3,000
                                    4,000



                            500

                    Net    Overseas Operating    Net     Overseas           Operating
                   Sales    Sales    Profit     Sales     Sales              Profit




                       2003                         2008

                                                                                                  5
    Maintaining the Momentum of Our Domestic Sales Strategy




                                                            Kenichi Higashi, President
                                                            Japan Medical Dynamic Marketing, INC.



     Question >
     Please discuss the domestic orthopedics market and your sales strategy for
     products in that market.
     Answer >
     Japan’s orthopedic trauma devices market is worth approximately ¥38.5 billion, while the joint replacements and
     spinal fixation devices markets amount to approximately ¥96.0 billion. We can expect annual growth rates of 5% in
     the orthopedics market, despite slowing growth due to lower reimbursement prices under Japan’s National Health
     Insurance system.
         During the period covered by the medium-term management plan, we will expand our presence in the field of
     spinal fixation devices. These devices require greater attention to safety because they are applied near the spinal cord.
     With safety as a top priority, Japan MDM has established a team of specialists to oversee spinal fixation device opera-
     tions. We currently supply two categories of spinal fixation devices, and we intend to expand our lineup in the field.
         In our mainstay orthopedic trauma devices, we will apply the lessons learned from our recent experience with
     trochanteric nails to reinforce our product lineup. Together with suppliers, we will work to improve our structure so
     as to make sales less susceptible to the performance of individual products. Fiscal 2005 and subsequent years will
     see us undertake several product renewal projects that will help strengthen our sales base and fortify our position
     as the leading company in this field.
         Robust sales of joint replacement products are being recorded in Japan and North America. To take full
     advantage of this situation, we will strive to gain higher product evaluations in both markets. Japan MDM will make
     every effort to strengthen its presence in this field by introducing new materials and building stronger ties with
     large-scale users.


     Question >
     Please tell us about the sales of the EMF System, beds for medical care and
     other non-core products.
     Answer >
     We are facing difficult conditions both in Japan and overseas. Sales results have been less than satisfactory, and we
     think there are several reasons for this.
         The biggest single factor, I think, was that we lacked proper marketing experience both in Japan and overseas.
     Another important factor was that our product lineup was insufficient. Based on this analysis, we plan to separate
     respective marketing activities for orthopedics and medical devices. We are also establishing a dedicated sales team
     for medical devices. To expand our product lineup, we will strengthen the marketing efforts of this team, alongside
     own-brand products. Our plan is to actively introduce a product lineup that leverages our collective strengths.
         We will adopt a long-term view as we develop a system for providing medical devices that meets the needs of
     frontline medical practitioners.


6
                                                                 37.0%

                                2008

Sales Targets for Own-brand Products
  Own-brand products now represent 28.0% of our total sales.
  Our goal is to raise this figure to 37.0% by fiscal 2008. In
  order to reach our target, we will pour resources into the
  development and sale of spinal fixation devices and joint
  replacements.                                                  2003

                                                                        23.5%



                                                                                7
    Driving Our Domestic Marketing Strategy Forward




                                                             Itsuro Numata, Director
                                                             Japan Medical Dynamic Marketing, INC.



     Question >
     Please tell us about any new functions or organizations being established
     as you implement your aggressive sales strategy.
     Answer >
     We are taking steps to improve our sales as we pursue our sales strategy. There are four themes for improving our
     marketing system.
         First, we must create a sales structure with closer ties to medical institutions and medical practitioners. In Japan,
     we intend to reinforce the sales network we already have in place. Our network for large urban areas (Tokyo,
     Osaka, and Nagoya) has one salesperson for every 860,000 people. We want to improve this ratio to one salesperson
     for every 750,000 people. Our plan is to carry out more detailed follow-up activities.
         Secondly, we must reinforce our sales of medical devices by forming groups that specialize in neurosurgery and
     ICU-related medical devices. As we move to strengthen our marketing bases in large cities, we want to develop at
     least 10 salespersons into specialists in these types of medical devices. Currently, we are focusing on our EMF System
     and Cincinnati Sub-Zero’s Blanketrol® II. Here, we want to introduce third and fourth product lines to broaden our
     product offering. We also must obtain stronger clinical evaluations in order to form closer ties with medical institutions.
         Next, to support such a sales system, we will divide our marketing system into four marketing groups: orthope-
     dic trauma devices, joint replacements, spinal fixation devices, and medical devices. With this plan, we should be
     able to formulate more accurate sales and marketing strategies. In addition, we will deepen relationships with our
     strategic partner, DePuy Orthopaedics, Inc. and our subsidiary, Ortho Development Corporation, to help upgrade
     their products and related instruments, to facilitate the smooth launch of new products and raise customer satisfac-
     tion at medical institutions.
         Finally, we will take actions to enhance our product lineup, including the launch of products of other companies
     that do not overlap with Ortho Development Corporation’s product development in the field of spinal fixation
     devices. To accomplish this goal, we will establish a team of specialists to oversee spinal fixation device operations.
     Our target is to generate annual sales of at least ¥1.0 billion in spinal fixation devices.




8
       The most important aspect of our
       domestic sales strategy is to strengthen
       our sales system. We intend to increase
       our sales force from the current 150
       salespersons to 180, and secure 10
       specialists in medical devices. We also
       plan to form a team of specialists to
       oversee spinal fixation devices. Our aim
                                                  2008
       is to strengthen our sales networks by
       increasing our sales force and forming
       dedicated sales teams, and to build

2003   strong relationships with customers.




150                                               180
      Projected
       Increase
   in Salespersons

                                                         9
     Accelerating Our Overseas Marketing Strategy




                                                           Masao Okawa,
                                                           Managing Director, Japan Medical Dynamic Marketing, INC.
                                                           President and Chief Executive Officer, Ortho Development Corporation



      Question >
      The EMF System faced an uphill battle in the U.S. market in the previous
      year. How are EMF System sales currently trending?
      Answer >
      EMF System sales in the U.S. remain sluggish. However, evaluations of the EMF System remain high and progress
      is being made in persuading dealers in each region to take another look at the product. In addition, although sales
      have been low, a steadily growing number of medical institutions are using the product in surgery. The growing
      adoption of the EMF System is starting to lift sales of related disposable supplies.
          We also plan to hold workshops and take part in academic conferences to promote greater uptake of this product.


      Question >
      What specific strategies will Ortho Development Corporation implement to
      achieve its sales target of ¥3.0 billion by the May 2008 fiscal year?
      Answer >
      Ortho Development Corporation is currently performing very well in orthopedics, but sales have been sluggish in
      the neurosurgery field. However, generating ¥3.0 billion sales at Ortho Development Corporation in fiscal 2008
      should not be too difficult. We cannot set our hopes too high in neurosurgery, due to the lack of positive signs at
      present. However, we have reason to be optimistic in orthopedics. We will continue to target markets in three
      fields—hip-joint replacements, knee-joint replacements, and spinal fixation devices. Ortho Development Corpora-
      tion has achieved a measure of success in the knee-joint replacement market in the United States. Currently, we
      are in a position to introduce a succession of new hip-joint replacement and spinal fixation devices, and within the
      next several years, we will be able to operate in our three targeted orthopedic fields. Strengthening our product
      lineup will pave the way for us to expand our presence in the U.S. orthopedics market, which is estimated to be
      worth US$3.0 billion.
          Although our operations are currently limited to only a handful of regions because we are only marketing knee-
      joint replacements, we will be able to expand geographically as we deepen our product lineup.




10
Expanding Our U.S. Presence
                                 Japan MDM began full-fledged marketing efforts in the U.S. in
                                 the fiscal year ended May 31, 2002. The dark blue areas in the
                                 map below indicate states where we are already operating. The
                                 light blue areas indicate states where we plan to operate in the
                                 future. Ortho Development Corporation and Japan MDM have
                                 steadily developed a presence in states with relatively high con-
                                 centrations of seniors, such as Texas, Florida and Arizona.




  States currently covered
  States planned to be covered




                                                                                                     11
     Shifting Innovation into High Gear




                                                             Isamu Nakahira, Director
                                                             Japan Medical Dynamic Marketing, INC.



      Question >
      Please tell us about the roles of domestic and overseas units in product
      development.
      Answer >
      We plan to clearly establish areas of responsibility for product development on the basis of proximity to the largest
      markets for a given product category. More specifically, this will make Ortho Development Corporation responsible
      for product development in the orthopedics field. Japan MDM will play the central role in the medical devices field.
      Three themes are essential for success — moving ahead with a development system that fully reflects the needs of
      frontline medical practitioners and marketing activities; shortening development lead times; and developing appealing
      new products. We are setting our sights on marketing orthopedic products in Japan, alongside the U.S. Concur-
      rently, we will also develop medical devices for the U.S. market. All of this means that it is important for the product
      development divisions of Ortho Development Corporation and Japan MDM to understand each other’s activities,
      and it is essential that the marketing divisions in each company develop a closer relationship.
          In our future orthopedics development work in the U.S., our efforts in knee-joint replacements, hip-joint replacements
      and spinal fixation devices will be intensified. The current development program will be steadily accelerated.
          Regarding the development of medical devices in Japan, we will concentrate on various applications of the
      EMF System, including research of other applications beyond the neurosurgery field, and also improving beds for
      medical care.


