UNITED STATES SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

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

For the Fiscal Year Ended March 31, 2005

Commission File No. 0-24624

CHINDEX INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

7201 Wisconsin Avenue
Bethesda, Maryland, 20814
(301) 215-7777

Securities registered pursuant to Section 12(b) of the Act: NONE

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $.01 par value

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in a definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes o No þ

The aggregate market value of the voting stock held by non-affiliates computed by reference to the price at which the stock was sold, or the average bid and asked prices of such stock, as of September 30, 2004 (the last business day of the registrant’s most recently completed second fiscal quarter) was approximately $41,232,510.

The number of shares outstanding of each of the issuer’s class of common equity, as of June 17, 2005, was 5,728,443 shares of Common Stock and 775,000 shares of Class B Common Stock.

Documents Incorporated by Reference: Part III: Proxy Statement

PART I

ITEM 1. BUSINESS

General

     Chindex International, Inc. (“Chindex” or “the Company”), founded in 1981, is an American company operating in several healthcare sectors of the Chinese marketplace, including Hong Kong. Revenues are generated from the sale of healthcare equipment and products and the provision of healthcare services. The Company operates in three segments:

	•		Medical Capital Equipment Division. This division markets, sells and facilitates the export of select capital healthcare equipment and instrumentation to China on the basis of both exclusive and non-exclusive agreements with the manufacturers of these products. Chindex believes based on its knowledge and experience in the Chinese healthcare system, that it is the largest independent U.S. distributor of healthcare equipment in China. For the fiscal year ended March 31, 2005, the Medical Capital Equipment Division accounted for 43% of our revenue.
	•		Healthcare Products Distribution Division. This division, through a network of wholly owned foreign subsidiaries in China, imports and distributes off-the-shelf healthcare instrumentation and health-related consumable products developed by third parties and Chindex. For the fiscal year ended March 31, 2005, the Healthcare Products Distribution Division accounted for 35% of the Company’s revenue.
	•		Healthcare Services Division. This division operates the Company’s private hospitals and clinics. Beijing United Family Hospital and Clinics (BJU) opened in 1997 and Shanghai United Family Hospital and Clinics (SHU), opened at the end of calendar year 2004. In 2002, we opened our first satellite clinic associated with BJU in Shunyi County outside of Beijing and have also established a satellite clinic associated with SHU. For the fiscal year ended March 31, 2005, the Healthcare Services Division accounted for 22% of the Company’s revenue.

Medical Capital Equipment Division

     On the basis of exclusive and non-exclusive distribution agreements, Chindex offers manufacturers of quality medical capital equipment access to the greater Chinese marketplace through a wide range of marketing, sales, and technical services for their products. We refer to these products as “capital” equipment since they are of the type that normally would be capitalized and depreciated on the financial statements of a purchasing hospital, as distinguished from products that normally would be expensed.

     Through a matrix of dedicated marketing and technical service departments, local area product and technical specialists, and local area territory representatives and clinical application specialists, we provide comprehensive marketing coverage on behalf of our clients and suppliers on a nationwide basis. Marketing efforts are based on annual marketing plans developed by each marketing department within Chindex for each product, and normally include attendance at a variety of trade shows throughout China, advertisements in leading Chinese industrial, trade, and clinical journals, production of Chinese language product literature for dissemination to the potential customer base, direct mail and telemarketing campaigns, and other product promotions.

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     The medical capital equipment operations in China are managed by our Medical Capital Equipment Division, which focuses on exporting quality Western medical capital equipment to the China market. These export sales are denominated in U.S. dollars and are made to China’s larger hospitals. The Medical Capital Equipment Division is organized both by clinical or therapeutic product specialty and by region.

     The Medical Capital Equipment Division markets its products directly to hospitals through all relevant participants in the purchasing process, including hospital administrators and the doctors who are the ultimate users of the products. There is virtually no private practice of medicine in China and all physicians are affiliated with hospitals or similar institutions.

     In addition to marketing products directly to end-users we also make sales via a network of sub distributors located throughout China who then sell the equipment to the end users. In addition to U.S. dollar sales of products to Foreign Trade Corporations (FTCs) or sub distributors, the Medical Capital Equipment Division has begun to utilize Chindex subsidiaries and the network of sub distributors to import equipment and sell to buyers in local currency. Most purchases of the medical capital equipment sold by Chindex in China, regardless of the nature of the end-user, are made through foreign trade corporations, or FTCs. Although the purchasing decision is made by the end-user, which may be an individual or a group having the required approvals from their administrative organizations, we enter into formal purchase contracts with FTCs. The FTCs make purchases on behalf of the end-users and are legally authorized by the Chinese government to conduct import business. These organizations are chartered and regulated by the government and are formed to facilitate foreign trade. We market our products directly to end-users, but in consummating a sale we also must interact with the particular FTC representing the end-user. For this reason, we seek to maintain ongoing relationships with the FTCs in our industries.

     Chindex owns and operates a separate, full service technical service center, within the Medical Capital Equipment Division to support the activities of that division. The Company is responsible for the technical support of virtually all the medical equipment that it sells. To support our medical capital equipment business, we own and operate a full-service technical service center in Beijing. This service center supports spare parts inventories and factory-trained service engineers on a nationwide basis.

     Chindex has from time to time helped arrange government-backed financing to help hospitals in China finance their purchases of medical equipment from the Company. Such financing has included loans and loan guarantees from the U.S. Export-Import Bank and the German KfW Investment Bank as well as commercial financing that is guaranteed by the Chinese government but without foreign government participation.

     Among the products sold by the Medical Capital Equipment Division are diagnostic color ultrasound imaging devices, chemistry analyzers, sterilizers, surgical equipment, computerized electrophysiology systems, bone densitometers, mammography and breast biopsy devices, lasers for cosmetic surgery, and robotic surgery systems.

