x    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

Nevada

6 Thomas
Irvine, CA  92618

74-2234246

(State or other jurisdiction of incorporation or organization)

(Address of principal executive offices) (Zip Code)

(IRS Employer Identification No.)

(949) 587-2700

(Registrant’s telephone number, including area code)

(1)

Yes

x

No

o

(2)

Yes

x

No

o

Page

PART 1

FINANCIAL INFORMATION

Item 1:

Financial Statements

Consolidated Condensed Balance Sheets – September 30, 2002 and December 31, 2001

3

Consolidated Condensed Statements of Operations – Three months and Nine months ended September 30, 2002 and 2001

4

Consolidated Condensed Statements of Cash Flows – Nine months ended September 30, 2002 and 2001

5

Notes to Consolidated Condensed Financial Statements

6

Item 2:

Management’s Discussion and Analysis of Financial Condition and Results of Operations

11

Item 3:

Quantitative and Qualitative Disclosures About Market Risk

16

Item 4:

Controls and Procedures

17

PART II

OTHER INFORMATION

Item 1:

Legal Proceedings

18

Item 2:

Changes in Securities and Use of Proceeds

18

Item 3:

Defaults upon Senior Securities

18

Item 6:

Exhibits and Reports on Form 8-K

19

Signatures

19

Certifications

20-23

September 30,
2002
(Unaudited)

December 31,
2001

ASSETS

CURRENT ASSETS:

Cash and cash equivalents

$

82,164

$

466,453

Accounts receivable, net of allowance for doubtful accounts of $327,760 and $461,731 in 2002 and 2001, respectively

2,104,430

2,485,191

Inventories, net

519,246

691,921

Prepaid expenses, net

337,174

145,107

Advances to employees, current portion

11,568

31,578

Deferred tax asset

877,455

877,455

Total current assets

3,932,037

4,697,705

Property and equipment, net (Note 4)

336,958

2,879,094

Patents, net

445,122

—  

Intangible assets, net

6,058,007

6,558,007

Deferred tax asset, noncurrent

1,412,601

2,349,552

Investment in affiliate

299,994

224,997

Other assets, net

204,531

232,042

TOTAL ASSETS

$

12,689,250

$

16,941,397

LIABILITIES AND STOCKHOLDERS’ EQUITY

CURRENT LIABILITIES:

Accounts payable

$

1,010,475

$

2,647,266

Accrued expenses

530,718

416,203

Line of credit

1,107,209

1,728,868

Notes payable, current

60,739

53,974

Total current liabilities

2,709,141

4,846,311

Deposits under building sales contract (Note 7)

—  

1,223,265

Notes payable, noncurrent

277,491

2,230,359

Total liabilities

2,986,632

8,299,935

COMMITMENTS AND CONTINGENCIES (Note 7 & 8)

STOCKHOLDERS’ EQUITY:

Preferred stock, $0.001 par value; 50,000,000 shares authorized; no shares issued or outstanding

—  

—  

Common stock, $0.001 par value; 150,000,000 shares authorized; 29,789,598 shares issued and outstanding in 2002 and 2001, respectively

29,789

29,789

Additional paid-in capital

15,137,105

15,137,105

Accumulated deficit

(5,464,276

)

(6,525,432

)

Total stockholders’ equity

9,702,618

8,641,462

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

$

12,689,250

$

16,941,397

Three Months Ended
September 30,

Nine Months Ended
September 30,

2002

2001

2002

2001

NET REVENUES

$

2,627,994

$

2,858,222

$

8,001,231

$

10,939,283

COST OF GOODS SOLD

933,626

929,751

2,722,030

3,401,632

GROSS PROFIT

1,694,368

1,928,471

5,279,201

7,537,651

OPERATING EXPENSES:

Selling and marketing

974,343

1,397,081

2,982,209

4,726,728

General and administrative

638,521

908,713

2,070,059

2,799,902

Total operating expenses

1,612,864

2,305,794

5,052,268

7,526,630

OPERATING INCOME (LOSS)

81,504

(377,323

)

226,933

11,021

OTHER (EXPENSE) INCOME, net:

Interest (expense)

(71,213

)

(147,656

)

(270,329

)

(417,039

)

Interest income

341

(1,509

)

1,865

7,976

Other income

39,939

—  

148,810

—  

Gain on sale of building

—  

—  

983,401

—  

Total other (expense) income, net

(30,933

)

(149,165

)

863,747

(409,063

)

INCOME (LOSS) BEFORE EXTRAORDINARY ITEM AND PROVISION OF INCOME TAXES

50,571

(526,488

)

1,090,680

(398,042

)

EXTRAORDINARY ITEM – gain from forgiveness of debt, net of income taxes of $0 and $270,985 for the three and nine month period ended September 30, 2002 (Note 1)

—  

—  

406,476

—  

INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES

50,571

(526,488

)

1,497,156

(398,042

)

PROVISION (BENEFIT) FOR INCOME TAXES

20,000

(106,392

)

436,000

(2,936

)

NET INCOME (LOSS)

$

30,571

$

(420,096

)

$

1,061,156

$

(395,106

)

NET INCOME (LOSS) PER SHARE

Basic

$

0.00

$

(0.01

)

$

0.03

$

(0.01

)

Diluted

$

0.00

$

(0.01

)

$

0.03

$

(0.01

)

WEIGHTED AVERAGE COMMON SHARES

Basic

29,789,598

28,438,903

29,789,598

28,438,903

Diluted options outstanding

0

0

0

0

Diluted

29,789,598

28,438,903

29,789,598

28,438,903

Nine Months Ended
September 30,

2002

2001

CASH FLOWS FROM OPERATING ACTIVITIES:

Net income (loss)

$

1,061,156

$

(395,106

)

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

Gain from forgiveness of debt

(677,461

)

—  

Gain from sale of building

(983,401

)

—  

Sublease income from affiliate

(74,997

)

—  

Depreciation and amortization

195,747