      Question >
      Can you give us an overview of applications for the EMF System under
      development?
      Answer >
      The development of EMF System applications is a very important theme, especially for making our products more
      appealing to medical practitioners. In the field of neurosurgery, for example, these applications have facilitated the
      use of neurological endoscopes in surgery. Currently, the techniques are monopolar, although bipolar applications
      are being studied. While neurosurgery markets are limited, applications that can be used in other fields can be
      developed, enabling us to stimulate demand in an expanded range of fields. Currently, orthopedic surgery and
      urology applications are also being studied.




12
Priority Projects
The products in this table are ongoing or completed development projects at             Commercialized
Japan MDM and Ortho Development Corporation.                                            Filed for regulatory approval/certification
                                                                                        Under development




                                                     KASMTM (Knee Articulating Spacer Mold)
                                                     Application Target: Knee
                                                     Status: Commenced sales in North America in 2004



                                                     IBSTM Allograft
                                                     Application Target: Spine
                                                     Status: Commenced sales in North America in 2004



                                                     EnvisionTM Cervical Plate
                                                     Application Target: Spine
                                                     Status: Commenced sales in North America in 2004



                                                     Balanced KneeTM Revision Tibia
                                                     Application Target: Knee
                                                     Status: Commenced sales in North America in 2004



                                                     Cervical Allograft
                                                     Application Target: Spine
                                                     Status: Sales in North America scheduled to commence in 2005



                                                     EncompassTM Hip System
                                                     Application Target: Hip
                                                     Status: Sales in North America scheduled to commence in 2005



                                                     Balanced KneeTM Revision Femur
                                                     Application Target: Femur
                                                     Status: Sales in North America scheduled to commence in 2005



                                                     Integrated Spine System
                                                     Application Target: Spine
                                                     Status: Under joint development with the New York Hospital for Special Surgery




                                                                                                                                      13
     Looking to Form Alliances




                                                                 Kenichi Higashi, President
                                                                 Japan Medical Dynamic Marketing, INC.


        Question >
        Please explain your strategy for forming business alliances.
        Answer >
        The two pillars of Japan MDM’s operations are its trading and manufacturing functions. However, manufacturing
        involves product development, a process that is very time consuming. It is essential that our manufacturing func-
        tions are strengthened to make them a firm and dependable source of earnings. We also need to pursue and build
        alliances in order to strengthen our trading functions.
            Japan MDM has established the following guidelines for the formation of business alliances.
            • Restrict alliances to the medical field.
            • Within the medical field, position orthopedics and medical devices as priority areas, and consider areas in
             which synergies can be developed with existing businesses.
            • Consider alliances that will not hinder our manufacturing function.
            • Consider business fields with a potential market value of ¥1.0 billion or more.
            We plan to carefully consider specific alliances, focusing on those that have the potential to capture synergies.
            In February 2004, we concluded an exclusive agreement with Spine Next S.A. on the domestic sales of spinal
        fixation devices. This is an example of an alliance that fits our strategy. This agreement will give us a stronger product
        lineup of spinal fixation devices, an orthopedics field where we were a late entrant, and will raise our collective strengths
        in the orthopedics field.




14
                     Since 1981, Japan MDM has concluded
                     a series of five-year contracts with
                        DePuy Orthopaedics, Inc. to act as
                          its exclusive sales agent in Japan
                             for orthopedic trauma devices.
                              Japan MDM renews this contract                                      Since 1981, Japan MDM has had an
     DePuy                     every year to ensure a stable                                      alliance with Cincinnati Sub-Zero
Orthopaedics, Inc.             supply of products to the Japa-                                    Products, Inc. to import and sell body
                              nese market.                                                           temperature management products
                                                                                                       in Japan. These products are
                                                                                                        designed to maintain the body
                                                                                                         temperature of a patient
                                                                  Cincinnati Sub-Zero                    undergoing surgery.
                                                                     Products, Inc.




           Japan
      Medical Dynamic
                                                                                                                 In February 2004, Japan MDM
      Marketing, INC.                                                                                            concluded a contract with Spine Next
                                                                                                                 S.A. for the exclusive rights to sell, in
                                                                                                                    Japan, spinal fixation devices manu-
                                                                                                                       factured by this company.




                                                                                        Spine Next S.A.




            A Growing Network of Alliances

                                                                      Since 1994, Ortho Development
                                   Ortho Development
                                                                      Corporation, a majority-owned
                                      Corporation                     subsidiary, has played a key role in
                                                                     Japan MDM’s global business strat-
                                                                   egy. This includes the development
                                                                 and manufacture of joint replacements
                                                                 and spinal fixation devices for sale in
                                                                 the U.S. and export to Japan, as well as
                                                                 the sale of the EMF System in the U.S.


                                                                                                                                                             15
                                               [   Corporate Governance                                   ]




                      Director                                       President                                        Director
                   Yuichi Tamura                                  Kenichi Higashi                                 Itsuro Numata



     Director                             Managing Director                               Managing Director                           Director
Hiroshi Kusakabe                           Masao Okawa                                     Yasuki Ogawa                           Isamu Nakahira
    (Advisor)




            Japan MDM has a Board of Corporate Auditors that includes one standing auditor, and a C.P.A. with ample
            auditing experience to serve as an outside auditor. The corporate auditors attend Board of Directors’ meet-
            ings to monitor the performance of duties and business execution on the part of directors and executives.
            Management believes that this auditing function, which has been upgraded and reinforced, provides a
            corporate governance structure appropriate for Japan MDM. There are no conflicts of interest between the
            company and its outside directors in terms of personal, capital, or business relationships.
               The Board of Directors is the company’s highest decision-making body, following the general meeting of
            stockholders. The Board deliberates on corporate management strategy and other important matters affect-
            ing the company as a whole. The Board endeavors to make rapid and effective decisions in response to
            changes in the operating environment.
               Regarding systems for internal control, the Planning and Administration Department, which reports directly
            to the president, conducts periodic internal audits. The company is also taking actions to establish risk
            management, compliance, and internal checks and balances, including the appointment of a compliance
            officer at Management Headquarters.



 16
       [   Financial Section                  ]




                    Contents
           Selected Financial Summary    18
Management’s Discussion and Analysis of Operations 19
           Consolidated Balance Sheets   24
       Consolidated Statements of Income 26
  Consolidated Statements of Stockholders’ Equity 27
      Consolidated Statements of Cash Flows 28
  Notes to the Consolidated Financial Statements 29
        Report of Independent Accountants 37




                                                        17
                                             [    Selected Financial Summary                                                      ]
                                                           Japan Medical Dynamic Marketing, INC. and its Subsidiary




                                                                                                                                                   Thousands of
                                                                                                                                                    U.S. dollars
                                                                                              Millions of yen                                        (Note 1)
     Years ended May 31,                                   1999            2000             2001             2002           2003         2004         2004

     For the year:
     Net sales                                           ¥ 9,627         ¥10,901         ¥11,727            ¥12,658       ¥13,944       ¥13,736     $124,817
        Domestic                                            9,627          10,816          11,564           12,345         13,408        12,884      117,074
        Overseas                                                  –              85            163              313               536      852           7,743
     Cost of sales                                          2,710           2,729           3,020             3,154          3,398        3,386        30,772
     Gross profit                                           6,917           8,172           8,707             9,504        10,546        10,350        94,045
     SG&A expenses                                          4,565           4,999           5,168             6,255          6,478        6,637        60,306
     Operating profit                                       2,352           3,173           3,539             3,249          4,068        3,713        33,739
     Net income                                                964          1,479           1,768             1,706          1,886        2,042        18,551
     Cash flows from operating activities                         –            360             700              (539)             877     1,840        16,724
     Cash flows from investing activities                         –         1,442             (184)          (1,111)        (1,008)      (1,030)        (9,362)
     Cash flows from financing activities                         –        (1,822)            (660)           2,054           (288)        (369)        (3,353)
     Weighted-average number of
      shares issued (in thousands)                         10,788          11,269          14,038           16,848         18,527        18,524


     At year-end:
     Total assets                                        ¥15,745         ¥15,743         ¥19,430            ¥23,677       ¥23,487       ¥23,024     $209,213
     Current assets                                         8,592          10,472          12,014           15,536         16,250        16,355      148,613
     Current liabilities                                    6,606           6,100           7,116             9,685          6,303        4,901        44,531
     Long-term debt                                         5,244           2,665           1,440             1,762          4,838        5,145        46,749
     Stockholders’ equity                                   3,722           6,823           8,370             9,883        11,192        12,521      113,772
     Number of employees                                       307             314             361              406               403      416
        Japan MDM                                              251             278             307              337               342      352
        Ortho development                                       56               36              54              69                61       64
     Number of stockholders                                       –         1,807           3,028             3,796          6,133        7,553

                                                                                                                                                    U.S. dollars
                                                                                                      Yen                                            (Note 1)

     Per share (Note 2 (13)):
     Net income – primary                                ¥ 89.40         ¥131.25         ¥125.94            ¥101.26      ¥ 95.84        ¥106.38          $0.97
     Stockholders’ equity                                  365.54          583.28          596.11           586.67         598.24        672.11            6.11
     Cash dividends                                         15.00           18.00           18.00             20.00          25.00        25.00            0.23


     Ratios:
     Gross profit ratio (%)                                 71.85           74.97           74.25             75.08          75.63        75.35
     Operating profit ratio (%)                             24.44           29.11           30.18             25.67          29.17        27.03
     Net income ratio (%)                                   10.01           13.57           15.08             13.48          13.53        14.86
     Return on equity (%)                                   32.40           28.18           23.27             18.69          17.89        17.22

     Notes
     1: U.S. dollar figures have been calculated at the rate of ¥110.05=US$1, the approximate rate of exchange on May 31, 2004.
     2: Statements of cash flows were prepared effective from the fiscal year ended May 31, 2000.