     Subject to the availability of capital and other conditions, our growth plans for the division include continuing to add new products and technologies to our offerings as well as continuing to expand our sales channels, primarily through the use of local sub-distributor networks, to access increasingly deeper levels of the Chinese hospital market place.

Healthcare Products Distribution Division

     Through our Healthcare Products Distribution Division, or HPD division, Chindex offers foreign manufacturers a unique nationwide distribution system for low price medical devices and consumables sold in hospitals and used in home healthcare, and other products sold to consumers in retail pharmacies. With an established distribution network, we believe that our HPD division is poised to leverage our

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experience and take advantage of new opportunities created by China’s WTO-based liberalization and government-mandated consolidation in the distribution industry.

     Through wholly owned subsidiaries, the HPD division imports healthcare and other products into China, carries them in inventory, sells them downstream for local currency, and pays the suppliers in foreign exchange.

     Our HPD division is comprised of three primary business units:

	•		Retail Pharmacy Sales;
	•		Hospital Dealer Sales; and
	•		Logistics Services.

     Retail Pharmacy Sales

     Our HPD retail products business unit is focused on distribution, including sales and marketing, of branded healthcare and health-related consumer products through China’s burgeoning retail pharmacy sector. Sales began in mid-1998 in Shanghai and we currently distribute to 60 cities and nearly 1,400 stores, doing business with eight of the top ten retail pharmacy chains in China.

     Chindex initiated retail pharmacy distribution through an agreement with the world’s largest producer of cosmetic products. Our ability to closely control both inventory and distribution in China has proven important in the distribution of this product line. Chindex currently has expanded its distribution relationships for the retail pharmacy sales channel by establishing distribution rights to certain other premier brands, as well as its own brand of baby care products, manufactured by Chinese manufacturers to the Company’s detailed specifications.

     Several new product areas are under development by us in parallel with our planned expansion of distribution capabilities. All of these branded healthcare and health-related consumer products are subject to a strict regulatory regime in China and the process of registration of the products often presents substantial challenges.

     Hospital Dealer Sales

     Through our hospital dealer sales division, we serve the market for quality imported medical consumables and low-priced instrumentation sold in local currency via a network of sub-distributors located throughout China.

     Beginning April 1, 2005, Chindex has moved some of the products of the Hospital Dealer Sales business unit to the Medical Capital Equipment Division. The reason for this reorganization is to take advantage of the synergies that are believed to be available by offering a broader range of products under a single management structure.

     Logistics Services

     The HPD logistics services business unit operates the import and supply chain platform which supports the retail sales and hospital sales business units, as well as portions of Chindex’s Medical Capital Equipment division’s business. The business unit is also the turnkey supplier of medical consumables to our Healthcare Services division and provides logistic services for external clients as well. The unit runs distribution centers in Shanghai and Tianjin and additional local warehouses in eastern China.

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     Our business strategy for the division is to seek a strategic partner to position the retail pharmacy and logistics platform we have developed for continued growth with expanded product offerings and increased external capital resources.

Healthcare Services Division

     United Family Hospitals and Clinics

     In 1997, we opened our first private, international standard hospital in Beijing which was the opening phase in the development of our United Family Hospital network. In late 2004 we opened our second United Family hospital in Shanghai, making us the only foreign-invested, multi-facility hospital organization in China. Our facilities are managed through a shared administrative network allowing cost and clinical efficiencies.

     The mission of our United Family Hospital network is to deliver top quality healthcare services to the largest urban centers in China. Our target patient base includes the expatriate communities and China’s growing upper-middle class. Emphasizing the need for well-care (routine visits in the absence of illness) and patient-centered care (involving the patient in healthcare decisions), United Family Hospitals offer a full range of top-quality family healthcare services, including 24/7 Emergency Rooms, ICUs and NICUs, operating rooms, clinical laboratory, radiology and blood banking services for men, women and children. An international standard hospital not only provides healthcare services at a level generally recognized and accepted internationally in the developed world, but also manages the hospital according to generally accepted international principles, such as transparency, infection control, medical records, patient confidentiality, peer review, etc. The hospitals are staffed by a mix of Western and Chinese physicians and operate in accordance with international hospital standards. Our facilities are also committed to community outreach programs and offer healthcare education classes, including CPR, Lamaze, and Stress Management.

     Both United Family Hospitals in Beijing and Shanghai are 50-bed models with affiliated satellite clinics strategically located to expand geographical reach and service offerings into our target patient markets. We maintain direct billing relationships with most insurers providing coverage for the expatriate communities in Beijing and Shanghai. We are actively working to facilitate development of a health insurance product that would provide top-tier coverage for the local Chinese market. Services provided to patients without insurance are on a cash basis.

     Our expansion plans include the development of additional United Family Hospitals in target cities in China including Xiamen and Guangzhou. In March of 2004 we announced that we had signed a Letter of Intent with Xiamen Zhongshan Hospital for possible establishment of a hospital in the city of Xiamen. Our plans also include the continued expansion of services in existing facilities and the opening of additional affiliated satellite clinics. In addition, we are exploring the possibility of marketing our hospital management expertise to third party facilities not owned and operated by Chindex. All of these expansion plans depend on the availability of capital resources, as to which there can be no assurances.

     Beijing United Family Hospital and Clinics – (BJU)

     The hospital is housed in a modern facility in the eastern section of Beijing, and features seven 5-star birthing suites, three operating theaters, a medical — surgical inpatient ward, a pediatric ward, two executive VIP suites, a NICU, an ICU, nursery, a clinical laboratory, extensive digital diagnostic imaging equipment, a pharmacy, 24-hour emergency department and six outpatient clinics.

     BJU completed a significant expansion development program in 2002 resulting in a doubling of the hospital’s capacity to its current size. In that year, we opened the first satellite clinic affiliated with United Family hospitals; the Beijing United Family Clinic – Shunyi, or the Shunyi Clinic. The Shunyi

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Clinic is the only outpatient clinic located in the densely expatriate-populated suburb of Shunyi County. It is also located near the International School of Beijing.

