PART II

Item 5. Market for Common Equity, Related Stockholder Matters and Small Business Issuer Purchases of Equity Securities

Our common stock trades on the OTCBB under the trading symbol NEOP. The prices set forth below reflect the quarterly high, low and closing sales prices for shares of our common stock during the last two fiscal years as reported by Reuters Limited. These quotations reflect inter-dealer prices, without retail markup, markdown or commission, and may not represent actual transactions.

	*High*		*Low*		Close
Fiscal Year 2005:
First Quarter	$	0.72	$	0.37	$	0.46
Second Quarter		0.46		0.30		0.35
Third Quarter		0.40		0.25		0.30
Fourth Quarter		0.32		0.20		0.25

Fiscal Year 2004:
First Quarter	$	1.10	$	0.28	$	0.90
Second Quarter		1.11		0.41		0.60
Third Quarter		0.60		0.35		0.53
Fourth Quarter		0.61		0.37		0.59

As of March 20, 2006, we had approximately 830 holders of common stock of record.

We have not paid any dividends on our common stock and do not anticipate paying cash dividends in the foreseeable future. We intend to retain any earnings to finance the growth of our business. We cannot assure you that we will ever pay cash dividends. Whether we pay cash dividends in the future will be at the discretion of our Board of Directors and will depend upon our financial condition, results of operations, capital requirements and any other factors that the Board of Directors decides are relevant. See Management’s Discussion and Analysis of Financial Condition and Results of Operations, below.

Recent Sales of Unregistered Securities

The following sets forth certain information regarding the sale of equity securities of our company during the period covered by this report that were not registered under the Securities Act of 1933 (the Securities Act).

In June 2005, our Board of Directors authorized the issuance of 37,051 shares of common stock to the trustees of our 401(k) employee benefit plan (the Plan) without registration. Such issuance is exempt from registration under the Securities Act under Section 3(a)(2). The Plan is a pension, profit sharing or stock bonus plan that is qualified under Section 401 of the Internal Revenue Code. The assets of the Plan are held in a single trust fund for the benefit of our employees, which does not hold assets for the benefit of the employees of any other employer. All of the contributions to the Plan from our employees have been invested in assets other than our common stock. We have contributed all of the Neoprobe common stock held by the Plan as a matching contribution that has been less in value at the time it was contributed to the Plan than the employee contributions that it matches.

During 2005, certain investors and placement agents who received warrants to purchase our common stock in connection with a November 2003 financing exercised a total of 206,865 warrants in exchange for 206,865 shares of our common stock, resulting in net proceeds of $57,922. The issuances of the shares and warrants to the investors and the placement agents were exempt from registration under Sections 4(2) and 4(6) of the Securities Act and Regulation D.

Item 6. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read together with our Consolidated Financial Statements and the Notes related to those statements, as well as the other financial information included in this Form 10-KSB. Some of our discussion is forward-looking and involves risks and uncertainties. For information regarding risk factors that could have a material adverse effect on our business, refer to Item 1 of this Form 10-KSB, Description of Business - Risk Factors.

The Company

Neoprobe Corporation is a biomedical technology company that provides innovative surgical and diagnostic products that enhance patient care. We currently market two lines of medical devices; our neo2000^® gamma detection systems and the Quantix^® line of blood flow measurement devices of our subsidiary, Cardiosonix. In addition to our medical device products, we have two radiopharmaceutical products, RIGScan^® CR and Lymphoseek^TM, in the advanced phases of clinical development. We are also exploring the development of our activated cellular therapy (ACT) technology for patient-specific disease treatment through our majority-owned subsidiary, Cira Biosciences, Inc. (Cira Bio).

Executive Summary

This Executive Summary section contains a number of forward-looking statements, all of which are based on current expectations. Actual results may differ materially. Our financial performance is highly dependent on our ability to continue to generate income and cash flow from our gamma device product line and on our ability to successfully commercialize the blood flow products of our subsidiary, Cardiosonix. We cannot assure you, however, that we will achieve the volume of sales anticipated, or if achieved, that the margin on such sales will be adequate to produce positive operating cash flow. We continue to be optimistic about the longer-term potential for our other proprietary, procedural-based technologies such as Lymphoseek and RIGS^® (radio-immuno-guided surgery); however, these technologies are not anticipated to generate any significant revenue for us during 2006. In addition, we cannot assure you that these products will ever obtain marketing clearance from the appropriate regulatory bodies.

We believe that the future prospects for Neoprobe are steadily improving as we continue to make progress in all of our lines of business. We expect revenue from our gamma device line to continue to provide a strong revenue base in 2006, and we expect revenue from our Quantix blood flow measurement products to increase substantially in the coming year as the product refinements introduced during 2005 related to our Quantix/OR^TM system are evaluated by increasing numbers of surgeons around the world.

We expect 2006 to be a year of positive developments for Neoprobe primarily due to our anticipation that Lymphoseek will enter into and complete pivotal clinical trial activities. We expect to spend approximately $3.5 million in out-of-pocket expenses on the development of Lymphoseek over the next twelve to eighteen months in order to complete manufacturing validation and scale-up, to complete Phase II and pivotal clinical trials and to prepare for the submission of a new drug application to the U.S. Food and Drug Administration (FDA) which we expect to submit during the first quarter of 2007. We also expect to incur development expenses in 2006 related to innovations we are working on related to our device product lines as well, although we do not currently expect our out-of-pocket expenses to exceed $1 million related to these projects. We may also incur some development expenses in 2006 related to our RIGS radiopharmaceutical product development although we intend to defer any major expenses until we identify a partner to assist us in the development and commercialization of RIGScan CR. As a result, although we expect to see positive movement in all our lines of business in 2006, we will likely show a loss for the year primarily due to our drug product development efforts.

As of December 31, 2005, our cash and investments on hand totaled $6.5 million. During 2005, we used $3.0 million in cash to fund our operations. We believe our currently available capital resources will be adequate to sustain our device operations at planned levels through 2006. If we decide to seek additional funding to support the development of our products and additional financing is not available when required or is not available on acceptable terms, or we are unable to arrange a suitable strategic opportunity, we may need to modify our business plan. We cannot assure you that the additional capital we require will be available on acceptable terms, if at all. We cannot assure you that we will be able to successfully commercialize products or that we will achieve significant product revenues from our current or potential new products. In addition, we cannot assure you that we will achieve or sustain profitability in the future.

Our Outlook for our Gamma Detection Device Products

We believe our core gamma detection device business line will continue to achieve positive results. Our belief is based on continued interest in the research community in lymphatic mapping. The National Cancer Institute (NCI) recently sponsored two large randomized clinical trials (research studies) for breast cancer comparing sentinel lymph node biopsy (SLNB) with conventional axillary lymph node dissection. The trials were conducted by the National Surgical Adjuvant Breast and Bowel Project (NSABP) and the American College of Surgeons Oncology Group (ACOSOG). NSABP and ACOSOG are both NCI-sponsored Clinical Trials Cooperative Groups, which are networks of institutions and physicians across the country who jointly conduct trials. Although several studies have examined the correlation between the sentinel node and the remaining axillary nodes, these are the first two large randomized multi-center trials that will compare the long-term results of sentinel lymph node removal with full axillary node dissection. Both of these trials are now closed. However, final data from these studies likely will not be presented for another two years. We expect the results from these clinical trials, when announced, will have a positive impact on helping us to penetrate the remaining market for breast cancer and melanoma. We also believe that the surgical community will continue to adopt the SLNB application while a standard of care determination is still pending. We also believe that Lymphoseek, our lymphatic targeting agent, should it become commercially available, could significantly improve the adoption of SLNB in future years in areas beyond melanoma and breast cancer.

We believe that most of the leading cancer treatment institutions in the U.S. and other major global markets have adopted SLNB and purchased gamma detection systems such as the neo2000. As a result, we may be reaching saturation within this segment of the market, except for potential replacement sales. As such, our marketing focus in all major global markets for gamma detection devices will continue to be among local/regional hospitals, which typically lag behind leading research centers and major hospitals in adapting to new technologies. A decline in the adoption of SLNB or the development of alternative technologies by competitors may negatively impact our sales volumes, and therefore, revenues and net income in 2006.

During March 2006, our primary gamma device marketing partner, Ethicon Endo-Surgery, Inc. (EES), a Johnson & Johnson company, exercised the second of its two options to extend the termination date of our distribution agreement with them through the end of 2008. As of December 31, 2005, we had approximately $1.7 million in committed orders from EES that extend through late April 2006. We believe that total quantities of base neo2000systems expected to be purchased by EES during 2006 should be consistent with 2005 purchase levels. We cannot assure you, however, that EES’ product purchases beyond those firmly committed through mid-2006 will indeed occur or that the prices we realize will not be affected by increased competition.

Under the terms of our distribution agreement with EES, the transfer prices we receive on product sales to EES are based on a fixed percentage of their end-customer sales price, subject to a floor transfer price. Throughout their sales history, our products have generally commanded a price premium in most of the markets in which they are sold, which we believe is due to their superior performance and ease of use. The average end-customer sales prices received by EES for our gamma detection devices remained relatively steady and strong for 2005 as compared to 2004 and as a result, the transfer price that we received from selling to EES during 2005 was 22% above the floor pricing for the base system configuration. While we continue to believe in the technical and user-friendly superiority of our products, the competitive landscape continues to evolve and we may lose market share or experience price erosion as a result. A loss of market share or significant price erosion would have a direct negative impact on net income. Although the average price for 2005 was consistent with 2004, sales prices during the second half of 2005 were lower than the first half of the year. If such price erosion should continue into 2006, there is some level of downside pricing risk associated with future sales of our gamma detection devices to EES that may erode some or all of the 22% premium we received in excess of the floor price. However, we believe the anticipated steady volumes coupled will result in continued profitability for our gamma device business line for 2006, even at floor prices.

Our Outlook for our Drugs and Therapeutics

The primary focus of our drug and therapeutic development efforts during 2005 centered around preparing for the start of a pivotal clinical trial for Lymphoseek and this is expected to continue in 2006. Lymphoseek is intended to be used in biopsy procedures for the detection of cancer cells in lymph nodes in a variety of tumor types including breast, melanoma, prostate, gastric and colon cancers. Our Lymphoseek development was focused on three primary areas: drug manufacturing and scale-up, completion of non-clinical safety testing and refinement of a clinical development plan. If approved, Lymphoseek would be the first radiopharmaceutical specifically designed to target lymphatic tissue.

We have recently submitted the Phase II protocol amendment and non-clinical testing data to FDA and are preparing to submit responses to the Chemistry, Manufacturing and Control questions asked by FDA. Following review of these items by FDA, we hope to receive approval begin patient enrollment in the Phase II trial in the second quarter and to be in a position to report preliminary results approximately ninety days after the commencement of patient enrollment. While preparing for the Phase II study, we began working with regulatory agencies in Europe to determine the pathway to seek marketing clearance for Lymphoseek in Europe. As a result of those discussions, it is our intention to pursue marketing clearance for Lymphoseek through the centralized authority, the European Agency for the Evaluation of Medicinal Products (EMEA), in London. We intend to review with the EMEA the Phase III protocol design that will be discussed with FDA with the intention of including European sites in the Phase III study. An investigator’s meeting was held with the Phase II clinical investigators at the recently completed Society of Surgical Oncology (SSO) meeting in March 2006 in preparation for the initiation of patient enrollment in the Phase II study. In addition, the SSO meeting also gave us the opportunity to meet with and recruit potential investigators for the planned Phase III study of Lymphoseek to be initiated later in 2006. We cannot assure you, however, that this product will achieve regulatory approval, or if approved, that it will achieve market acceptance.

Over the past few years, we have made progress in advancing our RIGScan CR development program while incurring little in the way of research expenses. Our RIGS technology, which had been essentially inactive since the failure to gain approval following our original license application in 1997, has been the subject of renewed interest due primarily to the analysis of survival data related to patients who participated in the original Phase III clinical studies that were completed in 1996. We believe there are development milestones that can be achieved prior to the need for significant capital investment in RIGScan CR such as preparing the request for a special protocol assessment (SPA) and completing a final protocol review. However, we continue to believe it will be necessary for Neoprobe to identify a development partner or an alternative funding source in order to prepare for and to fund the pivotal clinical testing that will be necessary to gain marketing clearance for RIGScan CR. We have engaged in discussions with various parties regarding such a partnership. At the present time, while we have parties who have indicated an interest in entering into a development relationship, we do not believe these efforts will result in a partnership until further clarity can be added to the RIGScan regulatory approval pathway, such as perhaps obtaining a positive SPA determination from FDA. However, even if we are able to make such arrangements on satisfactory terms, we believe that the time required for continued development, regulatory approval and commercialization of a RIGS product would likely be a minimum of five years before we receive any significant product-related royalties or revenues. We cannot assure you that we will be able to complete definitive agreements with a development partner for the RIGS technology and do not know if a partner will be obtained on a timely basis on terms acceptable to us, or at all. We also cannot assure you that FDA or the EMEA will clear our RIGS products for marketing or that any such products will be successfully introduced or achieve market acceptance.

In early 2005, we formed a new subsidiary, Cira Bio, to explore the development of ACT. Neoprobe owns approximately 90% of the outstanding shares of Cira Bio with the remaining shares being held by the principals of a private holding company, Cira LLC. In conjunction with the formation of Cira Bio, an amended technology license agreement also was executed with The Ohio State University, from whom both Neoprobe and Cira LLC had originally licensed or optioned the various cellular therapy technologies. As a result of the cross-license agreements, Cira Bio has the development and commercialization rights to three issued U.S. patents that cover the oncology and autoimmune applications of its technology. In addition, Cira Bio has licenses to several pending patent applications.

During 2005, Cira Bio engaged the Battelle Memorial Institute to complete a technology and manufacturing process assessment of the cellular therapy approach. Cira Bio intends to raise the necessary capital to move this technology platform forward; however, Cira Bio has not yet identified a potential source of capital. The means by which this funding is obtained will likely dilute Neoprobe’s ownership interest in Cira Bio; however, we believe that moving forward such a promising technology will only yield positive results for the Neoprobe shareholders and the patients who could benefit from these treatments. However, we do not know if we will be successful in obtaining additional funding, on terms acceptable to us, or at all. In addition, should Cira Bio not be successful in obtaining sufficient capital by December 31, 2006, the technology rights for the oncology applications of ACT would revert back to Neoprobe and the technology rights for the viral and autoimmune applications would revert back to Cira LLC.