18
   [   Management’s Discussion and Analysis of Operations                                                                                                        ]
                                                       Japan Medical Dynamic Marketing, INC. and its Subsidiary




Operating Results
Overview
       In the year under review, Japan’s medical sector saw the steady implementation of large-scale and far-reaching measures aimed at
       reforming the healthcare system. In this climate, curbs on medical spending were further tightened through, among other steps, an
       increase in co-payments required of patients and a revision of medical service fees in April 2004, which resulted in a reduction in
       reimbursement prices*1. With the full implementation of the amended Pharmaceutical Affairs Law in April 2005, there will also be
       a greater focus on post-marketing safety and quality control. This is anticipated to have a significant impact on the medical sector’s
       profit structure.
           In this environment, Japan MDM sought to reinforce its spinal fixation devices segment by concluding a contract with France-based
       Spine Next S.A. for the exclusive sale of this company’s products in Japan. Other steps were taken to upgrade Ortho Development
       Corporation’s product development and sales framework in the U.S. and the sales system in Japan. Meanwhile, problems with the
       recently launched trochanteric nails prompted the Company to voluntarily suspend sales of this product. As a consequence, the
       orthopedic trauma devices segment struggled. This had an impact on overall performance in the year under review, resulting in the first
       drop in net sales since Japan MDM listed on the Tokyo Stock Exchange.
           In the artificial joint replacements segment, proprietary products continued to sell well. U.S. consolidated subsidiary Ortho
       Development Corporation, responsible for developing and manufacturing these products, achieved profitable operations on a non-
       consolidated basis.
       *1: Set in accordance with Japan’s Pharmaceuticals Affairs Law, these prices represent the component of medical fees covered by the National Health Insurance
           (NHI) system that are reimbursed to medical institutions by the Japanese government.


Consolidated Performance
       Japan MDM’s net sales are derived from the sale of existing mainstay orthopedic trauma device products, mainly manufactured by U.S.-
       based DePuy Orthopaedics, Inc.; artificial joint replacements and spinal fixation devices manufactured by U.S. subsidiary Ortho Develop-
       ment Corporation; and products developed in-house such as medical beds and the EMF System.
           For fiscal 2004, ended May 31, 2004, net sales declined ¥208 million, or 1.5%, to ¥13,736 million (US$124,817 thousand).
       Japan MDM recorded lower overall sales of orthopedic trauma devices, which account for just under 70% of net sales. This reflected
       the voluntary withdrawal from the market of trochanteric nails, a promising new product, and a lull in demand for new products. Artificial
       joint replacements manufactured by Ortho Development Corporation continued to post steady growth, which offset the drop in sales
       of orthopedic trauma devices. As a result, sales of own-brand products as a percentage of net sales increased 4.5 percentage points
       from the previous fiscal year to 28.0%. Japan MDM aims to raise this percentage to 50% over the long term.



                            Net Sales by Product                                                  Share of Own-brand Products vs. Net Sales
                                  (Millions of yen)                                                                    (Millions of yen / %)


              15,000                                                                                  4,000                                          40



              12,000
                                                                                                      3,000                                          30


               9,000

                                                                                                      2,000                                          20

               6,000


                                                                                                      1,000                                          10
               3,000



                    0                                                                                      0                                         0
                            ’00 ’01 ’02 ’03 ’04                                                                    ’00 ’01 ’02 ’03 ’04
                           Orthopedic trauma devices                                                              Own-brand product net sales (left axis)
                           Joint replacements                                                                     Ratio of own-brand products to net sales (%)
                           Others                                                                                 (right axis)
                                                                                                                                                                       19
         Gross profit declined ¥196 million, or 1.9%, to ¥10,350 million (US$94,045 thousand). The gross profit ratio deteriorated 0.3 of
     a percentage point to 75.3%.
         Operating profit dropped ¥355 million, or 8.7%, to ¥3,713 million (US$33,739 thousand). Selling, general and administrative
     (SG&A) expenses increased ¥159 million, or 2.5% year on year. Notably, depreciation and amortization increased ¥178 million, due to
     a rise in medical equipment. Faced with declining sales, Japan MDM moved to curb variable expenses such as transportation, sales
     promotion, personnel and travel costs. As a result, a total reduction in expenses of ¥139 million was achieved.
         Other income, net, improved ¥547 million to ¥22 million (US$199 thousand). The main factor behind this improvement was
     foreign exchange gains of ¥492 million (US$4,468 thousand). This included a gain of ¥158 million arising from an exchange rate
     difference between accounts payable and the return of trochanteric nail products to inventories, and a gain of approximately ¥332
     million on foreign currency statement translation related to Ortho Development Corporation. The Company also booked a gain of ¥31
     million on the sale of investments in securities, due to the sale of shares in Orthovita, Inc. following the termination of Japan MDM’s
     contract with this company.
         As a result of the above, income before income taxes rose ¥192 million, or 5.4%, to ¥3,735 million (US$33,938 thousand). Net
     income increased ¥156 million, or 8.3%, to ¥2,042 million (US$18,551 thousand), and net income per share rose ¥10.54 to ¥106.38
     (US$0.97). For the year under review, Japan MDM paid a full-year dividend per share of ¥25.00 (US$0.23), representing a payout ratio
     of 23.5%. One of the Company’s management goals is to achieve a payout ratio of at least 30%.




         Overseas Sales vs. Share of Net Sales                                                 Operating Profit
                        (Millions of yen / %)                                                     (Millions of yen)


         1,000                                            10                        5,000



           800                                            8                         4,000



           600                                            6                         3,000



           400                                            4                         2,000



           200                                            2                         1,000



             0                                            0                             0
                    ’00 ’01 ’02 ’03 ’04                                                        ’00 ’01 ’02 ’03 ’04
                  U.S. (Ortho Development Corporation) (left axis)
                  Other (exports from Japan) (left axis)
                  Share of net sales (%) (right axis)
20
Segment Information
      Breakdown of Consolidated Sales
                                                                                                                   Millions of yen
      Years ended May 31,                                                                              2002             2003           2004
                        1
      Japan MDM*
        Orthopedic trauma devices                                                                    ¥ 9,478         ¥10,022         ¥ 9,234
        Joint replacements*2                                                                           1,893           2,578           2,813
        Spinal fixation devices                                                                          120              81              97
        Medical beds                                                                                       7              25              33
        High frequency surgical instruments (EMF)                                                        106              62              94
        Other medical devices                                                                            772             642             650
             Subtotal                                                                                 12,379          13,414          12,920
      Ortho Development Corporation*3
        Joint replacements                                                                                209             349            445
        Spinal fixation devices                                                                            45             144            343
        High frequency surgical instruments (EMF)                                                          20              32             28
        Other medical devices                                                                               2               4              –
             Subtotal                                                                                     278             530            816
                Total                                                                                ¥12,658         ¥13,944         ¥13,736
      *1 Sales derived from the domestic market and partly from exports to the U.S.
      *2 Imported from Ortho Development Corporation
      *3 Sold in the U.S.


          Total sales of orthopedic trauma devices declined ¥788 million, or 7.9%, to ¥9,234 million. This primarily reflected the voluntary
      suspension of sales of newly launched trochanteric nails, due to problems with these products. The market for orthopedic trauma
      devices in Japan is currently valued at around ¥40.0 billion. Although the sector is faced with a reduction in reimbursement prices due
      to healthcare system reforms, the market is anticipated to grow due to Japan’s ageing population. Japan MDM’s goal is to remain the
      industry leader with a market share of at least 25%.
          Total sales of joint replacements increased ¥331 million, or 11.3%, to ¥3,258 million. U.S. subsidiary Ortho Development Corpo-
      ration develops and manufactures these products for Japan MDM. Hip replacements continue to find growing acceptance, while knee
      replacements are also selling well in both Japan and the U.S. In this climate, Ortho Development Corporation launched a new product
      in the knee replacement field in fiscal 2004, called Revision Knee (Tibia). In Japan, the market for joint replacements is valued at some
      ¥80.0 billion. Despite being a relative latecomer to this market, Ortho Development Corporation is rapidly increasing its market share,
      making full use of Japan MDM’s existing sales network. Ultimately aiming to capture a 10% share of the market, Ortho Development
      Corporation is strengthening the research and development of new products.
          Total sales of spinal fixation devices almost doubled, increasing ¥215 million year on year to ¥440 million. Although there was no
      marked rise in sales in Japan, two new products developed by Ortho Development Corporation in the U.S., IBS™ and Cervical Plate,
      helped to boost sales by nearly ¥200 million.
          Total sales of high frequency surgical instruments increased ¥28 million, or 29.8%, to ¥122 million. In the domestic market, budget
      cuts at hospitals have delayed the approval of capital equipment spending for new systems, and this is limiting sales growth. However,
      with awareness of Japan MDM products clearly growing among physicians, the Company is steadily building its presence in the market.
      Japan MDM is also strengthening its position in overseas markets too, primarily by rebuilding its sales framework and reviewing its
      medical equipment sales agency network.