      In June of 2005 we opened a second affiliated clinic in downtown Beijing. The opening of this facility completes the primary geographic coverage needed to access the full expatriate community in Beijing. Two additional clinics aimed at projecting United Family Hospital services into the more affluent Chinese neighborhoods are in the planning stages.

     BJU was the first officially approved healthcare joint venture to provide international-standard healthcare services in China. It was formed as a contractual joint venture between Chindex and the Chinese Academy of Medical Sciences with Chindex being entitled to 90% of the profits of the enterprise. BJU received the initial national level approvals from the Chinese Ministry of Health, or MOH, and Ministry of Foreign Trade and Economic Cooperation, or MOFTEC, in 1995.

     Shanghai United Family Hospital and Clinics – (SHU)

     In late 2001, Chindex received approval from the MOH and in early 2002 received approval from MOFTEC to open a second hospital venture, Shanghai United Family Hospital and Clinics (SHU). This second Chindex hospital is located in the Changning District of Shanghai, also a center of the expatriate community. This facility is also a contractual joint venture undertaking. Our partner is Changning District Central Hospital, with Chindex being entitled to 70% of the profits of the enterprise. At the same time, we opened the Shanghai Racquet Club Clinic affiliated with SHU, again geographically located in the expatriate residential district. Future affiliated clinics are being planned for the Pudong area, the other affluent expatriate sector of the city. The construction of SHU was interrupted by the SARS epidemic. When work resumed after the epidemic significant changes were made in areas of infection control and sterilization in accordance with the new regulations and standards that followed the SARS period.

Competition

     In the sale of products by the Medical Capital Equipment Division, we compete with other independent distributors in China that market similar products. In addition to other independent distributors, we face more significant competition from direct distribution by established manufacturers. In the medical products field we compete with General Electric Corporation, or GE, which maintains its own direct sales force in China as well as selling through distributors. In addition, since certain manufacturers, such as GE, market a wide variety of products under one brand name in China to different market sectors, those manufacturers may be better able than we are to establish name recognition across industry lines. For example, GE manufactures and markets other electrical products in China as well as other medical instruments not sold by us. We believe that GE, Phillips and Toshiba are the largest such direct competitors in the medical products field.

     In the sales and distribution of off-the-shelf medical products and consumables, our sales, marketing and logistical distribution networks also compete with similar distribution operations of other independent distributors, both foreign and Chinese, joint ventures and foreign manufacturers. In addition, the products themselves supplied by us to the China market compete with similar products of foreign, joint venture and domestic manufacturers. Our competitive position for product sales depends in part upon our ability to attract and retain qualified personnel in sales, technical and administrative capacities. In addition, many of our various competitors have greater resources, financial or otherwise, than we do.

     At the present time, there are no Western-owned hospitals in Beijing that compete with Beijing United Family Hospital in catering to the expatriate diplomatic and affluent local Chinese markets. Although there are several foreign invested hospitals in Shanghai, these hospitals are focused on a different demographic segment than Shanghai United Family Hospital and do not pose a competitive threat in terms of drawing potential SHU patients away. There are, however, several Western-operated

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clinics and a variety of foreign-invested joint ventures that provide outpatient services in both Beijing and Shanghai.

Employees

     At March 31, 2005, the Company had 1,003 full-time salaried employees. Of these, 985 are in China and Hong Kong. Of the full-time personnel in China and Hong Kong, 112 are expatriates and 873 are Chinese or third country nationals. Of our non-U.S. based full-time employees, 569 are employed by the United Family Hospitals and Clinics.

Internet Information and SEC Documents

     Our Internet site is located at www.chindex.com. Copies of our reports and amendments thereto filed pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, including Annual Reports filed on Form 10-K, Quarterly Reports filed on Form 10-Q and Current Reports filed on Form 8-K may be accessed from the Company’s website, free of charge, as soon as reasonably practicable after we electronically files such reports with, or furnishes such reports to, the Securities and Exchange Commission (SEC). The information found on our Internet site is not part of this or any other report or statement Chindex files with or furnishes to the SEC.

ITEM 2. PROPERTIES

     Our representative headquarters in China are located at a newly renovated facility in Beijing. Our prior facility was designated for redevelopment in 2002 and, accordingly, we moved into new space in mid-2002. We have a ten-year lease for this new space. We also lease regional offices in the Chinese cities of Shanghai, Guangzhou and Tianjin. Our executive and administrative offices are located in Bethesda, Maryland, which provides access to nearby Washington, D.C. These facilities are used by corporate administration, the Medical Capital Equipment Division and the Healthcare Products Distribution Division.

     We also lease a four-story building of approximately 52,000 square feet in Beijing for Beijing United. This lease expires in 2010. In 1998, the Hospital entered into a lease for the building housing the dental clinic. This lease also expires in 2010. We initially renovated the first two floors of the main building for Beijing United Family Hospital. We had subleased the remaining two floors until the end of 2001, when the tenant moved out of the space, allowing the hospital to renovate the space for hospital use. This renovation was completed in 2002. This facility is used by the Healthcare Services Division.

     We have an 18-year lease for our new hospital facility in Shanghai. The lease is for a four-story stand-alone building on the grounds of the Shanghai Changning District Central Hospital. The building has approximately 54,000 square feet. This facility is used by the Healthcare Services Division.

ITEM 3. LEGAL PROCEEDINGS

     None.

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

     None.

Part II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER REPURCHASES OF EQUITY SECURITIES

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Our common stock is listed on The NASDAQ SmallCap Market under the symbol “CHDX.” The following table shows the high and low common stock closing prices as quoted on the Nasdaq SmallCap Market. Such quotations reflect interdealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions. The closing prices below have been adjusted to give effect to two two-for-one stock splits in the form of 100% stock dividends, the first of which was in September 2003 and the second of which was in January 2004.

