We recommend that you read this Report on Form 10-Q in conjunction with our Annual Report on Form 10-K for the year ended March 31, 2012.

Forward-looking Statements

This Form 10-Q contains "forward-looking statements" relating to projections, plans, objectives, estimates, and other statements of future economic performance. These forward-looking statements are subject to known and unknown risks and uncertainties relating to our future performance that may cause our actual results, performance, or achievements, or industry results, to differ materially from those expressed or implied in any such forward-looking statements. Our business operates in highly competitive markets and our ability to achieve the results implied by our forward looking statements is subject to changes in general economic conditions, competition, reimbursement levels, customer and market preferences, government regulation, the impact of tax regulation, foreign exchange rate fluctuations, the degree of market acceptance of products, the uncertainties of potential litigation, as well as other risks and uncertainties detailed elsewhere herein and in our Annual Report filed on Form 10-K for the year ended March 31, 2012.

We do not undertake, nor assume any obligation, to update any forward-looking statement that we may make from time to time.

Critical Accounting Policies

We prepare our consolidated financial statements in accordance with U.S. generally accepted accounting principles, which require us to make estimates and assumptions in certain circumstances that affect amounts reported. In preparing these consolidated financial statements, we have made our best estimates and judgments of certain amounts, giving due consideration to materiality.

We have identified accounting policies that we consider particularly important for the portrayal of our results of operations and financial position and which may require the application of a higher level of judgment by our management, and as a result are subject to an inherent level of uncertainty. These are characterized as "critical accounting policies" and address revenue recognition, accounts receivable, inventories, foreign currency translation and transactions, impairment of long-lived assets, share-based compensation, defined benefit pension plans and income taxes, each of which is described in our Annual Report on Form 10-K for the year ended March 31, 2012. Based upon our review, we have determined that these policies remain our most critical accounting policies for the three and nine months ended December 31, 2012, and we have made no changes to these policies during fiscal 2013.

Overview

We are a medical device company that develops, manufactures and markets innovative, proprietary products for the treatment of voiding dysfunctions. Our primary focus is on two products: the Urgent PC® Neuromodulation System, which we believe is the only FDA-cleared minimally invasive, office-based neuromodulation therapy for the treatment of overactive bladder (OAB) and associated symptoms of urinary urgency, urinary frequency, and urge incontinence; and Macroplastique® Implants, a urethral bulking agent for the treatment of adult female stress urinary incontinence primarily due to intrinsic sphincter deficiency (ISD). Outside of the U.S., our Urgent PC System is also approved for treatment of fecal incontinence, and Macroplastique is also approved for treatment of male stress incontinence and vesicoureteral reflux.

Our sales during the past four years have been significantly influenced by the availability of third-party reimbursement for PTNS treatments. Sales of our Urgent PC System grew rapidly during fiscal 2007 and 2008 with rapid market acceptance of PTNS treatments that were reimbursed under a listed Current Procedure Technology (CPT®) code. However, during the first quarter of our fiscal 2009 the American Medical Association (AMA) advised the medical community that the previously recommended listed CPT code for reimbursement for PTNS treatments should be replaced with an unlisted CPT code. As a result, many third-party insurers delayed or denied reimbursement for PTNS treatments, and sales of our Urgent PC System in the U.S. declined from a peak of $2.2 million in the first quarter of our fiscal 2009 to a range of $0.9 million to $1 million per quarter in the six subsequent fiscal quarters ended December 2010.

We responded by sponsoring several randomized, controlled clinical studies over the following two years, and supported by publication of these clinical studies in U.S. peer-reviewed journals, we applied for, and effective January 2011 the AMA granted, a Category 1 CPT code for PTNS treatments. Consistent with expanded reimbursement we have expanded our U.S. field sales and support organization from 15 employed sales representatives on April 1, 2010 to 43 employed sales representatives on December 31, 2012.

We also focused our efforts on expanding reimbursement coverage with the Medicare carriers and private payers by instituting a comprehensive program to educate their medical directors regarding the clinical effectiveness, cost effectiveness and patient benefits of PTNS treatments using our Urgent PC System. As of December 31, 2012, eleven regional Medicare carriers representing 39 states and the District of Columbia, with approximately 36 million covered lives, provide coverage for PTNS treatments. In addition, we estimate that private payers providing insurance to approximately 100 million lives cover PTNS treatments.

With the availability of a CPT Category 1 code and expanded reimbursement coverage from third-party payers, as well as an expanded sales organization, our U.S. Urgent PC sales of $8.0 million during the nine-month period ended December 31, 2012 grew 45% over sales during the nine-month period ended December 31, 2011.

At December 31, 2012, two regional Medicare carriers representing 11 states, with approximately 12 million covered lives, continued to decline reimbursement coverage for PTNS treatments. We are participating with a Medicare beneficiary who filed an administrative appeal for reconsideration of the decision of one of those regional Medicare carriers. That appeal remains pending.