                                                                                                                                                  21
     Impact of Changes in Foreign Exchange Rates
           As a company that markets imported products procured from overseas manufacturers on a U.S.-dollar-denominated basis, exchange
           rate fluctuations have a significant bearing on Japan MDM’s operating results. Japan MDM also manufactures products in the U.S. at
           subsidiary Ortho Development Corporation, where all manufacturing costs are denominated in U.S. dollars.
               Japan MDM takes a conservative approach toward mitigating the risk of exchange rate fluctuations. Japan MDM concludes long-
           term forward foreign currency contracts and uses other hedging instruments to minimize the impact of foreign exchange fluctuations on
           the Company’s ability to meet sales forecasts. The average settlement exchange rate for fiscal 2004 was ¥94.08 to the U.S. dollar.
           Japan MDM has entered into forward foreign currency contracts for settlements involving about 80% of budgeted accounts payable for
           the fiscal year ending May 31, 2005, at the settlement exchange rate of ¥110 to the U.S. dollar. Forward foreign currency contracts
           covering about 70% of all budgeted accounts payable for the fiscal year ending May 31, 2006, at the average exchange rate of
           ¥104.00 have also been concluded.


     Financial Position and Liquidity
           As of May 31, 2004, total current assets were ¥16,355 million (US$148,613 thousand), an increase of ¥105 million, or 0.6% from a year
           earlier. Although the ¥1,473 million recorded in the previous year for forward exchange contracts and others*1 was no longer a factor in the
           year under review, cash on hand and in banks increased ¥499 million, to ¥1,270 million (US$11,541 thousand), while prepaid expenses
           and other increased ¥739 million, to ¥1,030 million, mainly due to the booking of accounts due for returned merchandise.
               As of May 31, 2004, property, plant and equipment totaled ¥5,286 million (US$48,037 thousand), an increase of ¥312 million, or
           6.3%, compared to a year earlier. This reflected a rise in tools, furniture and fixtures of ¥401 million, in line with business growth.
               Investments and advances were ¥464 million (US$4,216 thousand), down ¥825 million, or 64.0%, from a year earlier. This drop
           was mainly attributable to the absence of ¥764 million recorded for forward exchange contracts and others*1 in the previous year.
           Investment in securities declined ¥58 million, mainly due to the sale of shares in Orthovita, Inc. following the termination of Japan
           MDM’s contract with this company.
               As a result, total assets declined ¥463 million, or 2.0%, to ¥23,024 million (US$209,213 thousand) at the end of the year
           under review.
               As of May 31, 2004, total current liabilities were ¥4,901 million (US$44,531 thousand), down ¥1,402 million, or 22.2%, from a




                                  Net Income                                                                  Total Assets
                                  (Millions of yen)                                                           (Millions of yen)


                    2,500                                                                      25,000



                   2,000                                                                       20,000



                    1,500                                                                      15,000



                   1,000                                                                       10,000



                     500                                                                        5,000



                        0                                                                            0
                               ’00 ’01 ’02 ’03 ’04                                                         ’00 ’01 ’02 ’03 ’04




22
     year ago. The main reason was the absence of deferred gains on hedging instruments of ¥1,473 million*1 recorded in the previous
     year. Short-term bank borrowings and the current portion of long-term debt declined ¥314 million, to ¥2,108 million.
         Long-term debt increased ¥307 million, or 6.3%, to ¥5,145 million (US$46,749 thousand). Although bank borrowings fell ¥258
     million, to ¥4,023 million, notes payable for property, plant and equipment, mainly long-term payments for medical equipment,
     increased ¥590 million, to ¥1,122 million.
         Stockholders’ equity increased ¥1,329 million, or 11.9%, to ¥12,521 million (US$113,772 thousand). The increase in net income
     was the main factor. The stockholders’ equity ratio improved 6.7 percentage points to 54.4%. Stockholders’ equity per share was
     ¥672.11 (US$6.11), ¥73.87 more than at the previous fiscal year-end.
     *1 Recorded as unrealized gains on forward exchange contracts. Based on the application of hedge accounting, the same figure is recorded in both current assets
        and current liabilities and has no effect on earnings.


Cash Flows
     In the fiscal year ended May 31, 2004, operating activities provided net cash of ¥1,840 million (US$16,724 thousand), ¥963 million
     more than in the previous fiscal year. This mainly reflected efforts to minimize the increase in inventories, which was ¥1,007 million less
     than in the previous fiscal year, at ¥246 million, and a cash inflow of ¥27 million from an increase in accounts payable, compared to a
     cash outflow of ¥613 million due to a decrease in accounts payable in the previous year. This was due to steps to reduce payments for
     imported products, which had been a drain on funds until the previous fiscal year.
         Investing activities used net cash of ¥1,030 million (US$9,362 thousand), approximately on par with the level in the previous fiscal
     year. This mainly reflected an increase of ¥254 million for the purchase of property, plant and equipment to ¥1,067 million, partially
     offset by proceeds from sale of investments in securities of ¥79 million, due to the sale of shares in Orthovita, Inc. following the
     termination of Japan MDM’s contract with this company.
         Financing activities used net cash of ¥369 million (US$3,353 thousand), ¥81 million more than in the previous fiscal year. The net
     decrease in interest-bearing debt was ¥572 million, compared to a net increase of ¥83 million in the previous year, while proceeds
     from sale of property brought in installments totaled ¥1,104 million. Cash dividends were ¥464 million (US$4,205 thousand), ¥128
     million, or 38.1%, higher than fiscal 2003.
         As a result of the above, cash and cash equivalents increased ¥499 million to ¥940 million (US$8,542 thousand) as of May
     31, 2004.




     Stockholders’ Equity & Stockholders’ Equity Ratio                                                                Cash Flows
                            (Millions of yen / %)                                                                     (Millions of yen)


             15,000                                          100                                      2,000



             12,000                                          80
                                                                                                      1,000


              9,000                                          60

                                                                                                           0

              6,000                                          40


                                                                                                     -1,000
              3,000                                          20



                  0                                          0                                       -2,000
                         ’00 ’01 ’02 ’03 ’04                                                                      ’00 ’01 ’02 ’03 ’04
                       Stockholders’ equity (left axis)                                                         Cash flows from operating activities
                       Stockholders’ equity ratio (%) (right axis)                                              Cash flows from investing activities
                                                                                                                Cash flows from financing activities
                                                                                                                                                                       23
                                         [    Consolidated Balance Sheets                                                        ]
                                                       Japan Medical Dynamic Marketing, INC. and its Subsidiary
                                                                   As of May 31, 2003 and 2004




                                                                                                                                                  Thousands of
                                                                                                                                                   U.S. dollars
                                                                                                                         Millions of yen            (Note 1)
     ASSETS                                                                                                           2003            2004           2004

     Current Assets:
       Cash on hand and in banks                                                                                  ¥     771          ¥ 1,270       $ 11,541
       Trade receivables                                                                                               2,526           2,518          22,881
       Less: allowance for bad debts                                                                                      (8)               (5)           (47)
                                                                                                                       2,518           2,513          22,834
       Inventories (Note 3)                                                                                           10,923          10,994          99,902
       Deferred tax assets (Note 6)                                                                                     274                366         3,325
       Forward exchange contracts and others (Note 9)                                                                  1,473                 –               –
       Deferred losses on hedging instruments (Note 9)                                                                       –             182         1,658
       Prepaid expenses and other                                                                                       291            1,030           9,353
          Total current assets                                                                                        16,250          16,355        148,613




     Investments and Advances:
       Investment in securities (Note 4)                                                                                280                222         2,013
       Forward exchange contracts and others (Note 9)                                                                   764                  –               –
       Deferred losses on hedging instruments (Note 9)                                                                       –               2              19
       Other                                                                                                            245                240         2,184
                                                                                                                       1,289               464         4,216



     Property, Plant and Equipment (Less: Accumulated Depreciation):
       Buildings and structures                                                                                         979                920         8,364
       Machinery, equipment and vehicles                                                                                211                212         1,930
       Tools, furniture and fixtures                                                                                   1,550           1,951          17,729
       Construction in progress                                                                                          57                 31            285
       Land                                                                                                            2,177           2,172          19,729
                                                                                                                       4,974           5,286          48,037


     Deferred Tax Assets (Note 6)                                                                                       518                503         4,572


     Deferred Charges and Intangibles                                                                                   456                416         3,775
                                                                                                                  ¥23,487            ¥23,024       $209,213

     The accompanying notes are an integral part of the statements.