Our Outlook for our Blood Flow Measurement Products

We have two blood flow measurement devices, the Quantix/OR and the Quantix/ND^TM, that have regulatory clearance to market in the U.S. and European Union (EU) as well as certain other foreign markets. The Quantix/OR is primarily intended to measure blood flow in cardiac bypass graft and other similar procedures while the Quantix/ND is designed to measure blood flow in neurovascular settings. Our efforts concerning the Quantix products in 2006 will be primarily focused on marketing our Quantix/OR system while we work with thought leaders to determine the ultimate market viability of the Quantix/ND. Currently, we have in place or have executed or reached agreement in principle with distributors and/or master distributors for the Quantix/OR covering the United States, all major market countries in the EU as well substantially all countries that comprise the Pacific Rim of Asia. In addition, we have distribution arrangements in place covering major portions of Central and South America. Our primary focus is to secure marketing and distribution partners who possess appropriate expertise in marketing medical devices, preferably ultrasound or cardiac care devices, into our primary target markets, the cardiovascular, vascular surgery and neurosurgical markets.

We anticipate spending a significant amount of time and effort in 2006 to market the Cardiosonix blood flow products to a wider market. We will need to continue the management of relationships with thought leaders in the cardiac surgery and neurosurgical fields to gain broader exposure to the advantages of our technology. We anticipate continuing to place blood flow systems with industry thought leaders to obtain critical commercial feedback during the widespread market launch. The market education process we envision will likely take some time to develop in the manner we desire. In addition, the sales cycle for medical devices such as our blood flow products is typically a four to six month cycle. As such, significant end customer sales, if they occur, will likely lag the signing of distribution arrangements.

We expect sales of blood flow products for 2006 to be higher than 2005 although such sales are difficult to gauge in situations where the use of the product is dependent on changes in surgical practice as well as subject to the sales cycles, etc. outlined above. We are also investigating alternative pricing strategies such as per use fees or leasing that may affect the adoption rates for our blood flow measurement devices. As a result, we anticipate that the product development and market support costs we will incur in 2006 will be greater than the revenue we generate from the sales of blood flow devices.

Summary

The strengthening of our gamma product (device and drug) portfolio coupled with the introduction of the Cardiosonix blood flow products should position us to eventually achieve profitable operating performance for our device product lines. However, overall profitable operational results will be significantly affected by our decision to fund drug and therapeutic development activities internally.

We anticipate generating a net profit from the sale of our gamma detection devices in 2005, excluding the allocation of any corporate general and administrative costs; however, we expect to show a loss for our blood flow device product line for 2006 due to continued research and development and increased marketing and administrative support costs that are still required to commercialize the product line. Currently, we expect our blood flow operations, excluding any allocation of corporate general and administrative costs, to approach breakeven during the third or fourth quarters of 2006. However, this expectation is based to a large degree on our anticipation that we will achieve the necessary developmental milestones required to achieve significant commercial sales of our Quantix/OR product in a timely manner. The overall operating results for 2006 will be affected by the amount of development for radiopharmaceutical products. If we are unsuccessful in achieving significant commercial sales of the Quantix/OR product in 2006, or if we modify our business plan and decide to carry out RIGS development internally, our profitability estimates will be adversely affected and our business plan will likely need to be modified.

As a result of our decision to fund Lymphoseek development internally, we do not expect to achieve operating profit during 2006. In addition, our net loss and earnings per share will likely be significantly impacted by the non-cash interest expense we expect to record related to the accounting treatment for the beneficial conversion feature of the convertible debt and for the warrants issued in connection with the private placement we completed in December 2004. Also, we cannot assure you that our current or potential new products will be successfully commercialized or that we will achieve significant product revenues or that we will achieve or be able to sustain profitability in the future.

Results of Operations

We reported revenues for 2005 of $5.9 million compared to $6.0 million in the prior year. However, license and other revenues for 2004 included a $600,000 non-cash item, representing the final installment of deferred revenue related to a distribution agreement we entered into with EES in 1999, and no such revenue was recognized in 2005. The decrease in license and other revenue was offset by increases of $251,000 related to blood flow device sales, $203,000 of gamma detection device extended service contract sales, $73,000 of gamma detection device sales, and $40,000 of gamma detection device service revenue.

Gross profit for 2005 decreased $64,000 or 2% as compared to 2004. Excluding license and other revenue, gross profit on net sales of our medical devices increased $536,000 or 18% compared to the prior year. The percentage improvement in gross profit on net sales of our medical devices in 2005 relative to the percentage increase in sales reflects the impact of manufacturing cost control initiatives implemented in 2004 coupled with the positive contribution from the increased service activities.

Results for 2005 also reflect the efforts made in the development of our gamma detection radiopharmaceutical products, RIGScan CR and Lymphoseek. Accordingly, our research and development costs for 2005 increased to $4.0 million compared to $2.5 million in 2004. Consolidated general and administrative expenses remained constant at $3.2 million in 2005 and 2004.

Major expense categories as a percentage of net sales fluctuated from 2004 to 2005 due to increased net sales as well as increased expenses related to our gamma detection radiopharmaceutical and therapeutic products. Research and development expenses, as a percentage of net sales, increased to 68% in 2005 from 46% in 2004 due to increased expenses related to the development of our gamma detection drug and therapeutic products. Selling, general and administrative expenses, as a percentage of net sales, decreased to 53% in 2005 from 59% in 2004 primarily due to the increase in net sales revenue. Due to the ongoing development activities of the company, research and development expenses are expected to be higher as a percentage of sales for 2006 than they were in 2005. In addition, as we move forward with commercialization activities related to the Quantix product line, selling, general and administrative expenses as a percentage of sales are expected to increase in 2006 over 2005.

Years Ended December 31, 2005 and 2004

Net Sales and Margins. Net sales, primarily of our gamma detection systems, increased $567,000, or 11%, to $5.9 million in 2005 from $5.4 million in 2004. Gross margins on net sales increased to 60% of net sales for 2005 compared to 56% of net sales for 2004.

The increase in net sales was the combined result of increases of $251,000 in blood flow device sales, $203,000 in gamma detection device extended service contract sales, $73,000 in gamma detection device sales, and $40,000 in gamma detection device service revenue. The price at which we sell our gamma detection products to EES is based on a percentage of the global average selling price received by EES on sales of Neoprobe products to end customers, subject to a minimum floor price. The base system price at which we sold neo2000 systems to EES increased approximately 1% from 2004 to 2005.

The increase in gross margins on net product sales was the combined result of increased extended service contract sales which typically generate higher margins than sales of our devices coupled with slightly decreased unit costs to manufacture our neo2000 control unit. Gross margins in 2005 were adversely affected by inventory impairments of $42,000 related to our laparoscopic probe product as well as impairments of $13,000 related to our Quantix products. Gross margins in 2004 were adversely affected by a $107,000 impairment charge related to obsolete Quantix inventory.

License and Other Revenue. License and other revenue for 2004 included $600,000 from the pro-rata recognition of license fees related to the distribution agreement with EES. These license fees were fully amortized into income as of the end of the third quarter of 2004. No license revenue was recorded in 2005.

Research and Development Expenses. Research and development expenses increased $1.6 million, or 64%, to $4.0 million during 2005 from $2.5 million in 2004. Research and development expenses in 2005 included approximately $2.3 million in drug and therapy product development costs, $1.4 million in product design activities for the Quantix products and $276,000 gamma detection device development costs. This compares to expenses of $489,000, $1.6 million and $404,000 in these respective product categories in 2004. The changes in each category were primarily due to (i) efforts to move our development of Lymphoseek forward, (ii) the costs of product refinement activities related to the Quantix/OR offsetting cost savings from headcount reductions at our facility in Israel, and (iii) development activities related to updated versions of our neo2000 control unit and detector probes, respectively.

Selling, General and Administrative Expenses. Selling, general and administrative expenses remained steady at $3.2 million during 2005 and 2004. Increases in U.S. headcount and compensation coupled with increases in certain overhead costs such as professional services and facilities expenses were offset by decreased marketing expenses and decreases in certain other overhead costs such as travel, insurance and taxes.

Other Income (Expenses). Other expenses decreased $257,000 to $1.3 million during 2005 from $1.5 million during 2004. The primary reason for the decrease was a $1.1 million decrease in warrant liability resulting from the accounting treatment for the warrants we issued in connection with the private placement of convertible debt we completed in December 2004. In addition, we recorded an increase of $198,000 in interest income resulting from maintaining a higher balance of cash and investments during 2005 compared to 2004. We also recorded interest expense of $1.4 million and $334,000 during 2005 and 2004, respectively, related to debt financings entered into during 2004 and 2003. Of this interest expense, $687,000 and $268,000 in 2005 and 2004, respectively, was non-cash in nature related to the amortization of debt issuance costs and discounts resulting from the warrants and beneficial conversion features of the convertible debt.

Liquidity and Capital Resources

Operating Activities. Cash used in operations increased $2.2 million to $3.0 million during 2005 from $825,000 during 2004. Working capital decreased $3.5 million to $6.9 million at December 31, 2005 as compared to $10.4 million at December 31, 2004. The current ratio decreased to 5.6:1 at December 31, 2005 from 11.3:1 at December 31, 2004. The decrease in working capital was primarily related to cash used in operations coupled with cash used in investing activities.

Cash and investment balances decreased to $6.5 million at December 31, 2005 from $9.8 million at December 31, 2004, primarily as a result of cash used to fund operating activities and service our debt during 2005.

Accounts receivable increased to $673,000 at December 31, 2005 from $412,000 at December 31, 2004. The increase was primarily a result of timing of purchases and payments by EES. We expect overall receivable levels will continue to fluctuate in 2006 depending on the timing of purchases and payments by EES. However, on average, we expect accounts receivable balances will start to increase commensurate with anticipated increases in sales of blood flow products to our distributors, many of whom are foreign-domiciled entities who typically pay at a slower rate than domestic companies. Such increases, if any, will require the increased use of our cash resources over time.

Inventory levels decreased to $804,000 at December 31, 2005 from $855,000 at December 31, 2004. During 2005, we wrote off inventory totaling $42,000 related to our laparoscopic probe product and $13,000 related to our Quantix products. We expect inventory levels to increase during 2006 as we ramp up our blood flow device business, reassess our gamma detection and blood flow measurement device safety stock levels, and prepare for radiopharmaceutical product distribution.

Investing Activities. Cash used in investing activities increased $1.5 million to $1.6 million during 2005 from $111,000 during 2004. We purchased $5.5 million and received $4.0 million from maturities of available-for-sale securities during 2005. Capital expenditures during 2005 were primarily related to purchases of production tools and equipment in preparation for blood flow measurement device production at our contract manufacturers. Capital expenditures during 2004 were primarily purchases of technology infrastructure. Capital needs for 2006 are expected to increase over 2005 as we start up blood flow product production at our contract manufacturers and establish alternative sales financing arrangements for our blood flow devices such as leasing and per use sales pricing.

Financing Activities. Financing activities used $273,000 in cash during 2005 versus providing $9.2 million during 2004. Proceeds from the issuance of common stock were $58,000 and $2.3 million in 2005 and 2004, respectively. Proceeds from notes payable were $8.1 million 2004. Payments of common stock and debt issuance costs were $30,000 and $767,000 in 2005 and 2004, respectively. Payments of notes payable were $190,000 lower during 2005 as compared to 2004, primarily due to the repayment of a note to our CEO in 2004.

During 2004, we sold a total of 2,350,000 shares of common stock and realized net proceeds of $1,468,874 under the terms of a 2001 common stock purchase agreement with the Fusion Capital Fund II, LLC. We also issued Fusion 66,129 shares of common stock for commitment fees related to the sales of our common stock to them during 2004. No common stock was issued to Fusion during 2005. The Fusion common stock purchase agreement expired under its own terms in February 2006.

During April 2003, we also completed a convertible bridge loan agreement with an outside investor for an additional $250,000. In consideration for the loan, we issued a note to the investor in the principal amount of $250,000. The note was secured by general assets of the company, excluding accounts receivable. In addition, we issued the investor 500,000 warrants to purchase our common stock at an exercise price of $0.13 per share, expiring in April 2008. Under the terms of the agreement, the note bore interest at 9.5% per annum, payable monthly, and was due on June 30, 2004. During January 2004, the investor converted the entire balance of the note into 1.1 million shares of common stock according to the conversion terms of the agreement.

During 2004, the certain investors who received warrants to purchase our common stock in connection with a November 2003 financing exercised a total of 3,230,066 warrants in exchange for 3,197,854 shares of our common stock. Of the warrants exercised by these investors in 2004, 3,134,783 were exercised in exchange for 3,134,783 shares of our common stock resulting in net proceeds of $871,398. The remaining 95,283 warrants exercised in 2004 were exercised on a cashless basis in exchange for 63,071 shares of our common stock. During 2005, certain investors and placement agents related to this financing also exercised a total of 206,865 warrants in exchange for 206,865 shares of our common stock, resulting in net proceeds of $57,922.

In December 2004, we completed a private placement of Convertible Promissory Notes in an aggregate principal amount of $8.1 million with Biomedical Value Fund, L.P., Biomedical Offshore Value Fund, Ltd. and David C. Bupp (our President and CEO). Biomedical Value Fund, L.P. and Biomedical Offshore Value Fund, Ltd. are funds managed by Great Point Partners, LLC. The notes bear interest at 8% per annum and are freely convertible into shares of our common stock at a price of $0.40 per share. Neoprobe may force conversion of the notes prior to their stated maturity under certain circumstances. The conversion price represents the ten-day volume weighted average trading price of our common stock through December 10, 2004. As part of this transaction, we issued the investors 10,125,000 warrants to purchase our common stock at an exercise price of $0.46, expiring in December 2009. In connection with this financing, we also issued 1,600,000 warrants to purchase our common stock to the placement agents, containing substantially identical terms to the warrants issued to the investors.

Our future liquidity and capital requirements will depend on a number of factors, including our ability to raise additional capital in a timely manner through additional investment, expanded market acceptance of our current products, our ability to complete the commercialization of new products, our ability to monetize our investment in non-core technologies, our ability to obtain milestone or development funds from potential development and distribution partners, regulatory actions by FDA and other international regulatory bodies, and intellectual property protection. We believe we now have adequate capital to assure that we can properly support our current business goals and objectives for 2006. Our near-term priorities are to commence multi-center trials for our Lymphoseek product, support the launch of the reengineered version of the Quantix/OR products, identify a development and commercialization partner for our RIGS technology, complete a technology assessment of our ACT technology and continue to innovate our gamma detection product line. We cannot assure you that we will be able to achieve significant product revenues from our current or potential new products. We also cannot assure you that we will achieve profitability again.

Contractual Obligations and Commercial Commitments

The following table presents our contractual obligations and commercial commitments as of December 31, 2005.