     As of June 1, 2005, there were 42 record holders of our common stock and six record owners of our Class B common stock. We have never declared or paid cash dividends on our common stock. We currently intend to retain all available funds and future earnings, if any, for use in the operation and expansion of our business and do not anticipate paying dividends in the foreseeable future. We did not repurchase any shares of common stock in the fourth quarter of fiscal 2005.

     Equity compensation plan information as of March 31, 2005 is as follows:

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     Other information required by this Item can be found in Note 5 Stockholder’s Equity.

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PART II

ITEM 6. SELECTED FINANCIAL DATA

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ITEM 7.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview

     Chindex International, Inc. is a Delaware corporation with headquarters located in the Washington, D.C. metropolitan area. We were founded in 1981 and currently are an American provider of healthcare products and services to China, including Hong Kong. We operate in three business segments:

	•		Medical Capital Equipment Division. This division markets, sells and facilitates the export of select capital healthcare equipment and instrumentation to China on the basis of both exclusive and non-exclusive agreements with the manufacturers of these products. We believe, based on our knowledge and experience in the Chinese healthcare system, that we are the largest independent U.S. distributor of healthcare equipment in China. For the fiscal year ended March 31, 2005, the Medical Capital Equipment Division accounted for 43% of our revenue.
	•		Healthcare Products Distribution Division. This division, through a network of wholly owned foreign subsidiaries in China, imports and distributes off-the-shelf healthcare instrumentation and health-related consumable products developed by third parties. For the fiscal year ended March 31, 2005, the Healthcare Products Distribution Division accounted for 35% of our revenue.
	•		Healthcare Services Division. This division operates our private hospitals and clinics. Beijing United Family Hospital and Clinics (BJU) opened in 1997 and Shanghai United Family Hospital and Clinics (SHU) opened at the end of 2004. We have opened satellite clinics associated with our hospitals in both Beijing and Shanghai. For the fiscal year ended March 31, 2005, the Healthcare Services Division accounted for 22% of our revenue.

     Substantially all of our assets are located in China and substantially all our revenues are derived from our operations in China. Accordingly, our business, financial condition and results of operations are subject, to a significant degree, to economic, political and legal developments in China. The economic system in China differs from the economics of most developed countries in many respects, including government investment, level of development, control of capital investment, control of foreign exchange and allocation of resources.

     Our Medical Capital Equipment Division and Healthcare Products Distribution Division are subject to challenges and risks as a result of our dependence on our relations with suppliers of equipment and products. In addition, the timing of our revenue from the sale of medical capital equipment is affected by the availability of funds to customers in the budgeting processes of those customers, the availability of credit from the Chinese banking system and otherwise. The timing of sales of such equipment may depend on the timing of our customers’ ability to arrange for credit sources. Further, because we recognize revenue and expenses relating to certain contracts as such products are shipped, the timing of shipments, among other things, affects our operating results for a particular period. Consequently, our operating results have varied and are expected to continue to vary from period to period.

Critical Accounting Policies

     The preparation of our financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Our

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estimates, judgments and assumptions are continually evaluated based on available information and experience. Because of the use of estimates inherent in the financial reporting process, actual results could differ from those estimates.

     Some of our accounting policies require higher degrees of judgment than others in their application. These include revenue recognition, receivable collectibility and income tax recognition of deferred tax items. In addition, Note 1 to the Consolidated Financial Statements includes further discussion of our significant accounting policies.

Revenue recognition

     Sales of equipment and healthcare products are recognized upon product shipment. We provide installation, warranty, and training services for certain of our capital equipment sales. These services are viewed as perfunctory to the overall arrangement and are not accounted for separately from the equipment sale. Costs associated with installation, after-sale servicing and warranty are not significant and are recognized in cost of sales as they are incurred. The estimated cost for training services is accrued upon shipment.

     Revenue related to services provided in our Healthcare Services segment is recognized in the period services are provided. Revenue includes an estimate of services at the end of the period for patients who have not completed service. Costs associated with such services are recognized in the period incurred.

Receivable collectibility

     We grant credit to some customers in the ordinary course of business. We evaluate collectibility of accounts receivable periodically and adjust our allowance for doubtful accounts accordingly. Bad debts are experienced predominately in the Healthcare Services business and to a lesser extent in the Medical Capital Equipment business. We have experienced few losses in the Healthcare Products Distribution business.

     We incurred bad debt expense in healthcare services of $920,000, $777,000 and $118,000 in the years ended March 31, 2005 and 2004, and three months ended March 31, 2003, respectively and $508,000 in the remaining two divisions only for the year ended March 31, 2005. In addition, we increased the reserve for doubtful accounts from $1,131,000 at March 31, 2004 to $1,851,000 at March 31, 2005 as the result of a detailed review of accounts receivable.

Valuation allowance of deferred tax assets

     Our operations are taxed in various jurisdictions including the United States and China. In certain jurisdictions individual subsidiaries are taxed separately. We have identified deferred tax assets resulting from cumulative temporary differences at each balance sheet date. A valuation allowance is provided for those deferred tax assets for which we are unable to conclude that it is more likely than not that the tax benefit will be realized.

     We have provided substantial deferred tax valuation allowances for certain deferred tax assets related to various subsidiaries in China in the year ended March 31, 2005 because we are not able to conclude that it is more likely than not that those assets will be realized. We released deferred tax valuation allowances totaling $660,000 in the year ended December 31, 2002 based on assessments in those years that it was more likely than not that we would be able to use our U.S. federal net operating loss carryforwards. Certain of these benefits were realized in tax filings for the period ended March 2003. These U.S. net operating loss carryforwards do not expire before 2024.