24
                                                                                        Thousands of
                                                                                         U.S. dollars
                                                               Millions of yen            (Note 1)
LIABILITIES AND STOCKHOLDERS’ EQUITY                        2003             2004            2004

Current Liabilities:
  Short-term bank borrowings                               ¥ 1,000       ¥       600     $    5,452
  Current portion of long-term debt (Note 5)                 1,422           1,508           13,703
  Accounts payable                                            778                971          8,825
  Income taxes payable                                        972            1,074            9,757
  Deferred gains on hedging instruments (Note 9)             1,473                  –               –
  Forward exchange contracts and others (Note 9)                   –             182          1,658
  Other current liabilities                                   658                566          5,136
    Total current liabilities                                6,303           4,901           44,531


Long-term Debt (Note 5)                                      4,838           5,145           46,749


Accrued Retirement Benefits (Note 7)                          390                456          4,142


Deferred Gains on Hedging Instruments (Note 9)                764                   –               –


Forward Exchange Contracts and Others (Note 9)                     –                1               19



Stockholders’ Equity
  Common stock                                               1,826           1,826           16,596
  Authorized: 37,728,000 shares at May 31, 2003 and 2004
  Issued: 18,533,116 shares at May 31, 2003 and 2004


  Additional paid-in capital                                 1,411           1,411           12,826
  Retained earnings (Note 13)                                7,818           9,286           84,376
  Unrealized gains on securities                               15                   9               82
  Adjustment on foreign currency statement translation        143                 12            102
                                                           11,213          12,544         113,982


  Less: Treasury stock                                        (21)               (23)          (210)
                                                           11,192          12,521         113,772
Contingent Liabilities (Note 10)
                                                           ¥23,487       ¥23,024         $209,213




                                                                                                         25
                                  [    Consolidated Statements of Income                                                                 ]
                                                           Japan Medical Dynamic Marketing, INC. and its Subsidiary
                                                                For the years ended May 31, 2003 and 2004




                                                                                                                                                    Thousands of
                                                                                                                                                     U.S. dollars
                                                                                                                          Millions of yen             (Note 1)
                                                                                                                       2003             2004           2004

     Net Sales (Note 11)                                                                                              ¥13,944          ¥13,736       $124,817

     Cost of Sales (Note 12)                                                                                            3,398            3,386          30,772
        Gross profit                                                                                                  10,546            10,350          94,045

     Selling, General and Administrative Expenses                                                                       6,478            6,637          60,306
        Operating profit                                                                                                4,068            3,713          33,739

     Other Income / (Expenses):
       Interest and dividend income                                                                                        4                   3             24
       Interest expense                                                                                                 (202)               (193)        (1,749)
       Foreign exchange gains                                                                                             35                 492          4,468
       Losses on disposal of inventory                                                                                  (175)                (55)          (499)
       Losses on write-down of inventory                                                                                 (28)               (215)        (1,951)
       Losses on sale/disposal of property and equipment, net                                                            (74)                (48)          (432)
       Losses on write-down of investment in securities                                                                   (8)                  –              –
       Losses on write-down of golf club membership                                                                      (16)                  –              –
       Amortization of unrealized net obligation of transition
         from adopting new accounting standard for retirement benefits                                                   (29)                (29)          (267)
       Gains on prior period adjustments                                                                                   –                  14            130
       Gains on sale of property, plant and equipment                                                                      –                   1              1
       Gains on sale of investments in securities                                                                          –                  31            284
       Other, net                                                                                                        (32)                 21            190
                                                                                                                        (525)                22             199


           Income before income taxes                                                                                   3,543            3,735          33,938

     Income Taxes (Note 6)
       Current                                                                                                          1,870            1,809          16,437
       Deferred                                                                                                          (213)            (116)         (1,050)
                                                                                                                        1,657            1,693          15,387


           Net income                                                                                                 ¥ 1,886          ¥ 2,042       $ 18,551


                                                                                                                                                     U.S. dollars
                                                                                                                                 Yen                  (Note 1)

     Per Share (Note 2 (13))
       Net income – primary                                                                                           ¥ 95.84          ¥106.38            $0.97
       Cash dividends                                                                                                   25.00            25.00             0.23
     Weighted Average Number of Shares Issued (in Thousands)                                                           18,527           18,524

     The accompanying notes are an integral part of the statements.


26
          [    Consolidated Statements of Stockholders’ Equity                                                                                  ]
                                                      Japan Medical Dynamic Marketing, INC. and its Subsidiary
                                                           For the years ended May 31, 2003 and 2004




                                                                                                                             Millions of yen
                                                                                                Number of                       Additional
                                                                                                 shares of       Common          paid-in         Retained
                                                                                              common stock         stock         capital         earnings

Balance at May 31, 2002                                                                        16,848,288         ¥1,826         ¥1,411             ¥6,378
   Net income for the year ended May 31, 2003                                                               –          –                –            1,886
   Cash dividends                                                                                           –          –                –            (336)
   Bonuses to directors and statutory auditors                                                              –          –                –            (110)
   Stock split (1.1 for 1)                                                                      1,684,828              –                –                –
Balance at May 31, 2003                                                                        18,533,116         ¥1,826         ¥1,411             ¥7,818
   Net income for the year ended May 31, 2004                                                               –          –                –            2,042
   Cash dividends                                                                                           –          –                –             (464)
   Bonuses to directors and statutory auditors                                                              –          –                –             (110)
Balance at May 31, 2004                                                                       18,533,116         ¥1,826          ¥1,411             ¥9,286



                                                                                                                    Thousands of U.S. dollars (Note 1)
                                                                                                Number of                       Additional
                                                                                                 shares of       Common          paid-in         Retained
                                                                                              common stock         stock         capital         earnings

Balance at May 31, 2003                                                                        18,533,116        $16,596        $12,826         $71,033
   Net income for the year ended May 31, 2004                                                               –          –                –           18,551
   Cash dividends                                                                                           –          –                –           (4,208)
   Bonuses to directors and statutory auditors                                                              –          –                –           (1,000)
Balance at May 31, 2004                                                                       18,533,116         $16,596       $12,826          $84,376


The accompanying notes are an integral part of the statements.




                                                                                                                                                              27
                             [    Consolidated Statements of Cash Flows                                                                            ]
                                                           Japan Medical Dynamic Marketing, INC. and its Subsidiary
                                                                For the years ended May 31, 2003 and 2004




                                                                                                                                                       Thousands of
                                                                                                                                                        U.S. dollars
                                                                                                                             Millions of yen             (Note 1)
                                                                                                                          2003              2004          2004

     Cash Flows from Operating Activities:
       Income before income taxes                                                                                     ¥ 3,543           ¥ 3,735         $ 33,938
       Adjustment for:
          Depreciation and amortization                                                                                      724                902         8,196
          Provision for accrued retirement benefits                                                                          106                 65           598
          Interest and dividend income                                                                                        (4)                (3)          (24)
          Interest expense                                                                                                   202                193         1,749
          Foreign exchange (gains) / losses                                                                                   70                (66)         (599)
          Losses on sale/disposal of property and equipment                                                                   74                 48           432
          Gains on sale of investments in securities                                                                           –                (31)         (284)
          Losses on write-down of investment in securities                                                                     8                  –             –
          Gains on sale of property, plant and equipment                                                                       –                 (0)           (1)
          Losses on write-down of golf-club membership                                                                        16                  –             –
          (Increase) / Decrease in trade receivables                                                                        (113)               197         1,788
          Increase in inventories                                                                                         (1,253)              (246)       (2,238)
          Increase in accounts receivable, other relating to returned merchandise                                              –               (911)       (8,280)
          Increase / (Decrease) in accounts payable                                                                         (613)                27           246
          Increase in unpaid bonuses to employees                                                                             26                  6            59
          Increase / (Decrease) in consumption tax payable                                                                   101                (56)         (505)
          Other                                                                                                               16               (180)       (1,631)
              Sub-total                                                                                                   2,903             3,680          33,444
        Interest and dividend income received                                                                                  7               2               20
        Interest expense paid                                                                                               (127)           (135)          (1,232)
        Income taxes paid                                                                                                 (1,906)         (1,707)         (15,508)
              Net cash provided by operating activities                                                                     877             1,840          16,724
     Cash Flows from Investing Activities:
         Transfer to time deposits                                                                                        (3,500)              –                –
         Transfer from time deposits                                                                                       3,500               –                –
         Purchase of investment securities in subsidiaries                                                                  (122)              –                –
         Purchase of property, plant and equipment                                                                          (813)         (1,067)          (9,699)
         Proceeds from sale of property, plant and equipment                                                                   4               6               54
         Purchase of intangible assets                                                                                      (137)            (55)            (495)
         Proceeds from sale of investments in securities                                                                       –              79              714
         Purchase of investment securities                                                                                  (200)              –                –
         Proceeds from unrealized gains on forward exchange contracts
          and other similar hedging instruments                                                                             260                    –              –
         Other                                                                                                                –                    7             64
              Net cash used in investing activities                                                                       (1,008)         (1,030)          (9,362)
     Cash Flows from Financing Activities:
         Proceeds from sale of property bought in installments                                                               434           1,104           10,035
         Payment of installment payables                                                                                    (453)           (435)          (3,958)
         Increase in short-term bank borrowings                                                                           (2,981)           (400)          (3,635)
         Proceeds from long-term debt                                                                                      5,000           1,500           13,630
         Repayment of long-term debt                                                                                      (1,937)         (1,672)         (15,193)
         Payments to acquire treasury stock                                                                                  (15)             (2)             (27)
         Cash dividends                                                                                                     (336)           (464)          (4,205)
              Net cash used in financing activities                                                                        (288)               (369)       (3,353)
     Effect of Exchange Rate Changes on Cash and Cash Equivalents                                                            32                 58             524
     Net Increase / (Decrease) in Cash and Cash Equivalents                                                                (387)               499          4,533
     Cash and Cash Equivalents at Beginning of Year                                                                         828                441          4,009
     Cash and Cash Equivalents at End of Year                                                                         ¥     441         ¥      940      $ 8,542
     The accompanying notes are an integral part of the statements.

