Preliminary results for the year ended 30 June 2004

Summary
A landmark year

• Orthopaedic Instruments
• 2nd half Sales up 52% on first half of 2003/04
• New factory completed and fully functional from January 2004
• Productivity and orders hit record levels.
• Drug Delivery Systems
  • Major collaboration agreement signed with a leading pharma company
  • Extension of markets into pet animals with collaboration with Dechra
  • Sales of existing needle-free devices growing also up 52% on first half
  • SQ-Pen now being launched worldwide through 12 Distributors

Chairman’s Statement
A year of considerable progress

During the year under review we have moved into our new manufacturing facility and further invested in new drug delivery systems. In addition, we have signed some agreements with pharmaceutical companies which are expected to have a highly material effect on the prospects for the drug delivery division. We have also raised around £2.3m before expenses which ensures that the Group has adequate financial resources to complete its investment programme. The level of investment has been modest by industry standards but significant in terms of achievement.

The level of demand for our orthopaedic products has enabled us to take full advantage of an increase in manufacturing capacity resulting in second half sales being 52% up on the first half of the 2003/4 year. The prospects for Eurocut are excellent as the market continues to be driven by ever more complex systems which necessitates a level of skill and expertise that few companies in the world possess. Eurocut continues to be at the forefront of the development of new systems and we are confident of continuing progress in this area. I would like to place on record my thanks to all our employees at Eurocut for their hard work in achieving such an increase in production in the last six months

The year under review has also been tremendously exciting and full of achievement for our drug delivery division. Clearly the deal with a global pharmaceutical company has a dramatic effect on the credibility of our technology and development capability but also on the levels of income we can expect going forward. It is a great tribute to the team at The Medical House. Our record of success is quite remarkable, particularly given the relatively modest sums of money we have had at our disposal. I am sure I speak for all shareholders by congratulating Ian Townsend and his team on their achievements in taking the Group from a standing start to their current position in the marketplace.

In addition to the global pharma deal, we have also signed a collaboration agreement with Dechra Pharmaceuticals in the pet animal market and together with the agreement to supply Biopartners with the SQ-Pen, the future looks very encouraging. Shareholders will have observed that we have been signing overseas distributors on a regular basis which all adds to the prospects for the drug delivery division going forward. Due to the increasing levels of activity in this division we are now bringing in additional personnel, particularly in areas such as regulatory and quality which are so important to the pharmaceutical industry.

As shareholders will recall from my statement last year we have not been able to commit significant resources to both drug delivery devices and the Hyperlyser breath test and we have consequently been seeking a partner to assist with the development of the Hyperlyser technology. Although we are in discussion with potential partners, at this moment in time an agreement has not been concluded. In this context, and in view of the uncertainty surrounding the value recoverable from the Hyperlyser, the Board has taken the decision to make full provision against the carrying value of the costs of acquiring and developing this device.

Once again I would like to invite all shareholders to attend the Annual General Meeting which will be held at our superb new premises and we would very much enjoy providing a guided tour to all who are interested. The Annual General Meeting will be held on 29 October 2004.

Results
Overall, the Group reported an operating loss before interest and exceptional items of £308,000 (2003: £343,000) and turnover of £5.6m (2003: £5.2m). The operating loss of ordinary activities and after exceptionals but before tax for the year was £2.18m (2003: £444,000). The basic loss per share was 3.75p (2003: 0.66p)

Dividend
Our policy of developing and bringing new products to market remains unchanged and the Board does not therefore recommend a dividend in respect of the year ended 30 June 2004.

Colleagues
The progress we continue to make is only possible due to the key skills and dedication of our staff who continually demonstrate their commitment to the business. On behalf of the Board I express sincere thanks and appreciation to them all.

Current Trading and Prospects
With both divisions operating at record levels we are confident that the financial year to 30 June 2005 will produce a much improved performance than that achieved in the year to 30 June 2004.

We would expect to report much higher sales which in turn should significantly improve profitability. However, shareholders should note that the growth in sales from the drug delivery division will have greatest impact from 2005/6 onwards.

The new financial year has started well and sales are significantly ahead in the first two months when compared to the corresponding period for 2003/04.

B.H. Bodek
23 September 2004

Chief Executive’s Review

Our legacy business underpins new product development

The year just ended has been the most significant and satisfying in our history of being a public company. During the year the Group has been totally transformed by a catalogue of success brought about by years of hard work and investment.

I am very proud of the achievements made in both divisions and would like to thank all my colleagues for the contributions they have made often under challenging timetables.

We are now reaping the rewards with both divisions achieving dramatic progress on which I will now expand.

Orthopaedic Division 2004: Profit £708K (2003: Profit £605K)

As we reported in March this year the second half of the year to 30 June 2004 started encouragingly with sales progressing well. I am pleased to say that this growth continued with sales in the second half 39% up on the comparative period. Accordingly, we managed to recover the first half drop in sales to report full year revenues 10% up on those achieved in 2003. This was accomplished in spite of the disruption caused by building alterations. When one also considers that work in progress has also increased by £601,000, the increase in total production is much higher than that shown by the invoiced sales in isolation.