	Payments Due By Period
Contractual Cash Obligations	Total		Less than 1 Year		1 - 3 Years		4 - 5 Years		After 5 Years
Capital Leases⁽¹⁾	$	61,151	$	24,769	$	33,897	$	2,485	$	—
Operating Leases		208,819		100,129		108,690		—		—
Unconditional Purchase Obligations⁽²⁾		1,869,255		1,869,255		—		—		—
Long-Term Debt⁽³⁾		10,012,043		648,000		9,364,043		—		—
Total Contractual Cash Obligations	$	12,151,268	$	2,642,153	$	9,506,630	$	2,485	$	—

(1)	These amounts include interest at rates between 8% and 13%.

(2)	These amounts represent purchases under binding purchase orders for which we are required to take delivery of the product under the terms of the underlying supply agreements going out approximately one year.

(3)	These amounts include interest at 8% on $8.1 million in outstanding principal due in December 2008, payable in either cash or common stock.

Recent Accounting Developments

In November 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 151, Inventory Costs - An Amendment of ARB No. 43, Chapter 4. This statement amends the guidance in ARB No. 43 Chapter 4, Inventory Pricing, to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). Paragraph 5 of ARB No. 43, Chapter 4, previously stated that “ . . . under some circumstances, items such as idle facility expense, excessive spoilage, double freight, and rehandling costs may be so abnormal to require treatment as a current period charge….” This statement requires that those items be recognized as current-period charges regardless of whether they meet the criterion of “so abnormal.” In addition, this statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. The provisions of this statement will be effective for inventory costs during fiscal years beginning after June 15, 2005. Neoprobe does not believe that the adoption of this statement will have a material impact on its financial condition or results of operations.

In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment, which is a revision of SFAS No. 123, Accounting for Stock-Based Compensation (SFAS No. 123R). SFAS No. 123R supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends SFAS No. 95, Statement of Cash Flows. Generally, the approach in SFAS No. 123R is similar to the approach described in SFAS No. 123. However, SFAS No. 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. We must adopt SFAS No. 123R for interim or annual reporting periods beginning after December 15, 2005. Early adoption will be permitted in periods in which financial statements have not yet been issued. We adopted SFAS No. 123R effective January 1, 2006.

As permitted by SFAS No. 123, during 2005 Neoprobe accounted for share-based payments to employees using APB Opinion No. 25’s intrinsic value method and, as such, generally recognized no compensation cost for employee stock options. However, had we adopted SFAS No. 123R in prior periods, the impact of that standard would have approximated the impact of SFAS No. 123 as described in the disclosure of pro forma net loss and loss per share in Note 1(l) to our consolidated financial statements. The adoption of SFAS No. 123R’s fair value method will have a significant impact on our results of operations, although it will have no impact on our overall cash position. Based on options outstanding at December 31, 2005, we estimate that the adoption of SFAS No. 123R will result in additional compensation expense of approximately $260,000 in 2006 and $115,000 in 2007. However, these amounts may change significantly depending on levels of share-based payments granted in the future and the assumptions for the variables which impact the computation. SFAS No. 123R also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature.

In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets - An Amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions (SFAS No. 153). SFAS No. 153 eliminates the exception from fair value measurement for nonmonetary exchanges of similar productive assets in paragraph 21(b) of APB Opinion No. 29, Accounting for Nonmonetary Transactions, and replaces it with an exception for exchanges that do not have commercial substance. SFAS No. 153 specifies that a nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS No. 153 is effective for fiscal periods beginning after June 15, 2005 and is required to be adopted by Neoprobe beginning January 1, 2006. Neoprobe is currently evaluating the effect that the adoption of SFAS No. 153 will have on its consolidated results of operations and financial condition but does not expect it to have a material impact.

In June 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections - A Replacement of APB Opinion No. 20 and FASB Statement No. 3 (SFAS No. 154). SFAS No. 154 supersedes APB Opinion No. 20, Accounting Changes, and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements. SFAS No. 154 requires retrospective application to prior periods’ financial statements of a voluntary change in accounting principle unless it is impracticable. APB Opinion No. 20 previously required that most voluntary changes in accounting principle be recognized by including in net income of the period of the change the cumulative effect of changing to the new accounting principle. SFAS No. 154 requires that a change in method of depreciation, amortization, or depletion for long-lived, nonfinancial assets be accounted for as a change in accounting estimate that is effected by a change in accounting principle. ABP Opinion No. 20 previously required that such a change be reported as a change in accounting principle. SFAS No. 154 carries forward many provisions of APB Opinion No. 20 without change, including the provisions related to the reporting of a change in accounting estimate, a change in the reporting entity, and the correction of an error. SFAS No. 154 also carries forward the provisions of SFAS No. 3 that govern reporting accounting changes in interim financial statements. SFAS No. 154 is effective for fiscal years beginning after December 15, 2005 and is required to be adopted by Neoprobe beginning January 1, 2006. We do not expect the adoption of SFAS No. 154 to have a material impact on our consolidated results of operations and financial condition.

In September 2005, the Emerging Issues Task Force (EITF) ratified EITF No. 05-8, Income Tax Consequences of Issuing Convertible Debt with a Beneficial Conversion Feature (EITF No. 05-8). EITF No. 05-8 determined that (a) the issuance of convertible debt with a beneficial conversion feature results in a difference between book basis and tax basis of the debt instrument, (b) such difference between book basis and tax basis of the debt instrument is temporary in nature, and (c) the recognition of deferred taxes for the temporary difference of convertible debt with a beneficial conversion feature should be recorded as an adjustment to additional paid-in capital. EITF No. 05-8 is required to be applied retrospectively, and is effective beginning in the first interim or annual reporting period beginning after December 15, 2005. Neoprobe is required to adopt EITF No. 05-8 beginning January 1, 2006. We do not expect the adoption of EITF No. 05-8 to have a material impact on our consolidated results of operations or financial condition, however we do expect the adoption of EITF No. 05-8 to result in a material change in our income tax disclosures.

In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial Instruments - An Amendment of FASB Statements No. 133 and 140 (SFAS No. 155). SFAS No. 155 amends SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, and SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. SFAS No. 155 (a) permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation, (b) clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS No. 133, (c) establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation, (d) clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives, and (e) amends SFAS No. 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. SFAS No. 155 is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006 and is required to be adopted by Neoprobe beginning January 1, 2007. We do not expect the adoption of SFAS No. 155 to have a material impact on our consolidated results of operations and financial condition.

Critical Accounting Policies

The following accounting policies are considered by us to be critical to our results of operations and financial condition.

Revenue Recognition Related to Net Sales. We currently generate revenue primarily from sales of our gamma detection products; however, sales of blood flow products constituted approximately 6% of total revenues for 2005 and are expected to increase in the future. Our standard shipping terms are FOB shipping point, and title and risk of loss passes to the customer upon shipment. We generally recognize sales revenue related to sales of our products when the products are shipped and the earnings process has been completed. However, in cases where product is shipped but the earnings process is not yet completed, revenue is deferred until it has been determined that the earnings process has been completed. Our customers have no right to return products purchased in the ordinary course of business.

The prices we charge our primary customer, EES, related to sales of products are subject to retroactive annual adjustment based on a fixed percentage of the actual sales prices achieved by EES on sales to end customers made during each fiscal year. To the extent that we can reasonably estimate the end-customer prices received by EES, we record sales to EES based upon these estimates. If we are unable to reasonably estimate end customer sales prices related to certain products sold to EES, we record revenue related to these product sales at the minimum (i.e., floor) price provided for under our distribution agreement with EES.

We also generate revenue from the service and repair of out-of-warranty products. Fees charged for service and repair on products not covered by an extended service agreement are recognized on completion of the service process when the serviced or repaired product has been returned to the customer. Fees charged for service or repair of products covered by an extended warranty agreement are deferred and recognized as revenue ratably over the life of the extended service agreement.

Use of Estimates. The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We base these estimates and assumptions upon historical experience and existing, known circumstances. Actual results could differ from those estimates. Specifically, management may make significant estimates in the following areas:

Allowance for Doubtful Accounts. We maintain an allowance for doubtful accounts receivable to cover estimated losses resulting from the inability of our customers to make required payments. We determine the adequacy of this allowance by regularly reviewing our accounts receivable aging and evaluating individual customer receivables, considering customers’ credit and financial condition, payment history and relevant economic conditions. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances for doubtful accounts may be required.

Inventory Valuation. We value our inventory at the lower of cost (first-in, first-out method) or market. Our valuation reflects our estimates of excess, slow moving and obsolete inventory as well as inventory with a carrying value in excess of its net realizable value. Write-offs are recorded when product is removed from saleable inventory. We review inventory on hand at least quarterly and record provisions for excess and obsolete inventory based on several factors, including current assessment of future product demand, anticipated release of new products into the market, historical experience and product expiration. Our industry is characterized by rapid product development and frequent new product introductions. Uncertain timing of product approvals, variability in product launch strategies, product recalls and variation in product utilization all impact the estimates related to excess and obsolete inventory.

Impairment or Disposal of Long-Lived Assets. We account for long-lived assets in accordance with the provisions of SFAS No. 144. This Statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net undiscounted cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. As of December 31, 2005, the most significant long-lived assets on our balance sheet relate to assets recorded in connection with the acquisition of Cardiosonix and gamma detection device patents related to SLNB. The recoverability of these assets is based on the financial projections and models related to the future sales success of Cardiosonix’ products and the continuing success of our gamma detection product line. As such, these assets could be subject to significant adjustment should the Cardiosonix technology not be successfully commercialized or the sales amounts in our current projections not be realized.

Product Warranty. We warrant our products against defects in design, materials, and workmanship generally for a period of one year from the date of sale to the end customer. Our accrual for warranty expenses is adjusted periodically to reflect actual experience. EES also reimburses us for a portion of warranty expense incurred based on end customer sales they make during a given fiscal year.

Fair Value of Warrant Liability. U.S. generally accepted accounting principles required us to classify the warrants issued in connection with our December 2004 placement of convertible promissory notes as a liability due to penalty provisions contained in the underlying securities purchase agreement. The penalty provisions could have required us to pay a penalty of 0.0667% per day of the total debt amount if we failed to meet certain registration deadlines, or if our stock was suspended from trading for more than 30 days. As a liability, the warrants were considered derivative instruments that were required to be periodically “marked to market” on our balance sheet. We estimated the fair value of the warrants at December 31, 2004 using the Black-Scholes option pricing model. On February 16, 2005, Neoprobe and the investors confirmed in writing their intention that the penalty provisions which led to this accounting treatment were intended to apply only to the $8.1 million principal balance of the promissory notes and underlying conversion shares and not to the warrant shares. Because the value of our stock increased $0.19 per share from $0.40 per share at the closing date of the financing on December 14, 2004 to $0.59 per share at December 31, 2004, our year end, the effect of marking the warrant liability to “market” at December 31, 2004 resulted in an increase in the estimated fair value of the warrant liability of $1.2 million which was recorded as non-cash expense during the fourth quarter of 2004. Subsequently, the value of our stock increased $0.02 per share from $0.59 at December 31, 2004 to $0.61 per share at February 16, 2005, such that marking the warrant liability to “market” at February 16, 2005 resulted in an increase in the estimated fair value of the warrant liability of $142,427 which was recorded as non-cash expense during the first quarter of 2005. The estimated fair value of the warrant liability was then reclassified to additional paid-in capital during the first quarter of 2005.

Other Items Affecting Financial Condition

At December 31, 2005, we had U.S. net operating tax loss carryforwards and tax credit carryforwards of approximately $131.3 million and $4.3 million, respectively, available to offset or reduce future income tax liability, if any, through 2025. However, under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, use of prior tax loss and credit carryforwards may be limited after an ownership change. As a result of ownership changes as defined by Sections 382 and 383, which have occurred at various points in our history, we believe utilization of our tax loss carryforwards and tax credit carryforwards may be significantly limited.

Item 7. Financial Statements

Our consolidated financial statements, and the related notes, together with the reports of BDO Seidman, LLP dated March 30, 2006 and KPMG LLP dated March 31, 2005, are set forth at pages F-1 through F-28 attached hereto.

Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 8A. Controls and Procedures.

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the Exchange Act)). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures are adequately designed to ensure that the information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, possessed, summarized and reported, within the time periods specified in the applicable rules and forms. During the last fiscal quarter covered by this Annual Report on Form 10-KSB, there was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Item 8B. Other Information.

None.

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

NEOPROBE CORPORATION

FORM 10-KSB ANNUAL REPORT

FOR THE FISCAL YEARS ENDED:

DECEMBER 31, 2005 AND 2004

FINANCIAL STATEMENTS

NEOPROBE CORPORATION and SUBSIDIARY

Index to Financial Statements


Consolidated Financial Statements of Neoprobe Corporation
Report of Independent Registered Public Accounting Firm BDO Seidman, LLP	F-2
Report of Independent Registered Public Accounting Firm KPMG LLP	F-3
Consolidated Balance Sheets as of December 31, 2005 and December 31, 2004	F-4
Consolidated Statements of Operations for the years ended December 31, 2005 and December 31, 2004	F-6
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2005 and December 31, 2004	F-7
Consolidated Statements of Cash Flows for the years ended December 31, 2005 and December 31, 2004	F-8
Notes to the Consolidated Financial Statements	F-9

F-1

Report of Independent Registered Public Accounting Firm

Board of Directors

Neoprobe Corporation

Dublin, Ohio

We have audited the accompanying consolidated balance sheet of Neoprobe Corporation as of December 31, 2005 and the related consolidated statements of operations, stockholders’ equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Neoprobe Corporation at December 31, 2005 and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

/s/ BDO Seidman, LLP

Chicago, Illinois

March 30, 2006

F-2

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

Neoprobe Corporation:

We have audited the accompanying consolidated balance sheet of Neoprobe Corporation and subsidiaries as of December 31, 2004, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Neoprobe Corporation and subsidiaries as of December 31, 2004, and the results of their operations and their cash flows for the year then ended, in conformity with U.S. generally accepted accounting principles.