28
        [     Notes to the Consolidated Financial Statements                                                                                              ]
                                                    Japan Medical Dynamic Marketing, INC. and its Subsidiary




1. Basis of Presenting the Consolidated Financial Statements
      The accompanying consolidated financial statements have been prepared from the accounts maintained by Japan Medical Dynamic Marketing, INC. (the
      “Company”) and its consolidated subsidiary (the “Companies”) in accordance with the provisions set forth in the Japanese Commercial Code (the
      “Code”) and the Securities and Exchange Law in conformity with accounting principles generally accepted in Japan, which are different in certain respects
      as to application and disclosure requirements of International Accounting Standards.
           Certain items presented in the consolidated financial statements submitted to the Director of the Kanto Finance Bureau in Japan have been
      reclassified for the convenience of readers outside Japan.
           The standards, procedures and practices to audit such financial statements are those generally accepted and applied in Japan.
           Amounts in U.S. dollars are included solely for the convenience of readers outside Japan. The rate of ¥110.05=U.S.$1, the rate of exchange on May
      31, 2004, has been used in translation. The inclusion of such amounts is not intended to imply that Japanese yen have been or could be readily
      converted, realized or settled in U.S. dollars at the rate or any other rate.

2. Summary of Significant Accounting Policies
 (1) Scope of Consolidation and Elimination
      The Company had only one subsidiary, Ortho Development Corporation as of May 31, 2003 and 2004. The consolidated financial statements include
      the accounts of the Company and its subsidiary at May 31, 2003 and 2004.
           In the year ended May 31, 2002, the Company purchased an additional 1,000,000 shares in its subsidiary. As a result, the ownership of the
      Company in its subsidiary was increased from 86.0 percent to 96.0 percent.

 (2) Elimination of Inter-company Accounts
      For the purposes of preparing the consolidated financial statements, all significant inter-company transactions, account balances and unrealized profits
      among the Companies have been entirely eliminated, and the portion attributable to minority interests is charged/credited to “Minority interests”.

 (3) Consolidated Statements of Cash Flows and Cash and Cash Equivalents
      Reconciliation of cash and cash equivalents of the consolidated statements of cash flows and account balances of the consolidated balance sheets
      is made as follows:

                                                                                                                                                        Thousands of
                                                                                                                           Millions of yen               U.S. dollars
                                                                                                                        2003            2004                2004
            Cash and bank deposits                                                                                      ¥ 771         ¥1,270             $11,541
            Time deposits with deposit term of over 3 months                                                             (330)          (330)             (2,999)
            Cash and cash equivalents                                                                                   ¥ 441         ¥ 940              $ 8,542


 (4) Inventories
      Merchandise and products are valued at lower of cost or market cost, cost being determined by the average method.
          Raw materials, work-in process and supplies are valued at cost, cost being determined by the average method.

 (5) Financial Instruments
     (a) Derivatives
      All derivatives are stated at fair value, with changes in fair value included in net profit or loss for the period in which they arise, except for derivatives that
      are designated as “hedging instruments” (see (c) Hedge Accounting).

     (b) Securities
      Securities held by the Company are classified as follows;
          Other securities for which market quotations are available are stated at fair value.
          Net unrealized gains or losses on these securities are reported as a separate item in the stockholders’ equity at a net-of-tax amount.
          Other securities for which market quotations are unavailable are stated at cost.

     (c) Hedge Accounting
      Gains or losses arising from changes in fair value of the derivatives designated as “hedging instruments” are deferred as an asset or liability and included
      in net profit or loss in the same period during which the gains and losses on the hedged items or transactions are recognized. In accordance with the
      exceptional measures, the Company does not record forward exchange contracts at market value but translates the underlying foreign currency denomi-
      nated accounts payable hedged by these contracts into yen using the contractual rate as long as the specific criteria are met. In accordance with the
      special measures, the Company does not record interest rate swap arrangements at market value but charges or credits net cash flows from the hedged
      interest-bearing borrowings as the arrangements satisfy the specific criteria for applying the accounting treatment.
           The derivatives designated as hedging instruments by the Company are forward exchange contracts, currency swap contracts, currency option
      contracts and interest rate swap contracts. The related hedged items are trade accounts payable and interest expenses on bank borrowings.


                                                                                                                                                                            29
              The Company has employed several derivative financial instruments for hedge purposes, such as foreign exchange forward contracts and other
         derivative contracts, in order to limit their exposures to losses resulting from adverse fluctuations in foreign currency exchange rates.
              The Company assesses the effectiveness of its hedging activities by reference to the accumulated gains or losses on the hedging instruments in
         comparison with the accumulated settlements on the related hedged items over the period from the commencement of the hedge to the end of the
         fiscal year. As an exception to the above, the Company does not assess the hedge effectiveness of interest rate swaps, which is accounted for in
         accordance with the special treatment measures for hedge accounting.

     (6) Property, Plant and Equipment
         Property, plant and equipment are stated at cost. Depreciation is computed on the declining-balance method over the estimated useful lives of assets.
             The range of useful lives is as follows:

             Buildings and structures                   6 to 65 years
             Machinery, equipment and vehicles          5 to 17 years
             Tools, furniture and fixtures              2 to 15 years

     (7) Accounting Standard for Impairment of Fixed Assets
         On August 9, 2002, the Business Accounting Council in Japan issued “Accounting Standard for Impairment of Fixed Assets”. The standard requires that
         fixed assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be
         recoverable. An impairment loss shall be recognized in the income statement by reducing the carrying amount of impaired assets or a group of assets to
         the recoverable amount to be measured as the higher of net selling price and value in use.
              The standard shall be effective for fiscal years beginning April 1, 2005. However, an earlier adoption is permitted for fiscal years beginning April 1,
         2004 and for fiscal years ending between March 31, 2004 and March 30, 2005.
              The Company has not yet applied this new standard. However, the management believes that an application of the new standard would not have
         significant impact on the Company’s consolidated financial statements.

     (8) Foreign Currency Translation
         All assets and liabilities of the foreign subsidiary are translated into Japanese yen at the exchange rates prevailing at the balance sheet date and the
         stockholders’ equity at the beginning of the year is translated into Japanese yen at the historical rates.
              Differences in yen amounts arising from the use of different rates are presented as “foreign currency translation adjustments” in the stockholders’
         equity section.

     (9) Accrued Retirement Benefits
         Effective from the year ended May 31, 2001, the Company and its subsidiary adopted the new Japanese accounting standard for retirement benefits.
              As of May 31, 2001 the balance of “Accrued Retirement Benefits” represents the estimated present value of projected benefit obligations in excess
         of the fair value of the plan assets except that, as permitted under the new accounting standard, the unrecognized transition amount arising from adopting
         the new accounting standard of ¥146 million at June 1, 2000 (the beginning of the year) is amortized on a straight-line basis over 5 years, and
         unrecognized actuarial differences are amortized on a straight-line basis over the period of 10 years from the next year in which they arise.
              The Company has provided for the accrued cost of retirement benefits payable to directors and statutory auditors it would be required to pay, if all
         eligible directors and statutory auditors had retired at the balance sheet date.

     (10) Income Taxes
         Income taxes are determined using the asset and liability approach, where deferred tax assets and liabilities are recognized for temporary differences
         between the basis of assets and liabilities and their reported amount in the financial statements.

     (11) Amortization
         Amortization of deferred charges is computed on the straight-line method. Research and development costs and new share expenses are charged to
         income when incurred.

     (12) Allowance for Bad Debts
         Allowance for bad debts is provided for in an amount that is deemed sufficient to cover estimated future losses.

     (13) Net Income and Dividends per Share
         Net income per share of common stock is based upon the weighted average number of shares of common stock outstanding during each year
         appropriately adjusted for a subsequent stock-split, if any. Cash dividends per share shown for each period in the accompanying consolidated statements
         of income represent dividends declared as applicable to the respective periods.

     (14) Accounting for Consumption Tax
         Consumption tax is imposed at the flat rate on all domestic consumption of goods and services (with certain exemptions). The consumption tax imposed
         on the Company’s sales to customers is withheld by the Company at the time of sale and is subsequently paid to the national government. The
         consumption tax withheld upon sale is not included in the amount of “Net Sales” and the consumption tax paid by the Company on the purchases of
         goods and services from vendors is not included either in the amounts of costs and expenses in the accompanying consolidated statements of income.
         The net balance of consumption tax withheld and paid is included in “Consumption tax payable” in the accompanying consolidated balance sheets.