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Fiscal year ended March 31, 2005 compared to fiscal year ended March 31, 2004

General

     Our revenue for 2005 was $100,775,000, up 14% from 2004 revenue of $88,183,000. We experienced continued revenue growth in the medical capital equipment and healthcare services segments, with revenue growth of 27% in the medical capital equipment segment and 43% in the healthcare services segment, as compared to the prior year. We experienced a 9% decrease in revenue over the prior year in our healthcare products distribution segment, the reasons for which are discussed below. Costs and expenses were $106,233,000 for fiscal 2005 as compared with costs and expenses of $89,773,000 for fiscal 2004. The increased costs in particular segments are discussed below. In general, however, greater than anticipated increased costs were experienced principally in the healthcare services segment in connection with the expansion of hospital services in Beijing and the commencement of services in Shanghai and to a lesser extent in the other two segments. We recorded a net loss of $5,658,000 for fiscal 2005, as compared to a net loss of $1,987,000 for fiscal 2004. There were a number of increased costs at the parent level of the Company, including significant increases related to local entity excise taxes and increased corporate governance, including in general Sarbanes-Oxley compliance and in particular preparation for compliance with section 404 thereof and an increase in our allowance for doubtful accounts. The largest parent level increases, which have been allocated among the segments as described below, include increased payroll of $447,000 and increased professional fees of $118,000 both substantially related to compliance and corporate reporting, increased excise taxes of $221,000, and increased rent of $249,000.

     Our business operations in fiscal 2006 will focus on cost reduction programs at the corporate level and cost containment programs at the operating division level. We expect continued growth generally in line with levels achieved in 2005 in the medical capital equipment and healthcare services segments. We have reorganized certain hospital product offerings in the healthcare products distribution division and have initiated a search for a strategic partner in the retail pharmacy business unit of that segment.

Medical Capital Equipment Segment

     The medical capital equipment segment exports high quality Western medical capital equipment to the China market. In fiscal 2005, this segment had revenue of $42,957,000, a 27% increase over revenue of $33,836,000 in fiscal 2004. The revenue increase reflects the continued development of and revenue from new sales channels for our capital medical equipment, involving greater use of local Chinese sub-distributors, as well as the fact that SARS was a significant negative factor in the prior year. Finally, the addition of a new range of medium-priced ultrasound products from Siemens enabled us to penetrate new market segments, thus helping to increase sales.

     Gross profit for the medical equipment segment in fiscal 2005 increased to $11,381,000 from $9,427,000 in fiscal 2004, and as a percentage of revenue was 26% in the recent year as compared to 28% in the prior year. The reduction in gross profit margin is a function of the increased use of channel sales, (i.e. sales through Chinese subdistributors) where the available commission to the Company is slightly less than in a direct sale. Sales under government backed financing arrangements also are made at lower gross profit margins and the gross profit margin may trend downward in those periods where we have significant loan and channel sales.

     Expenses for the medical capital equipment segment in fiscal 2005 increased to $11,392,000 from $9,696,000 in the twelve months ended March 31, 2004 and, as a percentage of revenue over the periods, decreased to 27% from 29%. Salaries for the segment in fiscal 2005 increased by $585,000 over fiscal 2004, and as a percentage of revenue was 10% compared to 11% for the twelve months ended March 31, 2004. Other costs increased $1,111,000 over the periods, primarily due to the segment’s allocated portion of additional parent-level administrative expenses and bad debt expenses. The segment had a loss

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from operation of $11,000 in the recent period, compared with a loss from operations of $269,000 in the prior period.

     In fiscal 2006 the medical capital equipment segment will focus on cost containment and expansion of market penetration primarily through continuing growth in the use of local subdistributor networks. We will also intend to continue to add new products and technologies to our offerings.

Healthcare Products Distribution Segment

     The healthcare products distribution segment distributes medical consumables and healthcare products from inventories maintained locally in China to a network of sub-dealers and pharmacies on a local currency basis. In fiscal 2005, this segment had a decrease in revenue of 9% to $35,017,000 as compared to revenue of $38,393,000 in fiscal 2004. The decrease in revenue during the recent period was attributable to faster than expected phase-out of third party logistics services, the readjustment of distribution territories by a large supplier and delays in the program for the rollout of additional branded products in the retail pharmacy business.

     Gross profit in fiscal 2005 decreased to $4,101,000 from $4,788,000 in the twelve months ended March 31, 2004. As a percentage of revenue, gross profit from the healthcare products distribution segment for the current year was 12%, approximately the same percentage as in the prior year. We encountered increased pricing pressures from our current suppliers and thus did not realize the expected increase in gross profit margin. In addition, with respect to our retail product sales through Chinese pharmacies, as part of the annual distributor agreement review process, effective January 1, 2005 our territory for one large supplier was significantly reduced. Although, as noted above, this reduction led to decreased revenues in the current period, going forward we intend to offset this decrease to a significant extent with an increase in the number of pharmacy outlets covered in the retained provinces based on our supplier’s announced intention to expand market penetration.

     Expenses for the healthcare products distribution segment in fiscal 2005 increased to $6,704,000 from $5,429,000 in fiscal 2004, and increased to 19% as a percentage of revenue as compared to 14% for prior period. Salaries for the segment increased $279,000 primarily due to the timing of payment of bonuses to employees. In addition, other expenses increased $996,000, primarily due to the segment’s allocated portion of additional parent-level administrative costs, increased promotion expenses of $268,000 and bad debt expense. The segment had a loss from operations of $2,603,000 in the recent period, compared with a loss from operations of $641,000 in the prior period.

     In fiscal 2006 the healthcare products distribution segment will focus on cost containment and strategic positioning of the retail pharmacy business unit. We have begun exploring opportunities to diversify our supplier base through strategic relationships with other potential business partners.

Healthcare Services Segment

     During fiscal 2005, the healthcare services segment consisted of an international standard private healthcare facility, Beijing United Family Hospital and Clinics (“BJU”), an affiliated satellite clinic in Beijing, our new hospital in Shanghai, Shanghai United Family Hospital and Clinics (“SHU”), and a clinic affiliated with SHU.