/s/ KPMG LLP

Columbus, Ohio

March 31, 2005

F-3

Neoprobe Corporation and Subsidiaries

Consolidated Balance Sheets

December 31, 2005 and 2004

ASSETS	2005		2004
Current assets:
Cash and cash equivalents	$	4,940,946	$	9,842,658
Available-for-sale securities		1,529,259		—
Accounts receivable, net		673,008		411,856
Inventory		803,703		855,022
Prepaid expenses and other		501,557		327,408
Total current assets		8,448,473		11,436,944

Property and equipment		2,051,793		2,341,785
Less accumulated depreciation and amortization		1,768,558		2,003,942
		283,235		337,843

Patents and trademarks		3,162,547		3,155,334
Non-compete agreements		—		584,516
Acquired technology		237,271		237,271
		3,399,818		3,977,121
Less accumulated amortization		1,300,908		1,458,012
		2,098,910		2,519,109

Other assets		739,823		1,071,999
Total assets	$	11,570,441	$	15,365,895

Continued

F-4

Neoprobe Corporation and Subsidiaries

Consolidated Balance Sheets, continued

LIABILITIES AND STOCKHOLDERS’ EQUITY	2005			2004
Current liabilities:
Accounts payable	$	207,824		$	198,912
Accrued liabilities and other		821,781			378,247
Capital lease obligations, current		19,530			13,863
Deferred revenue, current		252,494			176,192
Notes payable to finance companies		200,054			242,722
Total current liabilities		1,501,683			1,009,936

Capital lease obligations		31,855			30,297
Deferred revenue		41,132			57,591
Notes payable to CEO, net of discounts of $26,249 and $32,204, respectively		73,751			67,796
Notes payable to investor, net of discounts of $2,099,898 and $2,576,302, respectively		5,900,102			5,423,698
Liability related to warrants to purchase common stock		—			2,560,307
Other liabilities		5,122			52,440
Total liabilities		7,553,645			9,202,065

Commitments and contingencies

Stockholders’ equity:
Preferred stock; $.001 par value; 5,000,000 shares
authorized at December 31, 2005 and 2004; none issued and outstanding (500,000 shares designated as Series A, $.001 par value, at December 31, 2004; none outstanding)		—			—
Common stock; $.001 par value; 150,000,000 shares authorized,
58,622,059 shares issued and outstanding at December 31, 2005;
100,000,000 shares authorized, 58,378,143 shares issued and
outstanding at December 31, 2004		58,622			58,378
Additional paid-in capital		134,903,259			132,123,605
Accumulated deficit		(130,947,103	)		(126,018,153	)
Accumulated other comprehensive income		2,018			—
Total stockholders’ equity		4,016,796			6,163,830
Total liabilities and stockholders’ equity	$	11,570,441		$	15,365,895

See accompanying notes to consolidated financial statements.

F-5

Neoprobe Corporation and Subsidiaries

Consolidated Statements of Operations

	Years Ended December 31,
	2005			2004
Revenues:
Net sales	$	5,919,473		$	5,352,640
License and other revenue		—			600,000
Total revenues		5,919,473			5,952,640

Cost of goods sold		2,376,211			2,344,925

Gross profit		3,543,262			3,607,715

Operating expenses:
Research and development		4,031,790			2,453,755
Selling, general and administrative		3,155,674			3,153,059
Total operating expenses		7,187,464			5,606,814

Loss from operations		(3,644,202	)		(1,999,099	)

Other income (expense):
Interest income		226,663			28,869
Interest expense		(1,350,592	)		(334,196	)
Increase in warrant liability		(142,427	)		(1,245,307	)
Other		(18,392	)		8,711
Total other expenses		(1,284,748	)		(1,541,923	)
Net loss	$	(4,928,950	)	$	(3,541,022	)

Net loss per common share:
Basic	$	(0.08	)	$	(0.06	)
Diluted	$	(0.08	)	$	(0.06	)

Weighted average shares outstanding:
Basic		58,433,895			56,763,710
Diluted		58,433,895			56,763,710

See accompanying notes to consolidated financial statements.

F-6

Neoprobe Corporation and Subsidiaries

Consolidated Statements of Stockholders’ Equity

	Common Stock				Additional Paid-in			Accumulated			Accumulated Other Comprehensive
	Shares		Amount		Capital			Deficit			Income		Total

Balance, December 31, 2003		51,520,723	$	51,521	$	127,684,555		$	(122,477,131	)	$	—	$	5,258,945

Issued stock upon conversion of note payable to investor		1,098,851		1,099		250,748			—			—		251,847
Issued warrants in exchange for extension of note payable to CEO		—		—		171,801			—			—		171,801
Issued stock upon exercise of warrants		3,251,354		3,251		874,488			—			—		877,739
Issued stock in connection with stock purchase agreement		2,416,129		2,416		1,468,918			—			—		1,471,334
Issued stock options to consultants		—		—		172,736			—			—		172,736
Effect of beneficial conversion feature of convertible promissory notes		—		—		1,315,000			—			—		1,315,000
Issued warrants as fees to investment banking firms		—		—		208,014			—			—		208,014
Issued stock to 401(k) plan at $0.16		91,086		91		14,402			—			—		14,493
Paid offering costs related to issuance of stock and warrants		—		—		(37,057	)		—			—		(37,057	)
Net loss		—		—		—			(3,541,022	)		—		(3,541,022	)
Balance, December 31, 2004		58,378,143		58,378		132,123,605			(126,018,153	)		—		6,163,830

Issued stock upon exercise of warrants		206,865		207		57,715			—			—		57,922
Issued stock to 401(k) plan at $0.39		37,051		37		19,205			—			—		19,242
Reclassified liability related to warrants to purchase common stock		—		—		2,702,734			—			—		2,702,734
Comprehensive income (loss):
Net loss		—		—		—			(4,928,950	)		—		(4,928,950	)
Unrealized gain on available-for-sale securities		—		—		—			—			2,018		2,018
Total comprehensive loss														(4,926,932	)
Balance, December 31, 2005		58,622,059	$	58,622	$	134,903,259		$	(130,947,103	)	$	2,018	$	4,016,796

See accompanying notes to consolidated financial statements.

F-7

Neoprobe Corporation and Subsidiaries

Consolidated Statements of Cash Flows

	Years Ended December 31,
	2005			2004
Cash flows from operating activities:
Net loss	$	(4,928,950	)	$	(3,541,022	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation of property and equipment		163,121			154,703
Amortization of intangible assets		440,629			434,728
Provision for bad debts		320			79,718
Net loss on disposal and abandonment of assets		6,650			11,467
Amortization of debt discount and offering costs		687,370			266,580
Increase in warrant liability		142,427			1,245,307
Stock options granted for research and development		—			172,736
Other		(8,199	)		15,551
Change in operating assets and liabilities:
Accounts receivable		(261,472	)		616,226
Inventory		34,163			131,532
Prepaid expenses and other assets		257,005			169,001
Accounts payable		8,912			(26,120	)
Accrued liabilities and other liabilities		396,201			166,026
Deferred revenue		59,843			(721,804	)
Net cash used in operating activities		(3,001,980	)		(825,371	)

Cash flows from investing activities:
Purchases of available-for-sale securities		(5,480,787	)		—
Maturities of available-for-sale securities		3,950,000			—
Purchases of property and equipment		(86,004	)		(87,923	)
Proceeds from sales of property and equipment		11,092			2,960
Patent and trademark costs		(20,625	)		(25,779	)
Net cash used in investing activities		(1,626,324	)		(110,742	)

Cash flows from financing activities:
Proceeds from issuance of common stock		57,922			2,349,073
Payment of offering costs		—			(37,057	)
Proceeds from notes payable		—			8,100,000
Payment of debt issuance costs		(29,635	)		(729,978	)
Payment of notes payable		(286,035	)		(476,125	)
Payments under capital leases		(15,680	)		(15,902	)
Other		20			—
Net cash (used in) provided by financing activities		(273,408	)		9,190,011
Net (decrease) increase in cash and cash equivalents		(4,901,712	)		8,253,898
Cash and cash equivalents, beginning of year		9,842,658			1,588,760
Cash and cash equivalents, end of year	$	4,940,946		$	9,842,658

See accompanying notes to consolidated financial statements.

F-8

Notes to the Consolidated Financial Statements

1.	Organization and Summary of Significant Accounting Policies:

Organization and Nature of Operations: Neoprobe Corporation (Neoprobe, the company, or we), a Delaware corporation, is engaged in the development and commercialization of innovative surgical and diagnostic products that enhance patient care by meeting the critical decision making needs of physicians. We currently manufacture two lines of medical devices: the first is a line of gamma radiation detection equipment used in the application of intraoperative lymphatic mapping (ILM), and the second is a line of blood flow monitoring devices for a variety of diagnostic and surgical applications.

Our gamma detection device products are marketed throughout most of the world through a distribution arrangement with Ethicon Endo-Surgery, Inc. (EES), a Johnson & Johnson company. For the years ended December 31, 2005 and 2004, 92% and 91% of net sales, respectively, were made to EES. The loss of this customer would have a significant adverse effect on our operating results.

Our blood flow measurement device product line is in the early stages of commercialization. Our activity with this product line was initiated with our acquisition of Cardiosonix Ltd. (Cardiosonix, formerly Biosonix Ltd.), located in Ra’anana, Israel, on December 31, 2001.

We also have developmental and/or intellectual property rights related to two drugs that might be used in connection with gamma detection devices in cancer surgeries. The first, Lymphoseek^TM, is intended to be used in tracing the spread of certain solid tumor cancers. The second, RIGScan^® CR, is intended to be used to help surgeons locate cancerous tissue during colorectal cancer surgeries. Both of these drug products are still in development and must be cleared for marketing by the appropriate regulatory bodies before they can be sold in any markets.

In addition, in January 2005 we formed a new corporation, Cira Biosciences, Inc. (Cira Bio), to explore the development of patient-specific cellular therapies that have shown positive patient responses in a variety of clinical settings. Cira Bio is combining our activated cellular therapy (ACT) technology for patient-specific oncology treatment with similar technology licensed from Cira LLC, a privately held company, for treating viral and autoimmune diseases. Neoprobe owns approximately 90% of the outstanding shares of Cira Bio with the remaining shares being held by the principals of Cira LLC.

Principles of Consolidation: Our consolidated financial statements include the accounts of Neoprobe, our wholly-owned subsidiary, Cardiosonix, and our majority-owned subsidiary, Cira Bio. All significant inter-company accounts were eliminated in consolidation.

Fair Value of Financial Instruments: The following methods and assumptions were used to estimate the fair value of each class of financial instruments:

(1)

Cash and cash equivalents, accounts receivable, accounts payable, and accrued liabilities: The carrying amounts approximate fair value because of the short maturity of these instruments.

(2)

Available-for-sale securities: Available-for-sale securities are recorded at fair value. Unrealized holding gains and losses, net of the related tax effect, on available-for-sale securities are excluded from earnings and are reported as a separate component of other comprehensive income (loss) until realized. Realized gains and losses from the sale of available-for-sale securities are determined on a specific identification basis.

A decline in the market value of any available-for-sale security below cost that is deemed to be other than temporary results in a reduction in carrying amount to fair value. The impairment is charged to earnings and a new cost basis for the security is established. Premiums and discounts are amortized or accreted over the life of the related available-for-sale security as an adjustment to yield using the effective interest method. Dividend and interest income are recognized when earned.

Available-for-sale securities are classified as current based on our intent to use them to fund short-term working capital needs.

F-9

Notes to the Consolidated Financial Statements

(3)

Notes payable to finance companies: The fair value of our debt is estimated by discounting the future cash flows at rates currently offered to us for similar debt instruments of comparable maturities by banks or finance companies. At December 31, 2005 and 2004, the carrying values of these instruments approximate fair value.

(4)

Notes payable to CEO: The carrying value of our debt is presented as the face amount of the notes less the unamortized discounts related to the value of the beneficial conversion features and the initial estimated fair value of the warrants to purchase common stock issued in connection with the notes. At December 31, 2005, the carrying value of the note payable to our CEO approximates fair value. At December 31, 2004, the fair value of the note payable to our CEO was approximately $75,000, as determined by a third-party valuation expert.

(5)

Notes payable to outside investors: The carrying value of our debt is presented as the face amount of the notes less the unamortized discounts related to the value of the beneficial conversion features and the initial estimated fair value of the warrants to purchase common stock issued in connection with the notes. At December 31, 2005, the carrying value of the note payable to outside investors approximates fair value. At December 31, 2004, the fair value of the note payable to outside investors was approximately $6.0 million, as determined by a third-party valuation expert.

Cash and Cash Equivalents: There were no cash equivalents at December 31, 2005 or 2004. As of December 21, 2005 and 2004, $8,000 and $19,000, respectively, was restricted to secure bank guarantees related to sub-lease agreements for Cardiosonix’ office space.

Inventory: All components of inventory are valued at the lower of cost (first-in, first-out) or market. We adjust inventory to market value when the net realizable value is lower than the carrying cost of the inventory. Market value is determined based on recent sales activity and margins achieved.

The components of net inventory at December 31, 2005 and 2004 are as follows:

	2005		2004

Materials and component parts	$	461,218	$	486,323
Finished goods		342,485		368,699
	$	803,703	$	855,022

During 2005 and 2004, we wrote off $58,000 and $107,000, respectively, of excess and obsolete materials, primarily due to reduced demand for our laparoscopic probes and design changes to our Quantix^® product line.

Property and Equipment: Property and equipment are stated at cost. Property and equipment under capital leases are stated at the present value of minimum lease payments. Depreciation is computed using the straight-line method over the estimated useful lives of the depreciable assets ranging from 2 to 7 years, and includes amortization related to equipment under capital leases. Maintenance and repairs are charged to expense as incurred, while renewals and improvements are capitalized. Property and equipment includes $78,000 and $56,000 of equipment under capital leases with accumulated amortization of $33,000 and $14,000 at December 31, 2005 and 2004, respectively. During 2005 and 2004, we recorded losses of $7,000 and $4,000, respectively, on the disposal of property and equipment.

F-10

Notes to the Consolidated Financial Statements

The major classes of property and equipment are as follows:

	Useful Life		2005		2004

Production machinery and equipment		5 years	$	999,106	$	1,060,610
Other machinery and equipment, primarily computers and research equipment		2 - 5 years		543,313		663,772
Furniture and fixtures		7 years		334,275		360,663
Leasehold improvements		Life of Lease¹		74,682		134,856
Software		3 years		100,417		121,884
			$	2,051,793	$	2,341,785

We amortize leasehold improvements over the life of the lease, which in all cases we believe is shorter than the estimated useful life of the asset.

Intangible Assets: Intangible assets consist primarily of patents and other acquired intangible assets. Intangible assets are stated at cost, less accumulated amortization. Patent costs are amortized using the straight-line method over the estimated useful lives of the patents of 5 to 15 years. Patent application costs are deferred pending the outcome of patent applications. Costs associated with unsuccessful patent applications and abandoned intellectual property are expensed when determined to have no recoverable value. Acquired technology costs are amortized using the straight-line method over the estimated useful life of seven years. Non-compete agreements were amortized using the straight-line method over their estimated useful lives of four years. Non-compete agreements expired as of December 31, 2005. We evaluate the potential alternative uses of all intangible assets, as well as the recoverability of the carrying values of intangible assets on a recurring basis.

