The consolidated financial statements reflect the accounts of the Company and its wholly-owned and majority-owned subsidiaries. All intercompany accounts and transactions have been eliminated.

     On June 24, 1999, the Board of Directors approved a two for three reverse stock split of common shares, which was effected in the form of a reverse stock dividend on July 21, 1999. All common share and per common share amounts included in the accompanying consolidated financial statements and notes thereto have been retroactively restated to give effect to this reverse stock split.

     The preparation of the financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

     We obtain some key materials, including membranes and chemicals, from sole source suppliers. If such materials were no longer available at a reasonable cost from our existing suppliers, we would need to obtain supply contracts with new suppliers for substitute materials. If we need to locate a new supplier, the substitute or replacement materials will most likely be tested for equivalency. Such evaluations could delay development of a product, limit commercial sales of an FDA-approved product and cause us to incur additional expense. In addition, the time expended for such tests could delay the marketing of an FDA-approved product.

     The Company considers all liquid securities with original maturities of three months or less, when purchased, to be cash equivalents.

     Inventories are stated at the lower of cost (determined using the first-in, first-out method) or market. Inventories are reviewed periodically for slow-moving or obsolete status based on sales activity, both projected and historical. Inventories are also reviewed periodically for materials or product under quality compliance investigations. Appropriate reserves are established for inventory that falls into these categories.

     Property and equipment are recorded at cost and depreciated over the estimated useful lives of the assets using the straight-line method. The estimated useful lives are as follows:

     Acquired licenses are included in other assets and are stated at amortized cost. Amortization is calculated using the straight-line method over the estimated useful life of the amortized assets, which is 13 years.

     In accordance with Financial Accounting Standards Board Statement (SFAS) No. 121, Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of, the Company recognizes impairment losses on long-lived assets when indicators of impairment are present and future undiscounted cash flows are insufficient to support the assets’ recovery. Management believes that no such indicators of impairment of its long-lived assets exist at October 31, 2001.

     The Company recognizes revenue from product sales when evidence of arrangement exists, collectibility is probable, price is fixed and shipment has occurred.

     In fiscal 2001, the Company adopted Staff Accounting Bulletin (SAB) No. 101, issued by the Securities and Exchange Commission. SAB No. 101 summarizes some of the Staff’s interpretations and positions on the application of generally accepted accounting principles to revenue recognition. The adoption of SAB No. 101 had no significant impact on the Company’s financial position or results of its operations.

     Research and development costs are expensed as they are incurred. These costs include employee salary and related costs, supplies, outside services, costs of product used in trials and tests, occupancy costs and an allocation of a portion of the unabsorbed fixed costs of manufacturing.

     The Company grants stock options for a fixed number of shares, generally with an exercise price equal to the market value of the shares at the date of grant, as determined by the board of directors. The Company has elected to follow Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) and related interpretations, in accounting for its stock-based compensation plans, rather than the alternative fair value accounting method provided under SFAS 123, Accounting for Stock-Based Compensation, as the latter alternative requires the use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, when the exercise price of options granted to employees equals the market price of the underlying stock on the date of grant, no compensation expense is required.

     The Company applies SFAS 123 and EITF 96-18 Accounting for Equity Instruments That Are Issued to Other than Employees for Acquiring, or in Conjunction with Selling Goods or Services with respect to options issued to nonemployees.

     Basic net loss per common share is computed based on the weighted-average number of common shares outstanding during the period. Diluted net loss per common share is computed based upon the weighted-average number of common shares outstanding during the year, adjusted for the dilutive effect of shares issuable upon the conversion of preferred stock outstanding and the exercise of common stock options and warrants determined based upon average market price of common stock for the period. Diluted net loss per common share is not presented in the accompanying consolidated financial statements because the Company had losses for all periods presented and, consequently, the effect of such preferred stock, options and warrants is anti-dilutive.

     The unaudited pro forma basic net loss per common share is computed using the weighted-average number of outstanding common shares assuming conversion of all convertible preferred shares into common shares (at date of original issuance), which occurred upon completion of the initial public offering.

				Year Ended October 31,
				2001				2000				1999
				In thousands, except share and per share data
Per share data:
	Net loss			$	(49,419	)		$	(36,078	)		$	(35,530	)
	Stock dividends on preferred stock				—				—				(17,915	)
		Net loss applicable to common stockholders		$	(49,419	)		$	(36,078	)		$	(53,445	)
	Weighted-average number of common shares outstanding				25,066,132				23,947,251				14,813,045
Basic net loss per common share				$	(1.97	)		$	(1.51	)		$	(3.61	)
Pro forma (unaudited):
	Weighted-average number of common shares:
		Historical outstanding											14,813,045
		Issued upon assumed conversion of preferred stock											5,555,815
	Total weighted-average number of common shares used in computing basic pro forma net loss per common share												20,368,860
	Basic pro forma net loss per common share											$	(2.62	)

In November 2000, the Company adopted Financial Accounting Standards Board Statement (FASB) SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. This statement provides a comprehensive and consistent standard for the recognition and measurement of derivatives and hedging activities. Adoption of this standard had no material effect on the Company’s financial position or results of operations.

In July 2001, the FASB issued SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 applies to all business combinations completed after June 30, 2001, which among other things, requires the use of the purchase method of accounting. SFAS No. 141 also establishes new criteria for determining whether intangible assets should be recognized separately from goodwill. SFAS No. 142 provides that goodwill and intangible assets with indefinite lives will not be amortized, but rather will be reviewed for impairment at least annually. SFAS No. 142 is effective for fiscal years beginning after December 31, 2001. The Company will apply SFAS No. 142 beginning in the first quarter of fiscal 2002. Management does not expect that the application of SFAS No. 141 or No. 142 will have a significant impact on the results of operations or financial position of the Company.

In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which superseded SFAS No. 121, Accounting for Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The Company is required to adopt SFAS No. 144 in the first quarter of fiscal 2003. The adoption of SFAS No. 144 is not expected to have a material effect on the Company’s financial position or results of its operations.