     For the first nine months of fiscal 2005, SHU was in development. SHU received its operating license from the Chinese government on October 19, 2004 and held its opening ceremony on October 21, 2004. SHU was considered fully operational as of January 1, 2005 when inpatient services began. Development costs related to SHU were $2,044,000 for the nine month period, an increase from $780,000 in fiscal 2004.

     For fiscal 2005, the revenue from the segment was $22,801,000, an increase of 43% over fiscal

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2004 revenue of $15,954,000. The increased revenues were primarily attributable to growth in patient volumes partially due to increased services in the Beijing market and to a lesser degree the opening of the new facility in Shanghai. During the prior year the hospital was significantly impacted by the SARS crisis in Beijing, which was principally responsible for the loss in that year. Healthcare services operating costs increased for fiscal 2005 to $23,601,000, a 49% increase over fiscal 2004 costs of $15,854,000. Salaries increased by $4,830,000 (salaries were 58% and 53% of revenue for fiscal years 2005 and 2004, respectively). These increases were due primarily to the costs associated with increased services offered, the period of preparation for JCI accreditation at the BJU facility and three months opening of the Shanghai facilities. Other costs increased $2,917,000, primarily due to increases in direct patient care expenses, other professional fees, excise taxes and depreciation. The healthcare services segment had a loss from operations of $2,844,000 (including $2,044,000 of development expenses) in fiscal 2005, compared with a loss from operations of $680,000 (including $780,000 of development expenses) in the prior year.

     In fiscal 2006 the healthcare services segment will focus on cost containment and continued growth in both the Beijing and Shanghai markets. Subject to the availability of capital, we will continue to ramp-up operations in Shanghai, expand services at all facilities and open a new affiliated satellite clinic in Beijing. We also expect to receive JCI accreditation for our main facility in Beijing during the year.

Other Income and Expenses

     Interest expense incurred on short-term capitalized leases of $189,000, short-term debt of $2,839,000, long-term capitalized leases of $124,000 and long-term debt of $2,749,000 amounted to $318,000 whereas we had $249,000 in the prior period. Interest expense of $229,000 for the current period is net of $89,000 of capitalized interest. The long-term debt is for the development of SHU (see “Liquidity and Capital Resources”). There was no capitalized interest in the prior year because no substantial borrowings had occurred.

Taxes

     We recorded a $57,000 benefit from taxes in fiscal 2005 as compared to a provision for taxes of $64,000 for fiscal 2004. Our deferred tax asset increased by $1,871,000. We also recorded an additional valuation allowance of $1,670,000 that relates primarily to the China operations. The valuation allowance was recorded due to the conclusion that the realization of the tax benefit is currently unknown for the China operations. The remaining tax benefit of $201,000 was recorded for the US operations. This tax computation is in accordance with current accounting standards but assumes a certain level of future profitability. We believe the recognition of the $201,000 in deferred tax assets properly recognizes the benefits we have achieved as a result of our tax restructuring and expect to utilize a substantial portion of the loss carry-forward benefit in fiscal years 2006 and 2007. We have provided a 100% valuation allowance on deferred tax benefits related to losses incurred at Shanghai United, since it has no operating history to support a conclusion that realization of the tax benefit is more likely than not.

Fiscal 2004 compared to twelve months ended December 31, 2002

General

     Our revenue for fiscal 2004 was $88,183,000, up 25% from the twelve months ended December 31, 2002 revenue of $70,617,000. We experienced continued revenue growth in each of the three segments of the business, with revenue growth of 18% in the medical capital equipment segment, 33% in the healthcare products distribution segment, and 23% in the healthcare services segment, compared to the twelve months ended December 31, 2002. The growth in revenue in the medical capital equipment and healthcare products distribution segments was primarily a result of increased marketing and sales

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efforts and expense. The growth in revenue in the healthcare services segment was primarily a result of expanded services offered at Beijing United, including the addition of staff to support those services. Costs and expenses were $89,773,000 for fiscal 2004 as compared with costs and expenses of $70,434,000 for the twelve months ended December 31, 2002. We recorded a net loss of $1,987,000 for fiscal 2004, as compared to net income of $259,000 for the twelve months ended December 31, 2002. Each of our three segments experienced an operating loss in fiscal 2004. We believe that there are three principal reasons for the loss from operations for the fiscal year. First, the fiscal year was marked by the extraordinary experience of dealing with Severe Acute Respiratory Syndrome (SARS), which had a significant negative impact in a variety of ways on our business. Normal Beijing business activity came to a near standstill resulting in the delay of contract negotiations for the sale of medical capital equipment and hospital visits were far below our expectations as foreign residents in Beijing left the capital. Second, the lack of government-sponsored loan programs in the period also adversely impacted the volume of our sales. Third, we continued to incur operational expenses in connection with SHU, while the opening of that hospital was delayed due to a number of factors. Cost increases for the segments are discussed below. There were a number of increased costs at our parent level, including for an upgrade of our data systems in China and new offices in Beijing. The largest parent level increases, which have been allocated among the segments as described below, include increased payroll of $163,000, increased professional fees of $117,000, increased accounting and legal fees of $82,000, and increased rent of $136,000.

Medical Capital Equipment Segment

     The medical capital equipment segment exports high quality Western medical capital equipment to the China market. In fiscal 2004, this segment had revenue of $33,836,000, an 18% increase over revenue of $28,708,000 in the twelve months ended December 31, 2002. Loss from operations was $269,000 in fiscal 2004 compared with income from operations of $198,000 in the twelve months ended December 31, 2002.