The major classes of intangible assets are as follows:

			December 31, 2005				December 31, 2004
	Wtd Avg Life		Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization

Patents and trademarks		10 yrs	$	3,162,547	$	1,164,763	$	3,155,334	$	915,571
Non-compete agreements		—		—		—		584,516		440,005
Acquired technology		3 yrs		237,271		136,145		237,271		102,436
Total			$	3,399,818	$	1,300,908	$	3,977,121	$	1,458,012

During 2005 and 2004, we recorded general and administrative expenses of $440,000 and $442,000, respectively, of intangible asset amortization expense. Of those amounts, $11,000 and $7,000, respectively, was related to the abandonment of gamma detection patents and patent applications that were deemed no longer recoverable or part of our ongoing business.

The estimated future amortization expenses for the next five fiscal years are as follows:

	Estimated Amortization Expense

For the year ended 12/31/2006	$	262,992
For the year ended 12/31/2007		226,830
For the year ended 12/31/2008		201,976
For the year ended 12/31/2009		168,267
For the year ended 12/31/2010		168,267

F-11

Notes to the Consolidated Financial Statements

Other Assets:

Other assets consist primarily of deferred debt issuance costs. We defer costs associated with the issuance of notes payable and amortize those costs over the period of the notes using the effective interest method. In 2005 and 2004, we incurred $10,000 and $938,000, respectively, of debt issuance costs related to notes payable. Of the debt issuance costs incurred in 2004, $208,000 was non-cash in nature. See Note 6.

Revenue Recognition:

(1)

Product Sales: We derive revenues primarily from sales of our medical devices. Our standard shipping terms are FOB shipping point, and title and risk of loss passes to the customer upon delivery to a common carrier. We generally recognize sales revenue when the products are shipped and the earnings process has been completed. However, in cases where product is shipped but the earnings process is not yet completed, revenue is deferred until it has been determined that the earnings process has been completed. Our customers have no right to return products purchased in the ordinary course of business.

Sales prices on gamma detection products sold to EES are subject to retroactive annual adjustment based on a fixed percentage of the actual sales prices achieved by EES on sales to end customers made during each fiscal year, subject to a minimum (i.e., floor) price. To the extent that we can reasonably estimate the end customer prices received by EES, we record sales to EES based upon these estimates. To the extent that we are not able to reasonably estimate end customer sales prices related to certain products sold to EES, we record revenue related to these product sales at the floor price provided for under our distribution agreement with EES.

We recognize revenue related to the sales of products to be used for demonstration units when products are shipped and the earnings process has been completed. Our distribution agreements do not permit return of purchased demonstration units in the ordinary course of business nor do we have any performance obligations other than normal product warranty obligations. To the extent that the earnings process has not been completed, revenue is deferred. To the extent we enter into multiple-element arrangements, we allocate revenue based on the relative fair value of the elements.

(2)

Extended Warranty Revenue: We derive revenues from the sale of extended warranties covering our medical devices over periods of one to four years. We recognize revenue from extended warranty sales on a pro-rata basis over the period covered by the extended warranty. Expenses related to the extended warranty are recorded when incurred.

(3)

Service Revenue: We derive revenues from the repair and service of our medical devices that are in use beyond the term of the original warranty and that are not covered by an extended warranty. We recognize revenue from repair and service activities once the activities are complete and the repaired or serviced device has been shipped back to the customer.

(4)

License Revenue: We recognized license revenue in connection with our distribution agreement with EES on a straight-line basis over the five-year initial term of the agreement based on our obligations to provide ongoing support for the intellectual property being licensed such as patent maintenance and regulatory filings. As the license related to intellectual property held or licensed to us, we incurred no significant cost associated with the recognition of this revenue. The license revenue was fully recognized as of September 30, 2004.

Research and Development Costs: All costs related to research and development are expensed as incurred.

Income Taxes: Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Due to the uncertainty surrounding the realization of these favorable tax attributes in future tax returns, all of the net deferred tax assets have been fully offset by a valuation allowance at December 31, 2005.

F-12

Notes to the Consolidated Financial Statements

Stock Option Plans: At December 31, 2005, we have three stock-based employee compensation plans. (See Note 8(a).) We apply the intrinsic value-based method of accounting prescribed by Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations, in accounting for our stock options. As such, compensation expense is recorded on the date of grant and amortized over the period of service only if the current market price of the underlying stock exceeds the exercise price. No stock-based employee compensation cost related to options is reflected in net income (loss), as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant.

The fair value of each option grant was estimated on the date of the grant using the Black-Scholes option-pricing model with the following assumptions for 2005 and 2004, respectively: average risk-free interest rates of 4.3% and 3.0%; volatility of 79% for 2005 and 127% for 2004; and no dividend rate for any year. The weighted average fair value of options granted in 2005 and 2004 was $0.28 and $0.39, respectively.

The following table illustrates the effect on net income (loss) and earnings (loss) per share if compensation cost for our stock-based compensation plans had been determined based on the fair value at the grant dates for awards under those plans consistent with Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation:

	Years Ended December 31,
	2005			2004

Net loss, as reported	$	(4,928,950	)	$	(3,541,022	)
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards		(511,712	)		(304,266	)
Pro forma net loss	$	(5,440,662	)	$	(3,845,288	)

Loss per common share:
As reported (basic and diluted)	$	(0.08	)	$	(0.06	)
Pro forma (basic and diluted)	$	(0.09	)	$	(0.07	)

Equity Issued to Non-Employees: We account for equity instruments granted to non-employees in accordance with the provisions of SFAS No. 123 and Emerging Issues Task Force Issue No. 96-18, Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services. All transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the equity instrument issued, whichever is more reliably measurable. The measurement date of the fair value of the equity instrument issued is the earlier of the date on which the counterparty’s performance is complete or the date on which it is probable that performance will occur. During 2004, we issued 250,000 options to non-employee consultants and recognized $173,000 of research and development expense related to options granted to consultants.

Use of Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management 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 revenues and expenses during the reporting period. Actual results could differ from those estimates.

F-13

Notes to the Consolidated Financial Statements

Comprehensive Income (Loss): Due to our net operating loss position, there are no income tax effects on comprehensive income (loss) components for the year ended December 31, 2005.

	Year Ended December 31, 2005

Net loss	$	(4,928,950	)
Unrealized gains on available-for-sale securities		2,018
Other comprehensive loss	$	(4,926,932	)

We had no accumulated other comprehensive income (loss) activity during the year ended December 31, 2004.

Impairment or Disposal of Long-Lived Assets: We account for long-lived assets in accordance with the provisions of SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. This Statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net undiscounted cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.

Recent Accounting Developments: In November 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 151, Inventory Costs - An Amendment of ARB No. 43, Chapter 4. This statement amends the guidance in ARB No. 43 Chapter 4, Inventory Pricing, to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). Paragraph 5 of ARB No. 43, Chapter 4, previously stated that “ . . . under some circumstances, items such as idle facility expense, excessive spoilage, double freight, and rehandling costs may be so abnormal to require treatment as a current period charge….” This statement requires that those items be recognized as current-period charges regardless of whether they meet the criterion of “so abnormal.” In addition, this statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. The provisions of this statement will be effective for inventory costs during fiscal years beginning after June 15, 2005. Neoprobe does not believe that the adoption of this statement will have a material impact on its financial condition or results of operations.

F-14

Notes to the Consolidated Financial Statements

In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets - An Amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions (SFAS No. 153). SFAS No. 153 eliminates the exception from fair value measurement for nonmonetary exchanges of similar productive assets in paragraph 21(b) of APB Opinion No. 29, Accounting for Nonmonetary Transactions, and replaces it with an exception for exchanges that do not have commercial substance. SFAS No. 153 specifies that a nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS No. 153 is effective for fiscal periods beginning after June 15, 2005 and is required to be adopted by Neoprobe beginning January 1, 2006. Neoprobe is currently evaluating the effect that the adoption of SFAS No. 153 will have on its consolidated results of operations and financial condition but does not expect it to have a material impact.

F-15

Notes to the Consolidated Financial Statements

2.	Earnings Per Share:

Basic earnings (loss) per share are calculated using the weighted average number of common shares outstanding during the periods. Diluted earnings (loss) per share is calculated using the weighted average number of common shares outstanding during the periods, adjusted for the effects of convertible securities, options and warrants, if dilutive.

	Year Ended December 31, 2005						Year Ended December 31, 2004
	Basic Earnings Per Share			Diluted Earnings Per Share			Basic Earnings Per Share			Diluted Earnings Per Share
Outstanding shares		58,622,059			58,622,059			58,378,143			58,378,143
Effect of weighting changes in outstanding shares		(58,164	)		(58,164	)		(1,484,433	)		(1,484,433	)
Contingently issuable shares		(130,000	)		(130,000	)		(130,000	)		(130,000	)
Adjusted shares		58,433,895			58,433,895			56,763,710			56,763,710

There is no difference in basic and diluted loss per share related to 2005 or 2004. The net loss per common share for 2005 and 2004 excludes 40,648,684 and 37,982,562, respectively, of common shares issuable upon exercise of outstanding stock options and warrants into our common stock or upon the conversion of convertible debt since such inclusion would be anti-dilutive.

3.	Accounts Receivable and Concentrations of Credit Risk:

Accounts receivable at December 31, 2005 and 2004, net of allowance for doubtful accounts of $1,000 and $2,000, respectively, consist of the following:

	2005		2004

Trade	$	663,898	$	403,674
Other		9,110		8,182
	$	673,008	$	411,856

At December 31, 2005 and 2004, approximately 91% and 88%, respectively, of net accounts receivable are due from EES. We do not believe we are exposed to significant credit risk related to EES based on the overall financial strength and credit worthiness of the customer and its parent company. We believe that we have adequately addressed other credit risks in estimating the allowance for doubtful accounts.

F-16

Notes to the Consolidated Financial Statements

We estimate an allowance for doubtful accounts based on a review and assessment of specific accounts receivable and write off accounts when deemed uncollectible. The activity in the allowance for doubtful accounts for the years ended December 31, 2005 and 2004 is as follows:

	2005			2004

Allowance for doubtful accounts at beginning of year	$	1,694		$	46,000
Provision for bad debts		320			8,718
Write-offs charged against the allowance		(1,435	)		(53,024	)
Recoveries of amounts previously written off		287			—
Allowance for doubtful accounts at end of year	$	866		$	1,694

4.	Accrued Liabilities:

Accrued liabilities at December 31, 2005 and 2004 consist of the following:

	2005		2004

Contracted services and other	$	540,932	$	241,608
Compensation		204,421		56,547
Warranty reserve		41,185		66,000
Inventory purchases		35,243		14,092
	$	821,781	$	378,247

5.	Product Warranty:

We warrant our products against defects in design, materials, and workmanship generally for a period of one year from the date of sale to the end customer except in cases where the product has a limited use as designed. Our accrual for warranty expenses is adjusted periodically to reflect actual experience. EES also reimburses us for a portion of warranty expense incurred based on end customer sales they make during a given fiscal year. Payments charged against the reserve are disclosed net of EES’ estimated reimbursement.

The activity in the warranty reserve account for the years ended December 31, 2005 and 2004 is as follows:

	2005			2004

Warranty reserve, at beginning of year	$	66,000		$	53,000
Provision for warranty claims and changes in reserve for warranties		24,539			20,849
Payments charged against the reserve		(49,354	)		(7,849	)
Warranty reserve, at end of year	$	41,185		$	66,000

6.	Notes Payable:

During April 2003, we completed a bridge loan agreement with our President and CEO, David Bupp. Under the terms of the agreement, Mr. Bupp advanced us $250,000. In consideration for the loan, we issued a note to Mr. Bupp in the principal amount of $250,000. The note was secured by general assets of the company, excluding accounts receivable. In addition, we issued Mr. Bupp 375,000 warrants to purchase our common stock at an exercise price of $0.13 per share, expiring in April 2008. The per share value of these warrants was $0.10 on the date of issuance using the Black-Scholes option pricing model with the following assumptions: an average risk-free interest rate of 2.9%, volatility of 139% and no expected dividend rate. The note bore interest at 8.5% per annum, payable monthly, and the note was originally due on June 30, 2004. On March 8, 2004, at the request of the Board of Directors, Mr. Bupp agreed to extend the due date of the note from June 30, 2004 to June 30, 2005. In exchange for extending the due date of the note, we issued Mr. Bupp an additional 375,000 warrants to purchase our common stock at an exercise price of $0.50 per share, expiring in March 2009. The per share value of these warrants was $0.46 on the date of issuance using the Black-Scholes option pricing model with the following assumptions: an average risk-free interest rate of 2.7%, volatility of 152% and no expected dividend rate. The total estimated fair values for the warrants issued to Mr. Bupp in April 2003 and March 2004 were $31,755 and $171,801, respectively. These amounts were recorded as discounts on the note and were amortized over the period of the note. On December 13, 2004, we paid the balance of the note to Mr. Bupp. The discount remaining at the date of payment totaling $74,230 was recorded as interest expense.

F-17

Notes to the Consolidated Financial Statements

During April 2003, we also completed a bridge loan agreement with an outside investor for an additional $250,000. In consideration for the loan, we issued a note to the investor in the principal amount of $250,000. The note was secured by general assets of the company, excluding accounts receivable. In addition, we issued the investor 500,000 warrants to purchase our common stock at an exercise price of $0.13 per share, expiring in April 2008. The per share value of these warrants was $0.10 on the date of issuance using the Black-Scholes option pricing model with the following assumptions: an average risk-free interest rate of 2.9%, volatility of 139% and no expected dividend rate. The total estimated fair value for the warrants issued to the outside investor was $40,620. Under the terms of the agreement, the note bore interest at 9.5% per annum, payable monthly, was convertible into common stock and was due on June 30, 2004. Fifty percent of the principal and accrued interest of the note was convertible into common stock at a 15% discount to the closing market price on the date of conversion, subject to a floor conversion price of $0.10. The remaining 50% of the principal and accrued interest was convertible into common stock based on a 15% discount to the closing market price on the date of conversion, subject to a floor conversion price of $0.10 and a ceiling conversion price of $0.20. The intrinsic value of the conversion feature of the note to the outside investor was estimated at $40,620 based on the effective conversion price at the date of issuance and was recorded as an additional discount on the note. The estimated fair value of the warrants and the intrinsic value of the conversion feature were recorded as discounts on the note and were amortized over the term of the note. During January 2004, the outside investor converted the entire balance of the note into 1.1 million shares of common stock according to the conversion terms of the agreement. The total value of the shares issued in conversion of the note was $378,955 based on the closing market prices for our common stock on the dates of conversion. The discount remaining at conversion totaling $27,604 was recorded as interest expense.