We are currently facing the continual challenge of increasing our production capacity. We are rapidly absorbing the additional 12,000 square feet of manufacturing space which became available in January and in order to capitalise on the growing market in which we find ourselves we have submitted plans to add further manufacturing space of approximately 4,000 square feet. This should give us the capacity to grow sales to well over £10m and in order to grow beyond that we are seeking additional space nearby to continue to increase production capacity towards £20m to enable us to meet demand in a growing market requiring increasingly complex instrumentation.

The outlook for the orthopaedic instrument sector continues to be exciting and we continue to be closely involved with orthopaedic companies in the development of new instrument ranges. In particular the arrival of femoral head resurfacing techniques are having a major effect on the current order book at Eurocut. Basically by resurfacing an existing femoral head a whole new market opens itself up to the orthopaedic companies. This operation allows those people who are too young to receive a complete new hip to have a surgical procedure to improve their quality of life which would otherwise be impaired.

Shareholders will recall that last year I reported the effect of the high proportion of development work on the operating margin. I am pleased to advise that this situation has now normalised and as a result margins are improving.

We have purchased new plant to the value of £1.1m in the year and in the year to 30 June 2005 we expect to spend around another £1.2m as we continue to expand our capacity in line with the growth in our order book.

The current order book for the orthopaedic division is again at record levels at over £5m and as predicted last year the prospects for Eurocut are now better than at any time in its history.

Drug Delivery Division 2004: Loss £411K (2003: Loss £388K)

It is worth recalling how far this division has come in its relatively short history. Thanks to the success of the mhi-500 in achieving drug tariff approval and to our designers in creating the SQ-Pen and the ASI we are now taken very seriously by pharmaceutical companies around the world. This is evidenced by the recent major licence and development agreement with a global pharmaceutical company. They have a strong product range and they are an ideal partner for us in the ever-changing world of drug delivery. We hope that this will be the first of many projects we have with this company and we also believe that this will enhance our prospects of obtaining similar agreements with other global pharmaceutical companies. In addition to this agreement, we are also pleased to have teamed up with Arnolds (a subsidiary of Dechra Pharmaceuticals) in the potentially very exciting pet animal market. The attraction of needle-free devices to ourselves is very obvious as few people enjoy being injected by needle. However, it is even more advantageous to the thousands of pet owners and vets who need to inject animals on a regular basis. The main advantages of our systems are that the complete injection process is over in 200 milliseconds and there is no risk of a needle stick injury from a contaminated needle.

The strategy of the drug delivery division is to conclude partnerships with pharmaceutical companies by fulfilling their drug delivery requirements. These requirements clearly include needle-free systems but not all drugs are capable of being injected by a needle-free jet system. It may be that the molecules are too fragile or that the dose required is more than can be comfortably injected without a needle. Consequently, at the request of a major pharmaceutical company, we have developed the ASI. This is an automatic safe injection system which, as it contains only 6 components, is cheap to manufacture and offers many advantages to a healthcare provider. For example, it can inject almost any drug to any predetermined level, intra-dermal, sub-cutaneous or intra-muscular. The ASI houses a normal pre-filled syringe and so pharma companies do not need to go through the expensive procedures and regulatory hurdles they face when changing the presentation of their drug. If we reach agreement with a pharma company for this device, as it is for single use, the quantities are likely to far out strip the sales potential of the re-useable needle-free device sales. We also believe that the device may have uses in the fight against bio-terrorism as it enables large numbers of people to be injected safely, consistently and quickly without the need to have a doctor or nurse present.

We regard all the above achievements as forming the foundations for a successful business in drug delivery. Whilst this is a potentially very rewarding area to be in it is important to also recognise that major pharmaceutical companies have to be very confident of their supplier in this key area as the delivery device may well be packaged with a drug which generates billions of dollars in sales revenue. We are gradually establishing a record which is setting us apart from many of our competitors. We have also taken comfort levels of needle-free injections in the UK to a new level. We are continually working on making our systems more comfortable to the patient which is an area that has proved a stumbling block to the early pioneers of this type of technology.

This progress is evidenced by the improving levels of sales for the mhi-500 which, although still modest, have continued to increase as patients continue to look for an alternative to needles. In the year to 30 June 2004 sales were up to £121,510 (2003: £50,000). A significant amount of the increase has come in the latter part of the year as a result of a very successful PR campaign which included an excellent feature on the “This Morning” TV programme with Philip Schofield, Fern Britton and Dr Chris Steele.

We are now working with all our distributors to help them achieve good levels of sales in their respective countries which should generate solid sales growth for 2005 and beyond. I would point out, as I did last year, that the process of changing injection habits is not something which will happen overnight as is well evidenced by our own experiences in the UK. Many medical practitioners are risk averse and although needle-free injections offer a safe method of injecting they still tend to lean towards needles, which they have been prescribing for a very long time.