     Gross profit in fiscal 2004 increased to $9,427,000 from $7,822,000 in the twelve months ended December 31, 2002. Gross profit margin for the medical capital equipment segment for the recent fiscal year was 28% as compared to 27% in the prior period. Expenses for the medical capital equipment segment in fiscal 2004 increased to $9,696,000 from $7,624,000 in the twelve months ended December 31, 2002 and, as a percentage of revenue over the periods, increased to 29% from 27%. Payroll for the segment in fiscal 2004 increased by $864,000 over payroll in the twelve months ended December 31, 2002, and as a percentage of revenue was 11% compared to 10% for the twelve months ended December 31, 2002. The payroll increase was primarily due to increased sales personnel in connection with expanding the marketing of the segment’s products. In addition, travel and entertainment expenses for the segment increased $428,000. Other costs increased $781,000 over the periods, primarily due to the segment’s allocated portion of additional parent-level administrative expenses and higher costs for new customs fees related to parts purchases, promotion, meeting expenses and telephones.

Healthcare Products Distribution Segment

     The healthcare products distribution segment, consisting of medical consumables and personal healthcare products, had revenue growth of 33% to $38,393,000 fiscal 2004, as compared to revenue of $28,946,000 in the twelve months ended December 31, 2002. The segment had a loss from operations of $641,000 in the recent fiscal year, compared with a loss from operations of $601,000 in the twelve months ended December 31, 2002. We anticipate that revenue growth in this segment will be slower as several customers contemplate and effectuate direct sales and new products are subjected to an increasingly formalized Chinese regulatory process. For example, one significant client, Becton-Dickenson, had recently established a subsidiary in China that performs the logistical services previously performed by our healthcare products distribution division. Another client, Guidant, established a similar subsidiary in China. This transition away from lower margin logistical services is consistent with the division’s strategy of prioritizing higher margin business. With respect to delays in the Chinese

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regulatory process, the launch of new products required longer lead times, due to the fact that China’s regulatory environment is becoming more professional, bureaucratic and transparent, resulting in longer regulatory cycle time. During the regulatory approval process, some products that the division planned to launch encountered delays. The division’s local currency sales of medical consumables and personal healthcare products are made from inventories maintained locally in China (see “Foreign Currency Exchange and Impact of Inflation”) to a network of sub-dealers and pharmacies.

     Gross profit in fiscal 2004 rose to $4,788,000 from $3,856,000 in the twelve months ended December 31, 2002. Gross profit margin from the healthcare products distribution segment decreased to 12% for the 2004 fiscal year from 13% for the twelve months ended December 31, 2002.

     Expenses for the healthcare products distribution segment in fiscal 2004 increased to $5,429,000 from $4,457,000 in the twelve months ended December 31, 2002, but decreased to 14% as a percentage of revenue as compared to 15% for the twelve months ended December 31, 2002. Payroll for the segment increased $281,000 primarily due to increased staff compensation. In addition, travel and entertainment expense for the segment was relatively unchanged while other costs increased $694,000, due primarily to the segment’s allocated portion of additional parent-level administrative costs, increased other professional fees of $221,000 and $163,000 in promotion.

Healthcare Services Segment

     The healthcare services segment consists of two Western style primary care hospitals, Beijing United Family Hospital and Clinics (BJU) and Shanghai United Family Hospital and Clinics (SHU), which continued to be under construction, as well as an affiliated satellite clinic in Beijing. For fiscal 2004, the revenue from this segment was $15,954,000, an increase of 23% over the twelve months ended December 31, 2002 revenue of $12,963,000. The segment had a loss from operations of $680,000 in the recent fiscal year, compared with income from operations of $586,000 for the twelve months ended December 31, 2002. During the recent fiscal year, the hospital was significantly negatively impacted by the SARS crisis in Beijing. Many of BJU’s expatriate patients left the country and many others deferred visits during the April to August period. Healthcare services costs increased for fiscal 2004 to $16,634,000, a 34% increase over the twelve months ended December 31, 2002 costs of $12,377,000. This increase was due primarily to the costs associated with adding to BJU dermatology services and an intensive care unit plus $780,000 of operating expenses of the not yet open SHU facility. Payroll increased by $2,181,000 (payroll was 55% of revenue for fiscal 2004 and 50% for the twelve months ended December 31, 2002), with all other costs increasing a total of $2,027,000, including increases of $679,000 in bad debt accounts, $437,000 in other professional fees and $193,000 in depreciation. During fiscal 2004, in the process of the ongoing roll-out of our new clinical and financial reporting systems throughout this segment, we completed a review of all accounts receivable reflected on our predecessor systems. The increase in our bad debt accounts over periods is primarily based on our determinations in that review that certain patients and/or responsible parties had departed China or otherwise practically became unreachable. The rollout of our new systems also impacted our allowance for doubtful accounts. In addition to our normal reviews, the review of all accounts in connection with the roll-out resulted in an increase in our allowance for doubtful accounts from $883,000 at December 31, 2002 to $1,131,000 at March 31, 2004. Our new systems are designed to better monitor our accounts receivable aging.

     The opening of SHU, which was originally scheduled for the fall of 2003, did not occur until the fall of 2004. The delay in opening the new hospital was due to a number of factors. During the SARS epidemic, travel between Beijing and Shanghai was very difficult and proved a major disruption in the schedule. After the SARS experience ended, we decided to reevaluate the SHU design in light of lessons learned during the epidemic. As a result of this reevaluation, a number of specific design changes were made, such as adding a fever clinic, changing the air conditioning system and increasing the number of rooms where negative pressure could be utilized.

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Loss on Equity Investment

     We recorded an additional equity investment loss of $222,000 in fiscal year 2004, which represents our pro-rata share of additional capital for Natural Formula Asia (NFAL), a joint venture in which we have a 40% interest. The joint venture purchases various cosmetics made by Nesh, an Israeli cosmetics manufacturer, and sells such products into China through pharmacy channels developed by us. Our investment is in the form of a loan to the joint venture. The loan, which was accrued but not yet executed as of March 31, 2004, bears interest at the rate of 5% commencing May 15, 2004, has no stated maturity date and may be prepaid. We reported a loss of $38,000 for this venture in the year ended December 31, 2002.