In December 2004, we completed a private placement of four-year convertible promissory notes in an aggregate principal amount of $8.1 million with Biomedical Value Fund, L.P., Biomedical Offshore Value Fund, Ltd. and David C. Bupp (our President and CEO). Biomedical Value Fund, L.P. and Biomedical Offshore Value Fund, Ltd. are funds managed by Great Point Partners, LLC. The notes bear interest at 8% per annum, payable quarterly on each March 31, June 30, September 30 and December 31 of each year, and are freely convertible into shares of our common stock at a price of $0.40 per share. Neoprobe may force conversion of the notes prior to their stated maturity under certain circumstances. All of our material assets, except the intellectual property associated with our Lymphoseek and RIGS^® products under development, have been pledged as collateral for these notes.

In addition to the security interest in our assets, the notes carry substantial covenants that impose significant requirements on us, including, among others, requirements that: we pay all principal, interest and other charges on the notes when due; we use the proceeds from the sale of the notes only for permitted purposes such as Lymphoseek development and general corporate purposes; we nominate and recommend for election as a director a person designated by the holders of the notes; we keep reserved out of our authorized shares of common stock sufficient shares to satisfy our obligation to issue shares on conversion of the notes and the exercise of the warrants issued in connection with the sale of the notes; we achieve annual revenues on a consolidated basis of at least $5.4 million in 2005, $6.5 million in 2006, and $9.0 million in each year thereafter; we maintain minimum cash balances of $4.5 million at the end of the first six months of 2005, $4.0 million at the end of the second six months of 2005, and $3.5 million at the end of each six-month period thereafter; and we indemnify the purchasers of the notes against certain liabilities. Additionally, with certain exceptions, the notes prohibit us from: amending our organizational or governing agreements and documents, entering into any merger or consolidation, dissolving the company or liquidating its assets, or acquiring all or any substantial part of the business or assets of any other person; engaging in transactions with any affiliate; entering into any agreement inconsistent with our obligations under the Notes and related agreements; incurring any indebtedness, capital leases, or contingent obligations outside the ordinary course of business; granting or permitting liens against or security interests in our assets; making any material dispositions of our assets outside the ordinary course of business; declaring or paying any dividends or making any other restricted payments; or making any loans to or investments in other persons outside of the ordinary course of business.

F-18

Notes to the Consolidated Financial Statements

As part of this transaction, we issued the investors 10,125,000 Series T warrants to purchase our common stock at an exercise price of $0.46, expiring in December 2009. The fair value of the warrants issued to the investors was $1,315,000 on the date of issuance and was determined by a third-party valuation expert using the Black-Scholes option pricing model with the following assumptions: an average risk-free interest rate of 3.4%, volatility of 50% and no expected dividend rate. In connection with this financing, we also issued 1,600,000 warrants to purchase our common stock to the placement agents, containing substantially the same terms as the warrants issued to the investors. The fair value of the warrants issued to the placement agents was $208,014 using the Black-Scholes option pricing model with the same assumptions used to determine the fair value of the warrants issued to the investors. The intrinsic value of the conversion feature of the notes was estimated at $1,315,000 based on the effective conversion price at the date of issuance. The fair value of the warrants issued to the investors and the intrinsic value of the conversion feature were recorded as discounts on the note and will be amortized over the term of the note using an effective interest rate of 19.8%. The fair value of the warrants issued to the placement agents was recorded as a deferred debt issuance cost and will be amortized over the term of the note. See Note 1(h). If we issue equity at prices below the conversion rate for the promissory notes (and for the warrants below the exercise price), then we would be required to reset the exercise and conversion prices for these securities. This provision results in a contingent beneficial conversion feature that may require us to estimate an additional debt discount if a reset occurs.

U.S. generally accepted accounting principles also required us to classify the warrants issued in connection with the placement as a liability due to penalty provisions contained in the securities purchase agreement. The penalty provisions could have required us to pay a penalty of 0.0667% per day of the total debt amount if we failed to meet certain registration deadlines, or if our stock was suspended from trading for more than 30 days. As a liability, the warrants were considered derivative instruments that were required to be periodically “marked to market” on our balance sheet. We estimated the fair value of the warrants at December 31, 2004 using the Black-Scholes option pricing model with the following assumptions: an average risk-free interest rate of 3.4%, volatility of 50% and no expected dividend rate. On February 16, 2005, Neoprobe and the investors confirmed in writing their intention that the penalty provisions which led to this accounting treatment were intended to apply only to the $8.1 million principal balance of the promissory notes and underlying conversion shares and not to the warrant shares. Because the value of our stock increased $0.19 per share from $0.40 per share at the closing date of the financing on December 14, 2004 to $0.59 per share at December 31, 2004, our year end, the effect of marking the warrant liability to “market” at December 31, 2004 resulted in an increase in the estimated fair value of the warrant liability of $1.2 million which was recorded as non-cash expense during the fourth quarter of 2004. Subsequently, the value of our stock increased $0.02 per share from $0.59 at December 31, 2004 to $0.61 per share at February 16, 2005, such that marking the warrant liability to “market” at February 16, 2005 resulted in an increase in the estimated fair value of the warrant liability of $142,427 which was recorded as non-cash expense during the first quarter of 2005. The estimated fair value of the warrant liability was then reclassified to additional paid-in capital during the first quarter of 2005.

7.	Income Taxes:

As of December 31, 2005, our net deferred tax assets in the U.S. were approximately $38.1 million. Approximately $33.4 million of the deferred tax assets relate principally to net operating loss carryforwards of approximately $91.8 million available to offset future federal taxable income, and net operating loss carryforwards of approximately $39.4 million available to offset future state taxable income, if any, through 2025. An additional $4.3 million relates to tax credit carryforwards (principally research and development) available to reduce future income tax liability after utilization of tax loss carryforwards, if any, through 2025. The remaining $325,000 relates to temporary differences between the carrying amount of assets and liabilities and their tax bases. Due to the uncertainty surrounding the realization of these favorable tax attributes in future tax returns, all of the net deferred tax assets have been fully offset by a valuation allowance at December 31, 2005.

F-19

Notes to the Consolidated Financial Statements

As of December 31, 2005, Cardiosonix had net deferred tax assets in Israel of approximately $2 million, primarily related to net operating loss carryforwards available to offset future taxable income, if any. Under current Israeli tax law, net operating loss carryforwards do not expire. Due to the uncertainty surrounding the realization of these favorable tax attributes in future tax returns, all of the net deferred tax assets have been fully offset by a valuation allowance at December 31, 2005. Since a valuation allowance was recognized for the deferred tax asset for Cardiosonix’ deductible temporary differences and operating loss carryforwards at the acquisition date, the tax benefits for those items that are first recognized (that is, by elimination of the valuation allowance) in financial statements after the acquisition date shall be applied (a) first to reduce to zero other noncurrent intangible assets related to the acquisition and (b) second to reduce income tax expense.

Under Sections 382 and 383 of the Internal Revenue Code (IRC) of 1986, as amended, the utilization of U.S. net operating loss and tax credit carryforwards may be limited under the change in stock ownership rules of the IRC. As a result of ownership changes as defined by Sections 382 and 383, which have occurred at various points in our history, we believe utilization of our net operating loss carryfowards and tax credit carryforwards will likely be significantly limited under certain circumstances.

8.	Equity:

Stock Options: At December 31, 2005, we have three stock-based compensation plans. Under the Amended and Restated Stock Option and Restricted Stock Purchase Plan (the Amended Plan), the 1996 Stock Incentive Plan (the 1996 Plan), and the 2002 Stock Incentive Plan (the 2002 Plan), we may grant incentive stock options, nonqualified stock options, and restricted stock awards to full-time employees, and nonqualified stock options and restricted awards may be granted to our consultants and agents. Total shares authorized under each plan are 2 million shares, 1.5 million shares and 5 million shares, respectively. The Amended Plan was approved by the stockholders in 1994, and although options are still outstanding under this plan, the Amended Plan is considered expired and no new grants may be made from it. Under all three plans, the exercise price of each option is greater than or equal to the closing market price of our common stock on the day prior to the date of the grant.

Options granted under the Amended Plan, the 1996 Plan and the 2002 Plan generally vest on an annual basis over one to three years. Outstanding options under the plans, if not exercised, generally expire ten years from their date of grant or 90 days from the date of an optionee’s separation from employment with us.

F-20

Notes to the Consolidated Financial Statements

A summary of the status of stock options under our stock option plans as of December 31, 2005 and 2004, and changes during the years ended on those dates is presented below:

	2005					2004
	Options			Weighted Average Exercise Price		Options			Weighted Average Exercise Price
Outstanding at beginning of year		4,857,641		$	0.51		2,931,308		$	0.56
Granted		993,000		$	0.40		2,278,000		$	0.41
Forfeited		(326,667	)	$	1.42		(351,667	)	$	0.30
Exercised		—			—		—			—
Outstanding at end of year		5,523,974		$	0.44		4,857,641		$	0.51
Exercisable at end of year		3,394,308		$	0.46		2,046,321		$	0.59

Of the options granted during 2004, 250,000 were granted to non-employee consultants. All of these consultant options remain outstanding as of December 31, 2005. During 2004, we recognized $173,000 of research and development expense related to options granted to consultants.

The following table summarizes information about our stock options outstanding at December 31, 2005:

	Options Outstanding						Options Exercisable
Range of Exercise Prices	Number Outstanding as of December 31, 2005		Weighted Average Remaining Contractual Life		Weighted Average Exercise Price		Number Exercisable as of December 31, 2005		Weighted Average Exercise Price
$ 0.13 - $ 0.30		1,960,001		6 years	$	0.24		966,992	$	0.22
$ 0.31 - $ 0.41		1,230,500		7 years	$	0.39		762,507	$	0.40
$ 0.42 - $ 0.50		1,468,000		6 years	$	0.47		1,232,668	$	0.46
$ 0.59 - $ 5.63		865,473		7 years	$	0.89		432,141	$	1.10
		5,523,974		7 years	$	0.44		3,394,308	$	0.46

Restricted Stock: At December 31, 2005, we have 130,000 restricted shares outstanding, all of which are pending cancellation due to failure to vest under the terms of issuance of these shares. Restricted shares, if any, generally vest on a change of control of our company as defined in the specific grant agreements. As a result, we have not recorded any deferred compensation related to past grants of restricted stock due to the inability to assess the probability of the vesting event.

Stock Warrants: At December 31, 2005, there are 17.0 million warrants outstanding to purchase our common stock. The warrants are exercisable at prices ranging from $0.13 to $0.75 per share with a weighted average exercise price per share of $0.40.

F-21

Notes to the Consolidated Financial Statements

The following table summarizes information about our outstanding warrants at December 31, 2005:

	Exercise Price		Number of Warrants		Expiration Date

Series O	$	0.75		25,000		October 2006
Series Q	$	0.13		875,000		April 2008
Series Q	$	0.50		375,000		March 2009
Series R	$	0.28		2,808,898		October 2008
Series S	$	0.28		1,195,478		October 2008
Series T	$	0.46		10,125,000		December 2009
Series U	$	0.46		1,600,000		December 2009
	$	0.40		17,004,376

Common Stock Reserved: We have reserved 42,778,350 shares of authorized common stock for the exercise of all outstanding options, warrants, and convertible debt.

Common Stock Purchase Agreement: On November 19, 2001, we entered into a common stock purchase agreement with an investment fund, Fusion Capital Fund II, LLC (Fusion) for the issuance and purchase of our common stock. Under the stock purchase agreement, Fusion committed to purchase up to $10 million of our common stock over a forty-month period that commenced in May 2002. A registration statement registering for resale up to 5 million shares of our common stock became effective on April 15, 2002. Under the terms of the agreement, we can request daily drawdowns, subject to a daily base amount currently set at $12,500. The number of shares we are to issue to Fusion in return for that money will be based on the lower of (a) the closing sale price for our common stock on the day of the draw request or (b) the average of the three lowest closing sales prices for our common stock during a twelve day period prior to the draw request. However, no shares may be sold to Fusion at lower than a floor price currently set at $0.30, which may be reduced by us, but in no case below $0.20 without Fusion’s prior consent. Upon execution of the common stock purchase agreement in 2001, we issued 449,438 shares of our common stock to Fusion as a partial payment of the commitment fee. During 2004, we sold Fusion a total of 2,350,000 shares of our common stock and realized net proceeds of $1,468,874. We also issued Fusion 66,129 shares of our common stock for commitment fees related to the sales of our common stock to them during 2004.

Private Placement: In November 2003, we executed common stock purchase agreements with certain investors for the purchase of 12,173,914 shares of our common stock at a price of $0.23 per share for net proceeds of $2.4 million. In addition, we issued the purchasers 6,086,959 Series R warrants to purchase our common stock at an exercise price of $0.28 per share, expiring in October 2008, and issued the placement agents 1,354,348 Series S warrants to purchase our common stock on similar terms. During 2005 and 2004, certain investors and placement agents exercised a total of 206,865 and 3,308,327 warrants related to this placement, resulting in the issuance of 206,865 and 3,197,854 shares of our common stock and we realized net proceeds of $57,922 and $871,398, respectively.

9.	Shareholder Rights Plan:

During July 1995, our Board of Directors adopted a shareholder rights plan. Under the plan, one “Right” was to be distributed for each share of common stock held by shareholders on the close of business on August 28, 1995. The Rights were exercisable only if a person and its affiliate commenced a tender offer or exchange offer for 15% or more of our common stock, or if there was a public announcement that a person and its affiliate had acquired beneficial ownership of 15% or more of the common stock, and if we did not redeem the Rights during the specified redemption period. Initially, each Right, upon becoming exercisable, would have entitled the holder to purchase from us one unit consisting of 1/100^th of a share of Series A Junior Participating preferred stock at an exercise price of $35 (which was subject to adjustment). Once the Rights became exercisable, if any person, including its affiliate, acquired 15% or more of our common stock, each Right other than the Rights held by the acquiring person and its affiliate would have become a right to acquire common stock having a value equal to two times the exercise price of the Right. We were entitled to redeem the Rights for $0.01 per Right at any time prior to the expiration of the redemption period. The shareholder rights plan and the Rights expired on August 28, 2005.

10.

Segments and Subsidiary Information:

Segments: We report information about our operating segments using the “management approach” in accordance with SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. This information is based on the way management organizes and reports the segments within the enterprise for making operating decisions and assessing performance. Our reportable segments are identified based on differences in products, services and markets served. There were no inter-segment sales. We own or have rights to intellectual property involving two primary types of medical device products, including gamma detection instruments currently used primarily in the application of ILM, and blood flow measurement devices. We also own or have rights to intellectual property related to several drug and therapy products.