30
3. Inventories
      Inventories at May 31, 2003 and 2004 consisted of the following:

                                                                                                                                             Thousands of
                                                                                                              Millions of yen                 U.S. dollars
                                                                                                           2003            2004                 2004
          Merchandise                                                                                    ¥ 9,935         ¥10,268              $93,311
          Products                                                                                           586             294                2,667
          Raw materials                                                                                      206             268                2,433
          Work-in-process                                                                                    196             164                1,491
                                                                                                         ¥10,923         ¥10,994              $99,902


4. Investments in Securities
      A comparison of the aggregate cost and fair value of other securities for which market quotations are available at May 31, 2004 was as follows:

                                                                                                                    Millions of yen
                                                                                                                   At May 31, 2004
                                                                                                              Gross               Gross
                                                                                                            unrealized          unrealized         Fair
                                                                                                Cost          gains               losses          value
          Other securities for which market quotations are available—
            Equity securities                                                                     ¥6               ¥15            ¥–               ¥21
                                                                                                  ¥6               ¥15            ¥–               ¥21


                                                                                                              Thousands of U.S. dollars
                                                                                                                   At May 31, 2004
                                                                                                              Gross               Gross
                                                                                                            unrealized          unrealized         Fair
                                                                                                Cost          gains               losses          value
          Other securities for which market quotations are available—
            Equity securities                                                                    $51           $140                $–             $191
                                                                                                 $51           $140                $–             $191


          Other securities sold during the years ended May 31, 2003 and 2004 were as follows:

                                                                                                                         Carrying amount
                                                                                                                                             Thousands of
                                                                                                              Millions of yen                 U.S. dollars
                                                                                                          2003              2004                 2004
          Proceeds from sales                                                                                ¥–                 ¥79               $714
          Gain on sale                                                                                       ¥–                 ¥31               $284
          Loss on sale                                                                                       ¥–                 ¥ –               $    –

          Other securities for which market quotations are unavailable at May 31, 2003 and 2004 were as follows:

                                                                                                                         Carrying amount
                                                                                                                                             Thousands of
                                                                                                              Millions of yen                 U.S. dollars
                                                                                                          2003              2004                 2004
          Equity securities                                                                               ¥202              ¥201                $1,822
          Total                                                                                           ¥202              ¥201                $1,822




                                                                                                                                                             31
     5. Long-term Debt

           Long-term debt at May 31, 2003 and 2004 consisted of the following:

                                                                                                                                              Thousands of
                                                                                                                    Millions of yen            U.S. dollars
                                                                                                                2003           2004              2004
               Long-term bank borrowings                                                                       ¥ 5,703        ¥ 5,531          $ 50,259
               Notes payable for property, plant and equipment                                                     532          1,122            10,193
               Other                                                                                                25              –                 –
                                                                                                                6,260           6,653            60,452
               Less: current portion of long-term debt                                                         (1,422)         (1,508)          (13,703)
                                                                                                               ¥ 4,838        ¥ 5,145          $ 46,749


               The aggregate annual maturities of long-term bank borrowings at May 31, 2004 were as follows:

                                                                                                                              Millions of     Thousands of
               Years ending May 31,                                                                                               yen          U.S. dollars
               2005                                                                                                            ¥1,508           $13,703
               2006                                                                                                               773             7,024
               2007                                                                                                               250             2,272
               2008                                                                                                             3,000            27,260
                                                                                                                               ¥5,531           $50,259

     6. Income Taxes

           Income taxes in Japan applicable to the Company for the years ended May 31, 2003 and 2004 consisted of corporate income tax (national), enterprise
           tax (local) and resident income taxes (local) at the approximate rates indicated as follows:

                                                                                                                                Rates on taxable income
                                                                                                                               2003             2004
               Corporate income tax                                                                                           30.00%            30.00%
               Enterprise tax                                                                                                 10.08             10.08
               Resident income taxes                                                                                           6.21              6.21
                                                                                                                              46.29%            46.29%
               Statutory tax rate in effect to reflect the deductibility of enterprise tax when paid                          42.05%            42.05%


              Following the enactment of the Law to Partially Amend the Local Tax Law (Law No.9, 2003) on March 31, 2003, in the fiscal year ended May 31,
           2003 the tax rate applicable to temporary differences expected to be settled by May 31, 2004 is 42.05%, while a tax rate of 42.18% is applied to
           temporary differences expected to be settled thereafter.




32
         As of May 31, 2003 and 2004, significant components of deferred tax assets and liabilities consisted of the following:

                                                                                                                                          Thousands of
                                                                                                                Millions of yen            U.S. dollars
                                                                                                             2003            2004            2004
         Deferred tax assets (current):
           Accrued enterprise taxes                                                                         ¥ 87             ¥ 95            $ 865
           Accrued bonus to employees                                                                        104              127             1,150
           Write-down of inventory                                                                             –               58               529
           Unrealized profits in inventories                                                                  33               22               201
           Accrued expenses                                                                                    6               20               180
           Supplies for research and development                                                              12               14               125
           Other                                                                                              34               45               414
                Total deferred tax assets (current)                                                           276                 381         3,464
         Deferred tax liabilities (current)                                                                     (2)                 (1)          (9)
         Deferred state taxes in an overseas subsidiary                                                          –                 (14)        (130)
         Net deferred tax assets (current)                                                                    274                 366         3,325

         Deferred tax assets (noncurrent):
           Net operating loss carryforward in an overseas subsidiary                                          414                 299         2,721
           Accrued retirement benefits                                                                        140                 174         1,585
           Research and development expenses in an overseas subsidiary                                         83                  74           671
           Losses on write-down of golf club membership                                                        42                  43           387
           Other                                                                                               33                  19           176
         Less: Valuation allowance                                                                            (92)                  –             –
                Total deferred tax assets (non-current)                                                       620                 609         5,540

         Deferred tax liabilities (non-current):
           Unrealized revaluation gains in assets held by an overseas subsidiary                                (9)                 (6)         (60)
           Accelerated depreciation                                                                            (82)                (94)        (850)
           Unrealized gains on securities                                                                      (11)                 (6)         (58)
                Total deferred tax liabilities                                                               (102)                (106)        (968)
                Net deferred tax assets (non-current)                                                         518                 503         4,572
                Net deferred tax assets                                                                     ¥ 792            ¥ 869           $7,897


         As of May 31, 2003 and 2004, reconciliation of the statutory tax rate and the effective income tax rate were as follows:

                                                                                                                            2003            2004
         Statutory tax rate                                                                                                42.05%           42.05%
         Increase (decrease) in taxes resulting from permanent differences                                                  2.90             2.87
         Other                                                                                                              1.83             0.42
              Effective income tax rate                                                                                    46.78%           45.34%


7. Accrued Retirement Benefits and Pension Plan

     The reserve for retirement benefits as of May 31, 2003 and 2004 is analyzed as follows:

                                                                                                                                          Thousands of
                                                                                                                Millions of yen            U.S. dollars
                                                                                                             2003             2004           2004
         Projected benefit obligations                                                                       ¥380             ¥449           $4,083
         Unrecognized difference arising from change in accounting for retirement benefits                    (58)             (29)            (266)
         Unrecognized net actuarial gain or loss                                                               46               19              173
         Reserve for retirement benefits                                                                     ¥368             ¥439           $3,990




                                                                                                                                                          33
                The accrued retirement benefits account on the consolidated balance sheets includes the following accrued cost of retirement benefits payable to
           directors and statutory auditors.

                                                                                                                                                            Thousands of
                                                                                                                               Millions of yen               U.S. dollars
                                                                                                                            2003              2004              2004
               Accrued cost of retirement benefits payable to directors and statutory auditors                               ¥22                 ¥17             $152

               Net expense related to retirement benefits for the years ended May 31, 2003 and 2004 were as follows:

                                                                                                                                                            Thousands of
                                                                                                                               Millions of yen               U.S. dollars
                                                                                                                            2003              2004              2004
               Service cost                                                                                                ¥ 63                  ¥59             $539
               Interest cost                                                                                                 10                   10               86
               Amortization of difference arising from change in accounting in retirement benefits                           29                   29              267
               Amortization of unrecognized net actuarial gain or loss                                                        4                   (4)             (39)
               Other                                                                                                          1                    2               23
                                                                                                                           ¥107                  ¥96             $876


               Assumptions used in calculation of the above information were as follows:

                                                                                                                              2003                       2004
               Discount rate                                                                                                          2.5%                      2.0%
               Method of attributing the projected benefits to periods of service                                       Straight-line basis       Straight-line basis
               Amortization of difference arising from change in accounting in retirement benefits                                  5 years                   5 years
               Amortization of unrecognized actuarial differences                                                                 10 years                   10 years

     8. Finance Leases

           The Company and its subsidiary have various operating lease agreements. Certain key information on such lease contracts of the Company and its
           subsidiary for the years ended May 31, 2003 and 2004 was as follows:

                                                                                                                                                            Thousands of
                                                                                                                               Millions of yen               U.S. dollars
                                                                                                                            2003              2004              2004
               The scheduled maturities of future lease rental payments on such lease contracts
                as of May 31, 2003 and 2004 were as follows:
                 Due within one year                                                                                         ¥23                 ¥13             $119
                 Due over one year                                                                                            26                  15              133
                                                                                                                             ¥49                 ¥28             $252


     9. Information on Derivatives

       (1) Company’s Policy, Transactions and Purpose of Derivative Transactions
           The Company uses derivative financial instruments, which comprise principally of foreign exchange forward contracts and currency swap transactions, to
           reduce its exposure to market risks from fluctuations in foreign currency exchange rates on payables denominated in foreign currencies. The Company
           does not hold or issue derivative financial instruments for trading purposes. The Company has entered into the forward exchange contracts as a hedge
           against transactions in foreign currencies. The foreign exchange forward contracts are used by the Company to minimize exposure and to reduce risk from
           exchange rate fluctuations in the ordinary course of its operations.
                All derivatives are stated at fair value with changes in fair value included in net profit or loss for the period in which they arise, except for derivatives
           that are designated as “hedging instruments” (see 2(5)(c) Hedge Accounting).

       (2) Risk of Transactions
           The derivative transactions have market risks associated with market price volatility. Although the Company may be exposed to losses in the event of
           nonperformance by counterparties or currency fluctuations, it does not anticipate significant losses from the arrangements described above.

       (3) Management of Transaction
           The Company has internal rules for derivative transactions. The derivative transactions of the Company have been executed and controlled by the finance
           and accounting department, which ensures checks and balances under internal rules. In addition, the status of derivative transactions and necessary
           countermeasures have been reported to and discussed at ordinary meetings of the Board of Directors on a monthly basis.