Other Income and Expenses

     Interest expense on short-term capitalized leases of $123,000, short-term debt of $5,668,000 and long-term capitalized leases of $125,000 amounted to $249,000 whereas we had $54,000 the prior period. Over $2,900,000 of short-term debt is for the development of SHU that is currently under construction (see “Liquidity and Capital Resources”).

Taxes

     We recorded a $64,000 provision for taxes in fiscal 2004 as compared to a benefit from taxes of $240,000 for the twelve months ended December 31, 2002. Our deferred tax asset increased by $909,000. This tax computation is in accordance with current accounting standards but assumes a certain level of future profitability. We believe this properly recognizes the benefits we have achieved as a result of our tax restructuring and expect to utilize a substantial portion of the loss carry-forward benefit in fiscal years 2005 and 2006. We have provided a 100% valuation allowance on deferred tax benefits related to development expenses incurred at Shanghai United, since it has no operating history to support a conclusion that realization of the tax benefit is more likely than not.

Three months ended March 31, 2003 compared to three months ended March 31, 2002 (transition)

     Our revenue for the three months ended March 31, 2003 was $21,849,000, up 40% from the three months ended March 31, 2002 revenue of $15,578,000. We experienced continued growth in each of the three segments of the business, with revenue growth of 16% in the medical capital equipment segment, 74% in the healthcare products distribution segment, and 24% in the healthcare service segment, compared to the same period last year. We recorded net income of $76,000 for the three months ended March 31, 2003, as compared to a net loss of $192,000 for the three months ended March 31, 2002.

Medical Capital Equipment Segment

     In the three months ended March 31, 2003, the medical capital equipment segment had revenue of $7,716,000, a 16% increase over revenue of $6,653,000 in the three months ended March 31, 2002. Income from operations was $521,000 in the recent period compared with a loss from operations of $174,000 in the prior period.

     Gross profit in the three months ended March 31, 2003 increased to $2,474,000 from $1,439,000 in the three months ended March 31, 2002. Gross profit margin for this segment for the recent period was 32% as compared to 22% in the prior period. The increase in gross profit margin is primarily attributable to two factors. First, we had made this a priority for our sales staff and instituted additional reporting and reviewed margin issues on a contract-by-contract basis. Accordingly, where a salesperson might previously have been inclined to accept an offer from a customer to purchase our equipment at a less than optimum margin, the salesperson knew that the contract would be reviewed critically once it was brought back to our senior review staff. This created an additional incentive for the salesperson to seek better pricing from the customer. Second, in the recent period there were no loan program sales, which typically are at a lower gross margin because we are not required to provide warranty service. Thus, in periods

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where there are loan program sales, such as the three months ended March 31, 2002, the average gross profit margin is often lower because of the inclusion of these lower-margin loan sales in the mix. Further, to the extent, as we intend, that in future periods a larger portion of sales are made through sub-dealers, which are local Chinese distributors, then our gross profit margin may be proportionately lower. Sub-dealers represent an additional layer in the distribution process and their compensation reduces our profit. They purchase our products and resell them to customer hospitals. We cannot yet quantify the impact such increase might have or the extent thereof and the related cost cannot as yet be determined.

     Expenses for the medical capital equipment segment in the three months ended March 31, 2003 increased to $1,953,000 from $1,609,000 in the three months ended March 31, 2002 and as a percentage of revenue over the periods increased to 25% from 24%. Salaries for the segment in the three months ended March 31, 2003 increased by $238,000 from the three months ended March 31, 2002, and as a percentage of revenue over the periods increased to 11% from 9%. The salary increase was primarily due to increased payroll benefits mandated by the Chinese government and increased commissions. In addition, travel and entertainment expenses for the segment decreased $11,000. Other costs increased $101,000 over the periods, primarily due to additional administrative expenses offset by lower costs for exhibitions.

Healthcare Products Distribution Segment

     The healthcare products distribution segment had revenue growth of 74% to $10,663,000 in the three months ended March 31, 2003, as compared to revenue of $6,126,000 in the three months ended March 31, 2002. The segment had a loss from operations of $121,000 in the recent period, compared with a loss from operations of $161,000 in the prior period. The large revenue growth over the periods is attributed 26% to a temporary arrangement with an existing client to handle part of their product line that we had not previously handled and that we will not handle in the future. The remaining 48% increase in revenue was caused by growth across multiple product lines resulting from strong demand for healthcare and consumer products by our Chinese customers as well as our strong competitive position and management.

     Gross profit in the three months ended March 31, 2003 rose to $1,097,000 from $767,000 in the three months ended March 31, 2002. Gross profit margin from the healthcare products segment for the recent period was 10% as compared to 12% in the prior period. The decrease in gross profit is primarily attributable to the low margin non-recurring sale mentioned above.

     Expenses for the healthcare products distribution segment in the three months ended March 31, 2003 increased to $1,218,000 from $928,000 in the three months ended March 31, 2002, but decreased as a percentage of revenue over the periods to 11% from 15%. Payroll for the segment increased $151,000 primarily due to increased staff compensation. In addition, travel and entertainment expense for the segment increased $6,000 (but was flat at 1% of revenue for both periods) and other costs increased $134,000 due primarily to increased promotion expense and costs relating to facilities.

Healthcare Services Segment

     For the three months ended March 31, 2003, the revenue from this segment was $3,470,000, an increase of 24% over the three months ended March 31, 2002 revenue of $2,799,000. The segment had a loss from operations of $178,000 in the recent period, compared with income from operations of $42,000 in the prior period. During the recent period, the hospital completed the $2.6 million expansion of its Beijing facility, which contributed to increased patient visits as well as increased inpatient stays over the periods. Total inpatient days in the hospital increased to 669 in the three months ended March 31, 2003 from 518 in the three months ended March 31, 2002, an increase of 29%. For outpatient c