F-22

Notes to the Consolidated Financial Statements

The information in the following table is derived directly from each reportable segment’s financial reporting.

*($ amounts in thousands)* *2005*	Gamma Detection Devices		Blood Flow Devices			Drug and Therapy Products			Corporate			Total
Net sales:
United States¹	$	5,459	$	58		$	—		$	—		$	5,517
International		120		282			—			—			402
Research and development expenses		276		1,414			2,342			—			4,032
Selling, general and administrative expenses, excluding depreciation and amortization²		—		—			—			2,572			2,572
Depreciation and amortization		183		401			—			—			584
Income (loss) from operations³		2,897		(1,627	)		(2,342	)		(2,572	)		(3,644	)
Other income (expense)⁴		—		—			—			(1,285	)		(1,285	)

Total assets, net of depreciation and amortization:
United States operations		1,171		318			28			7,734			9,251
Israeli operations (Cardiosonix Ltd.)		—		2,319			—			—			2,319
Capital expenditures		27		58			1			—			86

*2004*
Net sales
United States¹	$	5,173	$	—		$	—		$	—		$	5,173
International		91		89			—			—			180
License and other revenue		600		—			—			—			600
Research and development expenses		404		1,561			489			—			2,454
Selling, general and administrative expenses, excluding depreciation and amortization²		—		—			—			2,566			2,566
Depreciation and amortization		173		414			—			—			587
Income (loss) from operations³		3,169		(2,113	)		(489	)		(2,566	)		(1,999	)

Other income (expense)⁴		—		—			—			(1,542	)		(1,542	)
Total assets, net of depreciation and amortization:
United States operations		1,160		64			3			11,240			12,467
Israeli operations (Cardiosonix Ltd.)		—		2,899			—			—			2,899
Capital expenditures		12		22			—			54			88

¹ All sales to EES are made in the United States. EES distributes the product globally through its international affiliates.

^2.Selling, general and administrative costs, excluding depreciation and amortization, represent costs that relate to the general administration of the Company and as such are not currently allocated to our individual reportable segments.

³ Income (loss) from operations does not reflect the allocation of selling, general and administrative costs to our individual reportable segments.

^4.Amounts consist primarily of interest income and interest expense which are currently not allocated to our individual reportable segments.

Subsidiary: On December 31, 2001, we acquired 100 percent of the outstanding common shares of Cardiosonix, an Israeli company. The aggregate purchase price included common stock valued at $4,271,095; payment of vested options of Cardiosonix employees in the amount of $17,966; and acquisition costs of $167,348. We accounted for the acquisition under SFAS No. 141, Business Combinations, and certain provisions of SFAS No. 142, Goodwill and Other Intangible Assets. The results of Cardiosonix’ operations have been included in our consolidated results from the date of acquisition.

F-23

Notes to the Consolidated Financial Statements

As a part of the acquisition, we also entered into a royalty agreement with the three founders of Cardiosonix. Under the terms of the royalty agreement, which expires December 31, 2006, we are obligated to pay the founders an aggregate one percent royalty on up to $120 million in net revenue generated by the sale of Cardiosonix blood flow products through 2006. As of December 31, 2005, approximately $1,000 of royalties were accrued under the royalty agreement.

11.

Agreements:

Supply Agreements: In December 1997, we entered into an exclusive supply agreement with eV Products (eV), a division of II-VI Incorporated, for the supply of certain crystals and associated electronics to be used in the manufacture of our proprietary line of hand-held gamma detection instruments. The original term of the agreement expired on December 31, 2002 and was automatically extended during 2002 through December 31, 2005; however, the agreement was no longer exclusive throughout the extended period. Total purchases under the supply agreement were $430,000 and $555,000 for the years ended December 31, 2005 and 2004, respectively. We have issued purchase orders for $347,000 of crystal modules for delivery of product through September 2006 under the same terms as the original agreement.

In February 2004, we entered into a product supply agreement with TriVirix International (TriVirix) for the manufacture of the neo2000 control unit, 14mm probe, 11mm laparoscopic probe, Quantix/OR^TM control unit and Quantix/ND^TM control unit. The initial term of the agreement expires in January 2007, but may be automatically extended for successive one-year periods. Either party has the right to terminate the agreement at any time upon one hundred eighty (180) days prior written notice, or may terminate the agreement upon a material breach or repeated non-material breaches by the other. Total purchases under the product supply agreement were $1.1 million and $1.2 million for the years ended December 31, 2005 and 2004, respectively. We have issued purchase orders for $1.5 million of our products for delivery through December 2006.

Marketing and Distribution Agreement: During 1999, we entered into a distribution agreement with EES covering our gamma detection devices used in ILM. The initial five-year term expired December 31, 2004, with options to extend for two successive two-year terms. See Note 16(a). Under the agreement, we manufacture and sell our current line of ILM products exclusively to EES, who distributes the products globally, except in Japan. EES agreed to purchase minimum quantities of our products over the first three years of the term of the agreement and to reimburse us for certain research and development costs and a portion of our warranty costs. We are obligated to continue certain product maintenance activities and to provide ongoing regulatory support for the products.

EES may terminate the agreement if we fail to supply products for specified periods, commit a material breach of the agreement, suffer a change of control to a competitor of EES, or become insolvent. If termination were due to failure to supply or a material breach by us, EES would have the right to use our intellectual property and regulatory information to manufacture and sell the products exclusively on a global basis for the remaining term of the agreement with no additional financial obligation to us. If termination is due to insolvency or a change of control that does not affect supply of the products, EES has the right to continue to sell the products on an exclusive global basis for a period of six months or require us to repurchase any unsold products in its inventory.

Under the agreement, EES received a non-exclusive worldwide license to our ILM intellectual property to make and sell other products that may be developed using our ILM intellectual property. The term of the license is the same as that of the agreement. EES paid us a non-refundable license fee of $4 million. We recognized the license fee as revenue on a straight-line basis over the five-year initial term of the agreement, and the license fee was fully amortized into income as of the end of September 2004. If we terminate the agreement as a result of a material breach by EES, they would be required to pay us a royalty on all products developed and sold by EES using our ILM intellectual property. In addition, we are entitled to a royalty on any ILM product commercialized by EES that does not infringe any of our existing intellectual property.

F-24

Notes to the Consolidated Financial Statements

Research and Development Agreements: Cardiosonix’ research and development efforts have been partially financed through grants from the Office of the Chief Scientist of the Israeli Ministry of Industry and Trade (the OCS). Through the end of 2004, Cardiosonix received a total $775,000 in grants from the OCS. In return for the OCS’s participation, Cardiosonix is committed to pay royalties to the Israeli Government at a rate of 3% to 5% of the sales if its products, up to 300% of the total grants received, depending on the portion of manufacturing activity that takes place in Israel. There are no future performance obligations related to the grants received from the OCS. However, under certain limited circumstances, the OCS may withdraw its approval of a research program or amend the terms of its approval. Upon withdrawal of approval, Cardiosonix may be required to refund the grant, in whole or in part, with or without interest, as the OCS determines. In January 2006, the OCS consented to the transfer of manufacturing as long as we comply with the terms of the OCS statutes under Israeli law. As long as we maintain at least 10% Israeli content in our blood flow devices, we will pay a royalty rate of 4% on sales of applicable blood flow devices and must repay the OCS a total of $1.2 million in royalties. However, should the amount of Israeli content of our blood flow device products decrease below 10%, the royalty rate could increase to 5% and the total royalty payments due could increase to $2.3 million. As such, the total amount we will have to repay the OCS will likely be 150% to 300% of the amounts of the original grants. Through December 2005, we have paid the OCS a total of $22,000 in royalties related to sales of products developed under this program. As of December 31, 2005, we have accrued obligations for royalties totaling $2,000.

During January 2002, we completed a license agreement with the University of California, San Diego (UCSD) for a proprietary compound that we believe could be used as a lymph node locating agent in ILM procedures. The license agreement is effective until the later of the expiration date of the longest-lived underlying patent or January 30, 2023. Under the terms of the license agreement, UCSD has granted us the exclusive rights to make, use, sell, offer for sale and import licensed products as defined in the agreement and to practice the defined licensed methods during the term of the agreement. We may also sublicense the patent rights, subject to the approval of certain sublicense terms by UCSD. In consideration for the license rights, we agreed to pay UCSD a license issue fee of $25,000 and license maintenance fees of $25,000 per year. We also agreed to pay UCSD milestone payments related to successful regulatory clearance for marketing of the licensed products, a royalty on net sales of licensed products subject to a $25,000 minimum annual royalty, fifty percent of all sublicense fees and fifty percent of sublicense royalties. We also agreed to reimburse UCSD for all patent-related costs. Total costs related to the UCSD license agreement were $44,000 and $87,000 in 2005 and 2004, respectively, and were recorded in research and development expenses.

UCSD has the right to terminate the agreement or change the nature of the agreement to a non-exclusive agreement if it is determined that we have not been diligent in developing and commercializing the covered products, marketing the products within six months of receiving regulatory approval, reasonably filling market demand or obtaining all the necessary government approvals.

During April 2005, we completed an evaluation license agreement with UCSD expanding the field of use for the proprietary compound developed by UCSD researchers. The expanded field of use will allow Lymphoseek to be developed as an optical or ultrasound agent. The evaluation license agreement is effective until March 31, 2007. Under the terms of the agreement, UCSD has granted us limited rights to make and use licensed products as defined in the agreement and to practice the defined licensed methods during the term of the agreement for the sole purpose of evaluating our interest in negotiating a commercial license. We may also sublicense the patent rights, subject to the approval of certain sublicense terms by UCSD. In consideration for the license rights, we agreed to pay UCSD an evaluation license fee of $36,000 and evaluation license maintenance fees of $9,000 payable on the first year anniversary of the effective date, $9,000 payable on the eighteen-month anniversary of the effective date, and $18,000 payable prior to termination. We also agreed to pay UCSD fifty percent of any sublicense fees and to reimburse UCSD for all patent-related costs. Total costs related to the UCSD evaluation license agreement were $36,000 in 2005, and were recorded in research and development expenses.

F-25

Notes to the Consolidated Financial Statements

During January 2005, we executed a license agreement with the Ohio State University (OSU), Cira LLC, and Cira Bio for certain technology relating to activated cellular therapy. The license agreement is effective until the expiration date of the longest-lived underlying patent. Under the terms of the license agreement, OSU has granted the licensees the exclusive rights to make, have made, use, lease, sell and import licensed products as defined in the agreement and to utilize the defined licensed practices. We may also sublicense the patent rights. In consideration for the license rights, we agreed to pay OSU a license fee of $5,000 on January 31, 2006. We also agreed to pay OSU additional license fees related to initiation of Phase II and Phase III clinical trials, a royalty on net sales of licensed products subject to a minimum annual royalty of $100,000 beginning in 2012, and a percentage of any non-royalty license income. Also during January 2005, we completed a business venture agreement with Cira LLC that defines each party’s responsibilities and commitments with respect to Cira Bio and the license agreement with OSU.

Employment Agreements: We maintain employment agreements with six of our officers. The employment agreements contain change in control provisions that would entitle each of the officers to one to two times their current annual salaries, vest outstanding restricted stock and options to purchase common stock, and continue certain benefits if there is a change in control of our company (as defined) and their employment terminates. Our maximum contingent liability under these agreements in such an event is approximately $1.9 million. The employment agreements also provide for severance, disability and death benefits. See Note 16(b).

12.

Leases:

We lease certain office equipment under capital leases which expire from 2007 to 2009. In August 2003, we entered into an operating lease agreement for office space, which originally expired in September 2006. In February 2005, we entered into another operating lease agreement for additional office space expiring in January 2008. The February 2005 lease agreement also extended the term of the original lease through January 2008.

In April 2002, Cardiosonix entered into an operating sublease agreement for office and parking space that expired in April 2004. In June 2004, Cardiosonix entered into a new operating sublease agreement for office space that expired in June 2005. In July 2004, Cardiosonix entered into a sublease agreement for parking space that expired in June 2005, and automatically renewed until either party terminated the agreement. The Cardiosonix office space and parking space subleases expired in January 2006.

The future minimum lease payments for the years ending December 31 are as follows:

	Capital Leases		Operating Leases

2006	$	24,769	$	100,771
2007		18,008		100,129
2008		15,889		8,561
2009		2,485		—
2010		—		—
		61,151	$	209,461
Less amount representing interest		9,766
Present value of net minimum lease payments		51,385
Less current portion		19,530
Capital lease obligations, excluding current portion	$	31,855

Total rental expense was $221,000 and $218,000 for the years ended December 31, 2005 and 2004, respectively.

F-26

Notes to the Consolidated Financial Statements

13.

Employee Benefit Plan:

We maintain an employee benefit plan under Section 401(k) of the Internal Revenue Code. The plan allows employees to make contributions and we may, but are not obligated to, match a portion of the employee’s contribution with our common stock, up to a defined maximum. We accrued expenses of $27,000 and $19,000 during 2005 and 2004, respectively, related to common stock to be subsequently contributed to the plan.

14.

Supplemental Disclosure for Statements of Cash Flows:

We paid interest aggregating $677,000 and $52,000 for the years ended December 31, 2005 and 2004, respectively. During 2005 and 2004, we purchased equipment under capital leases totaling $23,000 and $27,000, respectively. During 2005 and 2004, we transferred $17,000 and $22,000, respectively, in inventory to fixed assets related to the creation and maintenance of a pool of service loaner equipment. Also during 2005 and 2004, we prepaid $243,000 and $277,000, respectively, in insurance through the issuance of notes payable to finance companies with weighted average interest rates of 6% and 5%, respectively. The note payable to a finance company issued in 2005 matures in September 2006.

15.

Contingencies:

We are subject to legal proceedings and claims that arise in the ordinary course of business. In our opinion, the amount of ultimate liability, if any, with respect to these actions will not materially affect our financial position.

16.

Subsequent Events:

Distribution Agreement: In March 2006, EES exercised its option for a second two-year term extension of the distribution agreement covering our gamma detection devices, thus extending the distribution agreement through the end of 2008. See Note 11(b).

Employment Agreements: Effective January 1, 2006, we entered into new employment agreements with two executive officers. The new agreements have substantially similar terms to the previous agreements. See Note 11(d).

F-27

Notes to the Consolidated Financial Statements

17.

Supplemental Information (Unaudited):

The following summary financial data are derived from our consolidated financial statements that have been audited by our independent registered public accounting firm. These data are qualified in their entirety by, and should be read in conjunction with, our Consolidated Financial Statements and Notes thereto included herein.