Hyperlyser

The Group remains fully committed to the orthopaedic and drug delivery markets. Consequently, we have not been able to commit large resources to developing the Hyperlyser breath test. We continue to seek a partner to assist with the development of this device, but at this moment in time an agreement has not been concluded. Given the uncertainty regarding the value recoverable from the technology, full provision has been made against the carrying value of the costs of developing this device, therefore drawing a line under the past development period.

Major Achievements of the year

We have made and continue to make achievements over the last 12 months, which include:

October 2003 New Head Office and factory extension completed

December 2003 Signed Distribution Agreement for the SQ-Pen for Egypt and New Zealand

December 2003 Signed Distribution Agreement for the SQ-Pen for China

January 2004 Signed Distribution Agreement for the SQ-Pen for Poland

February 2004 Signed Collaboration Agreement with Arnolds (a subsidiary of Dechra)

February 2004 Awarded DTI grant to develop ASI and gas-powered needle-free device

May 2004 Signed Distribution Agreement for the SQ-Pen for Pakistan

June 2004 Signed Distribution Agreement for the SQ-Pen for Morocco

September 2004 Signed Collaboration Agreement with a global pharmaceutical company

Conclusion

In summary, we have had a very full and challenging year and we are now confident of achieving record results in the year to 30 June 2005 and beyond.

I Townsend
23 September 2004

Independent Auditors’ Report to the Members of The Medical House PLC
for the year ended 30 June 2004

We have audited the financial statements contained in this report.

This report is made solely to the Company’s members, as a body, in accordance with section 235 of the Companies Act 1985. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members, as a body, for our audit work, for this report, or for the opinions we have formed.

Respective Responsibilities of Directors and Auditors
The Directors are responsible for preparing the Annual Report and, as contained in this report, the financial statements in accordance with applicable United Kingdom law and accounting standards. Our responsibilities, as independent auditors, are established in the United Kingdom by statute, the Auditing Practices Board and by our profession’s ethical guidance.

We report to you our opinion as to whether the financial statements give a true and fair view and are properly prepared in accordance with the Companies Act 1985. We also report to you if, in our opinion, the Directors’ report is not consistent with the financial statements, if the Company has not kept proper accounting records, if we have not received all the information and explanations we require for our audit, or if information specified by law regarding Directors’ remuneration and transactions with the Group is not disclosed.

We read the other information contained in the Annual Report and consider whether it is consistent with the audited financial statements. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the financial statements.

Basis of Audit Opinion
We conducted our audit in accordance with Auditing Standards issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements. It also includes an assessment of the significant estimates and judgements made by the Directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the Group’s circumstances, consistently applied and adequately disclosed.

We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements.

Opinion
In our opinion:

• the Financial Statements give a true and fair view of the state of affairs of the Company and the
Group as at 30 June 2004 and of the loss of the Group for the period then ended; and
• the Financial Statements, and the part of the Directors’ Remuneration Report to be audited, have been properly prepared in accordance with the Companies Act 1985.

KMPG Audit Plc
Chartered Accountants
Registered Auditor
23 September 2004

Consolidated
+ Profit and Loss Account
for the year ended 30 June 2004

There is no difference between the loss for the period stated above and its historical cost equivalent.

All results are derived from continuing activities. There were no recognised gains or losses in either the current or preceding years other than these disclosed in the Profit and Loss Account.

(Loss) per ordinary share – basic Note 1 (3.75p) (0.66p)

(Loss) per ordinary share – diluted Note 1 (3.64p) (0.66p)

Consolidated Balance Sheet
at 30 July 2004

Company Balance Sheet
as at 30 July 2004

Consolidated Cash Flow Statment
for the year ended 30 June 2004

Notes to the Financial Statements for the year ended 30 June 2004
1. Loss per share

Loss per share is calculated by dividing the weighted average number of ordinary shares in issue into the loss after taxation for the year attributable to ordinary shareholders. Diluted earnings per share are calculated using 58,350,855 shares (2003: 53,230,898) being the weighted average number of shares in issue including the dilutive effects of the shares held under the Group's share option schemes.

2. Reconciliation of Operating Loss to Net Cash Outflow from Operating Activities

3. Reconciliation of Net Cash Movement to Net Debt

4. The financial information set out above does not constitute the Company’s statutory accounts for the years ended 30 June 2004 or 2003. The financial information for 2003 is derived from the statutory accounts for 2003 which have been delivered to the registrar of companies. The auditors have reported on the 2003 accounts; their report was unqualified and did not contain a statement under section 237 (2) or (3) of the Companies Act 1985. The statutory accounts for 2004 will be finalised on the basis of the financial information presented by the directors in this preliminary announcement and will be delivered to the registrar of companies following the Company’s annual general meeting.