34
10. Contingent Liabilities

       The Company was contingently liable for trade notes discounted by banks in the aggregate amount of ¥2,452 million (US$22,282 thousand) at May
       31, 2004.

11. Segment Information

  (1) Geographical Segment Information
       Geographical segment information for the years ended May 31, 2003 and 2004 is summarized as follows:

                                                                     For the year ended May 31, 2003
                                                                              Millions of yen
                                               Sales to       Inter-
                                               outside      segment        Total      Operating   Operating
                                              customers       sales        sales      expenses     profit        Assets
           Geographical Segment
             Japan                             ¥13,414      ¥       4    ¥13,418       ¥ 8,950        ¥4,468    ¥24,075
             North America                         530          1,095      1,625         1,937          (312)     2,422
                Total                            13,944         1,099     15,043        10,887         4,156     26,497

              Elimination of inter-segment
               sales/profit or common asset            –       (1,099)     (1,099)      (1,011)          (88)     (3,010)
                Consolidated total             ¥13,944      ¥       –    ¥13,944       ¥ 9,876        ¥4,068    ¥23,487


                                                                                                                                  For the year ended
                                                                    For the year ended May 31, 2004                                 May 31, 2004
                                                                              Millions of yen                                   Thousands of U.S. dollars
                                               Sales to       Inter-
                                               outside      segment        Total      Operating   Operating                    Operating
                                              customers       sales        sales      expenses     profit        Assets         profit          Assets
           Geographical Segment
             Japan                             ¥12,920     ¥        6    ¥12,926      ¥ 9,001      ¥3,925       ¥23,297         $35,666      $211,697
             North America                         816          1,283      2,099        2,087          12         2,682             105        24,372
                Total                           13,736          1,289     15,025       11,088          3,937     25,979          35,771        236,069

              Elimination of inter-segment
               sales/profit or common asset            –       (1,289)    (1,289)       (1,065)        (224)     (2,955)          (2,032)      (26,856)
                Consolidated total             ¥13,736     ¥        –    ¥13,736      ¥10,023      ¥3,713       ¥23,024         $33,739      $209,213


  (2) Industrial Segment Information and Overseas Sales Information
       Industrial segment information and overseas sales information for the years ended May 31, 2003 and 2004 are not disclosed, because the Companies
       have one segment only and neither net sales of overseas subsidiary nor overseas sales of the Companies are material (less than 10% of the consolidated
       net sales amount).




                                                                                                                                                                35
     12. Related Party Information
           Material transactions of the Company with its related companies and individuals, excluding transactions with its consolidated subsidiary which are
           eliminated in the consolidated financial statements and other than those disclosed elsewhere in these financial statements, for the years ended May 31,
           2003 and 2004, were as follows:

                                                              As of May 31, 2004                                           Millions of yen
                                                                                          Equity
                                                                                        ownership
                                                                                        percentage                                    Volume of transactions made
               Name of related company/          Paid-in              Principal           by the          Description of the           in the year ended May 31,
               individual                        capital              business           Company        Company’s transactions          2003             2004

               DOLF MAEJIMA                                      Production of
                CO., LTD.                       ¥10 million      metal materials            –          Purchase of products                  ¥3         ¥10

               The terms and conditions on the above transactions are the same as those of arm’s-length transactions.
               The account balances arising from these related party transactions shown above are none or nominal, if any, at May 31, 2003 and 2004.

     13. Subsequent Event

       (1) Appropriation of Retained Earnings
           The stockholders’ meeting of the Company held on August 20, 2004 approved the payment of cash dividends in the aggregate amount of ¥464 million
           (US$4,208 thousand) (¥25.00 per share) to stockholders of record as of May 31, 2004 and the payment of directors’ bonuses in the aggregate amount
           of ¥71 million (US$645 thousand).

       (2) Stock Option Plan
           The Company has adopted a stock option plan pursuant to the provisions of Article 280-20, 21 of the Commercial Code of Japan.
                It was approved by the stockholders at the general meeting held on August 20, 2004 and the plan grants options to purchase shares of common
           stock of the Company during the period from September 1, 2006 to August 31, 2008 to directors and employees of the Company and its subsidiary.
                The maximum number of share options is 550,000 and the exercise price of the options is determined at the average market quotation during the
           preceding month of option granting, subject to certain adjustment.




36
                [   Report of Independent Accountants                                                   ]




The Board of Directors and shareholders of
Japan Medical Dynamic Marketing, INC.


We have audited the accompanying consolidated balance sheets of Japan Medical Dynamic Marketing, INC. and its subsidiary
as of May 31, 2003 and 2004, and the related consolidated statements of income, stockholders’ equity, and cash flows for the
years then ended, all expressed in Japanese yen. These consolidated financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.


We conducted our audits in accordance with auditing standards, procedures and practices generally accepted and applied in
Japan. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consoli-
dated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presen-
tation. 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 Japan Medical Dynamic Marketing, INC. and its subsidiary as of May 31, 2003 and 2004, and the consoli-
dated results of their operations and their cash flows for the years then ended in conformity with accounting principles and
practices generally accepted in Japan.


The amounts expressed in U.S. dollars, which are provided solely for the convenience of the reader, have been translated on the
basis set forth in Note 1 to the accompanying consolidated financial statements.




ChuoAoyama PricewaterhouseCoopers


Tokyo, Japan
August 25, 2004




                                                                                                                                     37
                                   [    Investor Information                                  ]
                                                      As of May 31, 2004




     Stock listing:            Tokyo Stock Exchange (First Section, Ticker Code: 7600)

     Transfer agent:           The Chuo Mitsui Trust & Banking Company, Limited

     Common stock:             Authorized:             37,728,000 shares
                               Issued:                 18,533,116 shares

                               * Japan MDM conducted a 1.1-for-1 stock split on July 22, 2002, resulting in an increase in common stock
                                   outstanding from 16,848,288 shares to 18,533,116 shares.

     Number of stockholders:   7,553

     Major stockholders:
                                                                                                       Stockholdings          Voting rights
                               Stockholder                                                                  (Shares)                   (%)
                               The Master Trust Bank of Japan, Ltd. (Trust Account)                      1,994,800                 10.82
                               Japan Trustee Services Bank, Ltd. (Trust Account)                         1,466,000                   7.95
                               Takashi Watanabe                                                         1,444,800                    7.84
                               Yasuo Watanabe                                                           1,012,064                    5.49
                               Motohiro Shimazaki                                                          914,102                   4.96
                               The Nomura Trust and Banking Co., Ltd. (Trust Account)                      432,800                   2.34
                               I.T.T. Co., Ltd.                                                            396,000                   2.14
                               Hiroshi Kusakabe                                                            390,529                   2.11
                               Trust & Custody Services Bank, Ltd. (Pension Tokkin Account)                390,500                   2.11
                               The Chase Manhattan Bank, NA London                                         343,800                   1.86




     Stock price and trading volume on the Tokyo Stock Exchange

                                                                                                                                      (¥)
                                                                                                                                      6,000
                                                                                                                           High
                                                                                                                           Low
                                                                Stock Price

                                                                                                                                      4,000



                                       1.2 for 1
                                       stock split
       (Shares)                                                   1.1 for 1                                                           2,000
     2,000,000                                                    stock split


     1,500,000
                                                             Trading Volume                                                           0

     1,000,000


      500,000


             0

                  2000      2001                         2002                          2003                            2004

38
                                 [    Corporate Data                         ]
                                               As of May 31, 2004




Company name:              Japan Medical Dynamic Marketing, INC.

Address:                   12-2, Ichigayadaimachi, Shinjuku-ku, Tokyo 162-0066, Japan

Phone:                     +81-3-3341-6545

Fax:                       +81-3-3341-6752

URL:                       http://www.jmdm.co.jp/

Board of Directors and     PRESIDENT:                     Kenichi Higashi
 Corporate Auditors:       MANAGING DIRECTORS:            Masao Okawa
                                                          Yasuki Ogawa
                           DIRECTORS:                     Yuichi Tamura
                                                          Itsuro Numata
                                                          Isamu Nakahira
                                                          Hiroshi Kusakabe (Advisor)
                           STANDING AUDITOR:              Sonoo Ichikawa
                           AUDITORS:                      Takeo Suzuki
                                                          Shuzo Ohara
                                                          Akira Nozaki
                                                          (As of August 20, 2004)


Number of employees:       416 (Consolidated)

Established:               May 28, 1973

Capital:                   ¥1,826 million

Business activities:       • Import and sale of medical devices
                           • Development, manufacture and sale of domestic medical products
                           • Promotion of medical products to medical professionals and major hospitals throughout Japan
                           • Provision of training and services to local distributors

Major overseas partners:   DePuy Orthopaedics, Inc. (U.S.)
                           Cincinnati Sub-Zero Products, Inc. (U.S.)
                           Spine Next S.A. (FRANCE)

Subsidiary:                Ortho Development Corporation
                           12187 South Business Park Drive, Draper, Utah 84020, USA
                           Phone: +1-800-429-8339, +1-801-553-9991
                           Fax: +1-801-553-9993
                           E-mail: info@orthodevelopment.com
                           URL: http://www.odev.com

For further information,   Corporate Strategy Department
 please contact:           Japan Medical Dynamic Marketing, INC.
                           Phone: +81-3-3341-6705
                           Fax: +81-3-3341-6673


                                                                                                                           39
This annual report is printed on recycled paper.
                             Printed in Japan

				
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