(Amounts in thousands, except per share data)	Years Ended December 31,
	2005			2004			2003			2002			2001
Statement of Operations Data:
Net sales	$	5,919		$	5,353		$	5,564		$	3,383		$	6,764
License and other revenue		—			600			946			1,538			1,428
Gross profit		3,543			3,608			3,385			2,570			3,802
Research and development expenses		4,032			2,454			1,894			2,324			948
Selling, general and administrative expenses		3,156			3,153			3,103			3,267			2,321
Acquired in-process research and development		—			—			—			(28	)		885
(Loss) income from operations		(3,644	)		(1,999	)		(1,611	)		(2,993	)		(352	)

Other (expenses) income		(1,285	)		(1,542	)		(188	)		29			370
Net (loss) income	$	(4,929	)	$	(3,541	)	$	(1,799	)	$	(2,964	)	$	15

(Loss) income per common share:
Basic	$	(0.08	)	$	(0.06	)	$	(0.04	)	$	(0.08	)	$	0.00
Diluted	$	(0.08	)	$	(0.06	)	$	(0.04	)	$	(0.08	)	$	0.00

Shares used in computing (loss) income per common share: ⁽¹⁾
Basic		58,434			56,764			40,338			36,045			25,899
Diluted		58,434			56,764			40,338			36,045			26,047

	As of December 31,
	2005			2004			2003			2002			2001
Balance Sheet Data:
Total assets	$	11,570		$	15,366		$	7,385		$	7,080		$	11,329
Long-term obligations		6,052			8,192			585			1,169			1,981
Accumulated deficit		(130,947	)		(126,018	)		(122,477	)		(120,678	)		(117,714	)

⁽¹⁾

Delaware		31-1080091
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

425 Metro Place North, Suite 300, Dublin, Ohio		43017-1367
(Address of Principal Executive Offices)		(Zip Code)

Indication	Number of Patients	Status
Breast (peritumoral injection)	24	Completed
Melanoma	24	Completed
Breast (intradermal injection, next day surgery)	60	Ongoing
Prostate	60	Ongoing

Name	Age	Position

Anthony K. Blair	45	Vice President, Manufacturing Operations
Carl M. Bosch	49	Vice President, Research and Development
Rodger A. Brown	55	Vice President, Regulatory Affairs and Quality Assurance
Brent L. Larson	42	Vice President, Finance; Chief Financial Officer; Treasurer and Secretary
Douglas L. Rash	62	Vice President, Marketing

										Long Term Compensation Awards
	Annual Compensation									Restricted Stock Awards		Securities Underlying Options
Name and Principal Position	Year		Salary		Bonus (e)		Other			($)		(#)

Anthony K. Blair Vice President, Manufacturing Operations		2005 2004 2003	$	115,000 55,000 —	$	1,875 — —	$	2,204(a) — —			— — —		30,000 90,000 —
Carl M. Bosch Vice President, Research and Development		2005 2004 2003	$	149,000 138,375 135,125	$	7,500 6,000 —	$	2,980(b 2,887(b 6,573(b	) ) )		— — —		40,000 170,000 70,000
Rodger A. Brown Vice President, Regulatory Affairs/ Quality Assurance		2005 2004 2003	$	124,000 117,300 125,316	$	1,875 2,500 —	$	— — —			— — —		20,000 160,000 70,000
David C. Bupp President and Chief Executive Officer		2005 2004 2003	$	290,000 271,250 222,167	$	45,000 15,000 32,500	$	5,744(c 5,770(c 32,566(c	) ) )		— — —		200,000 500,000 170,000
Brent L. Larson Vice President, Finance and Chief Financial Officer		2005 2004 2003	$	149,000 137,700 135,125	$	7,500 6,000 —	$	2,986(d 2,874(d 11,733(d	) ) )		— — —		40,000 170,000 70,000

Name	Number of Securities Underlying Unexercised Options at Fiscal Year-End: Exercisable/Unexercisable		Value of Unexercised In-the-Money Options at Fiscal Year-End: Exercisable/Unexercisable⁽¹⁾
Anthony K. Blair		40,021 / 79,979	$ 0 / $0
Carl M. Bosch		286,695 / 163,305	$ 5,333 / $2,667
Rodger A. Brown		271,182 / 143,318	$ 5,333 / $2,667
David C. Bupp		886,801 / 523,199	$12,933 / $6,467
Brent L. Larson		343,895 / 163,305	$ 5,333 / $2,667

	Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights *(a)*		Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights *(b)*		Number of Securities Remaining Available for Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a)) *(c)*

Equity compensation plans approved by security holders		5,523,974	$	0.44		976,026
Equity compensation plans not approved by security holders		—		—		—
Total		5,523,974	$	0.44		976,026

Beneficial Owner	Number of Shares *Beneficially Owned ()**			Percent of Class ()**
Carl J. Aschinger, Jr.		103,000	(a)		(o	)
Reuven Avital		264,256	(b)		(o	)
Anthony K. Blair		95,643	(c)		(o	)
Kirby I. Bland		110,000	(d)		(o	)
Carl M. Bosch		425,146	(e)		(o	)
Rodger A. Brown		317,848	(f)		(o	)
David C. Bupp		2,674,542	(g)		4.4	%
Julius R. Krevans		362,000	(h)		(o	)
Brent L. Larson		538,174	(i)		(o	)
Fred B. Miller		196,000	(j)		(o	)
Douglas L. Rash		56,616	(k)		(o	)
J. Frank Whitley, Jr.		216,000	(l)		(o	)
All directors and officers as a group		5,359,225	(m)(p)		8.5	%
(12 persons)

Great Point Partners, L.P. 2 Pickwick Plaza, Suite 450 Greenwich, CT 06830		30,000,000	(n)		33.9	%

Exhibit
Number		Exhibit Description

3.1		Amended and Restated Certificate of Incorporation of Neoprobe Corporation as corrected February 18, 1994 and amended June 27, 1994, June 3, 1996, March 17, 1999, May 9, 2000, June 13, 2003, July 27, 2004 and June 22, 2005 (incorporated by reference to Exhibit 3.1 to the Company’s June 30, 2005 Form 10-QSB).

3.2		Amended and Restated By-Laws dated July 21, 1993, as amended July 18, 1995 and May 30, 1996 (filed as Exhibit 99.4 to the Company’s Current Report on Form 8-K dated June 20, 1996, and incorporated herein by reference).

10.1		Amended and Restated Stock Option and Restricted Stock Purchase Plan dated March 3, 1994 (incorporated by reference to Exhibit 10.2.26 to the Company’s December 31, 1993 Form 10-K).

10.2		1996 Stock Incentive Plan dated January 18, 1996 as amended March 13, 1997 (incorporated by reference to Exhibit 10.2.37 to the Company’s December 31, 1997 Form 10-K).

10.3		Neoprobe Corporation Amended and Restated 2002 Stock Incentive Plan (incorporated by reference to Appendix A to the Company’s Definitive Proxy Statement (File No. 000-26520), filed with the Securities and Exchange Commission on April 29, 2005).

10.4		Employment Agreement between the Company and David C. Bupp, dated January 1, 2004 (incorporated by reference to Exhibit 10.12 to the Company’s December 31, 2003 Form 10-KSB).

10.5		Employment Agreement between the Company and Brent L. Larson, dated January 1, 2005 (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed January 5, 2005. This is one of five substantially identical employment agreements. A schedule identifying the other agreements and setting forth the material details in which such agreements differ from the one that is incorporated by reference herein is filed as Exhibit 10.6 to this Annual Report on Form 10-KSB).

10.6		Schedule identifying material differences between the employment agreement incorporated by reference as Exhibit 10.5 to this Annual Report on Form 10-KSB and other substantially identical employment agreements.*

10.7		Technology Transfer Agreement dated July 29, 1992 between the Company and The Dow Chemical Corporation (portions of this Exhibit have been omitted pursuant to a request for confidential treatment and have been filed separately with the Commission) (incorporated by reference to Exhibit 10.10 to the Company’s Form S-1 filed October 15, 1992).

10.8		Cooperative Research and Development Agreement between the Company and the National Cancer Institute (incorporated by reference to Exhibit 10.3.31 to the Company’s September 30, 1995 Form 10-QSB).

10.9		License dated May 1, 1996 between the Company and The Dow Chemical Company (incorporated by reference to Exhibit 10.3.45 to the Company’s June 30, 1996 Form 10-QSB).

10.10		License Agreement dated May 1, 1996 between the Company and The Dow Chemical Company (portions of this Exhibit have been omitted pursuant to a request for confidential treatment and have been filed separately with the Commission) (incorporated by reference to Exhibit 10.3.46 to the Company’s June 30, 1996 Form 10-QSB).

10.11		License Agreement dated January 30, 2002 between the Company and the Regents of the University of California, San Diego, as amended on May 27, 2003 and February 1, 2006 (portions of this Exhibit have been omitted pursuant to a request for confidential treatment and have been filed separately with the Commission).*

10.12		Evaluation License Agreement dated March 31, 2005 between the Company and the Regents of the University of California, San Diego (portions of this Exhibit have been omitted pursuant to a request for confidential treatment and have been filed separately with the Commission).*

10.13		Distribution Agreement between the Company and Ethicon Endo-Surgery, Inc. dated October 1, 1999 (portions of this Exhibit have been omitted pursuant to a request for confidential treatment and have been filed separately with the Commission), (incorporated by reference to Exhibit 10.4.39 to the Company’s September 30, 1999 Form 10-Q).

10.14		Product Supply Agreement between the Company and TriVirix International, Inc., dated February 5, 2004 (portions of this Exhibit have been omitted pursuant to a request for confidential treatment and have been filed separately with the Commission) (incorporated by reference to Exhibit 10.17 to the Company’s December 31, 2004 Form 10-KSB).

10.15		Warrant to Purchase Common Stock of Neoprobe Corporation dated March 8, 2004 between the Company and David C. Bupp (incorporated by reference to Exhibit 10.28 to the Company’s December 31, 2003 Form 10-KSB).

10.16		Warrant to Purchase Common Stock of Neoprobe Corporation dated April 2, 2003 between the Company and Donald E. Garlikov (incorporated by reference to Exhibit 99(g) to the Company’s Current Report on Form 8-K filed April 2, 2003).

10.17		Warrant to Purchase Common Stock of Neoprobe Corporation dated April 2, 2003 between the Company and David C. Bupp (incorporated by reference to Exhibit 99(h) to the Company’s Current Report on Form 8-K filed April 2, 2003).

10.18		Registration Rights Agreement dated April 2, 2003 between the Company, David C. Bupp and Donald E. Garlikov (incorporated by reference to Exhibit 99(i) to the Company’s Current Report on Form 8-K filed April 2, 2003).

10.19		Stock Purchase Agreement dated October 22, 2003 between the Company and Bridges & Pipes, LLC (incorporated by reference to Exhibit 10.32 to the Company’s registration statement on Form SB-2 filed December 2, 2003).

10.20		Registration Rights Agreement dated October 22, 2003 between the Company and Bridges & Pipes, LLC (incorporated by reference to Exhibit 10.33 to the Company’s registration statement on Form SB-2 filed December 2, 2003).

10.21		Series R Warrant Agreement dated October 22, 2003 between the Company and Bridges & Pipes, LLC (incorporated by reference to Exhibit 10.34 to the Company’s registration statement on Form SB-2 filed December 2, 2003).

10.22		Series S Warrant Agreement dated November 21, 2003 between the Company and Alberdale Capital, LLC (incorporated by reference to Exhibit 10.35 to the Company’s registration statement on Form SB-2 filed December 2, 2003).

10.23		Securities Purchase Agreement, dated as of December 13, 2004, among Neoprobe Corporation, Biomedical Value Fund, L.P., Biomedical Offshore Value Fund, Ltd. and David C. Bupp (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed December 16, 2004).


10.24		Form of Neoprobe Corporation 8% Series A Convertible Promissory Note (Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed December 16, 2004. This is the form of three substantially identical agreements. A schedule identifying the other agreements and setting forth the material details in which such agreements differ from the one that is incorporated by reference herein was filed as Exhibit 10.4 to the Company’s Current Report on Form 8-K filed December 16, 2004).

10.25		Form of Series T Neoprobe Corporation Common Stock Purchase Warrant (Incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed December 16, 2004. This is the form of three substantially identical agreements. A schedule identifying the other agreements and setting forth the material details in which such agreements differ from the one that is incorporated by reference herein was filed as Exhibit 10.4 to the Company’s Current Report on Form 8-K filed December 16, 2004).

10.26		Security Agreement, dated as of December 13, 2004, made by Neoprobe Corporation in favor of Biomedical Value Fund, L.P., Biomedical Offshore Value Fund, Ltd. and David C. Bupp (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed December 16, 2004).

10.27		Form of Series U Warrant Agreement dated December 13, 2004 between the Company and the placement agents for the Series A Convertible Promissory Notes and Series T Warrants. (Incorporated by reference to Exhibit 10.35 to the Company’s December 31, 2004 Form 10-KSB. This is the form of six substantially identical agreements. A schedule identifying the other agreements and setting forth the material details in which such agreements differ from the one that is incorporated by reference herein was filed as Exhibit 10.36 to the Company’s December 31, 2004 Form 10-KSB.)

21.1		Subsidiaries of the registrant.*

23.1		Consent of BDO Seidman, LLP.*

23.2		Consent of KPMG LLP.*

24.1		Powers of Attorney.*

31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

32.1		Certification of Chief Executive Officer of Periodic Financial Reports pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.*

32.2		Certification of Chief Financial Officer of Periodic Financial Reports pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.*


	NEOPROBE CORPORATION (the Company)

Dated: March 31, 2006	By:	/s/ DAVID C. BUPP

		Name: David C. Bupp Title: President and Chief Executive Officer

Signature	Title	Date

/s/David C. Bupp	Director, President and Chief Executive Officer	February 28, 2006
David C. Bupp	(principal executive officer)

/s/ Brent L. Larson*	Vice President, Finance and Chief Financial Officer	February 28, 2006
Brent L. Larson	(principal financial officer)

/s/ Carl J. Aschinger, Jr.*	Director	February 28, 2006
Carl J. Aschinger, Jr.

/s/ Reuven Avital*	Director	February 28, 2006
Reuven Avital

/s/ Kirby I. Bland*	Director	February 28, 2006
Kirby I. Bland

/s/ Julius R. Krevans*	Chairman, Director	February 28, 2006
Julius R. Krevans

/s/ Fred B. Miller*	Director	February 28, 2006
Fred B. Miller

/s/ J. Frank Whitley, Jr.*	Director	February 28, 2006
J. Frank Whitley, Jr.