The Centers for Medicare and Medicaid Services expects to continue to consolidate the regional Medicare claims administrators and there is no guarantee that Medicare beneficiaries in a region with reimbursement coverage will continue to be reimbursed when consolidated into a regional Medicare carrier with a negative reimbursement policy, or, if reimbursed, that coverage will remain unchanged. We continue to work with the medical directors of both Medicare and private payers to expand coverage of PTNS treatments, and to ensure that coverage continues after the number of Medicare regions is decreased and regional Medicare administrators are transitioned.

In March 2010, significant U.S. healthcare reform legislation, the Patient Protection and Affordable Care Act (PPACA) along with the Health Care and Education Reconciliation Act of 2010, was enacted into law. As a U.S. headquartered company with sales in the United States, this health care reform law will impact us. Certain provisions of the health care reform are not effective for a number of years and there are many programs and requirements for which the details have not yet been fully established or consequences not fully understood, and it is unclear what the full impact will be from the legislation. The law does levy an excise tax on all U.S. medical device sales beginning in 2013. Our U.S. Net sales represented approximately 73% of our worldwide consolidated Net sales through nine months ended December 31, 2012 and we expect in the future the U.S. sales to continue to grow and become a greater proportion of our worldwide consolidated Net sales. We expect the new tax could affect our business, cash flows and results of operations. The law also focuses on a number of Medicare provisions aimed at improving quality and decreasing costs. It is uncertain at this time what impact these provisions will have on patient access to new technologies. The Medicare provisions also include value-based payment programs, increased funding of comparative effectiveness research, reduced hospital payments for avoidable readmissions and hospital acquired conditions, and pilot programs to evaluate alternative payment methodologies that promote care coordination (such as bundled physician and hospital payments). Additionally, the law includes a reduction in the annual rate of inflation for hospitals that began in 2011 and the establishment of an independent payment advisory board to recommend ways of reducing the rate of growth in Medicare spending beginning in 2014. We cannot predict all healthcare programs and regulations that will be ultimately implemented at the federal or state level, or the effect of any future legislation or regulation. However, any changes that lower reimbursement for our products or reduce medical procedure volumes could adversely affect our business and results of operations.

Results of Operations

Three and nine months ended December 31, 2012 compared to three and nine months ended December 31, 2011

Net Sales: During the three months ended December 31, 2012, consolidated Net sales of $5.6 million represented a $246,000, or a 5% increase, over Net sales of $5.3 million for the three months ended December 31, 2011. During the nine months ended December 31, 2012, consolidated Net sales of $16.9 million represented a $1.9 million, or a 13%, increase over net sales of $15.0 million for the nine months ended December 31, 2011.

The increase in consolidated Net sales for the three and nine months ended December 31, 2012 is attributed to the growth in U.S. sales.

Net sales to customers in the U.S. of $4.1 million during the three months ended December 31, 2012, represented an increase of $528,000, or 15%, over Net sales of $3.6 million for the three months ended December 31, 2011. Net sales to customers in the U.S. of $12.4 million during the nine months ended December 31, 2012, represented an increase of $2.5 million, or 25%, over Net sales of $9.9 million for the nine months ended December 31, 2011.

Net sales in the U.S. of our Urgent PC product increased 37% to $2.7 million for the three months ended December 31, 2012, from $2.0 million for the same period last year. Net sales in the U.S. of our Urgent PC product increased 45% to $8.0 million for the nine months ended December 31, 2012, from $5.5 million for the same period last year. Net sales increased because of expanded reimbursement coverage by third-party payers, and because of the impact of our expanded direct sales organization and programs to support continued use of our Urgent PC products.

In the fiscal third quarter ended December 31, 2012, we had 620 U.S. customers purchasing 3,501 lead set boxes, compared to 500 customers purchasing 2,531 lead set boxes in the third fiscal quarter of last year. The increase is attributed to an expanded customer base and the ramp-up in customers' practice in light of the decision by several Medicare carriers and private payers to cover PTNS treatments using our Urgent PC. The performance for fiscal third quarter ended December 31, 2012 was slightly down from the 648 active customers and 3,576 lead set boxes sold during the fiscal second quarter ended September 30. We believe the decrease reflects the seasonal slowdown in initiation of treatments by new patients.

Net sales in the U.S. of our Macroplastique product decreased 12% to $1.4 million for the three months ended December 31, 2012, compared to $1.6 million for the same period last year. Net sales in the U.S. of our Macroplastique product increased $62,000, or 1%, to $4.3 million for the nine months ended December 31, 2012, compared to the same period last year. The sales decrease is attributed primarily to the shift in sales focus from Macroplastique to Urgent PC.

Net sales to customers outside the U.S. for the three months ended December 31, 2012 decreased 16% to $1.5 million compared to $1.8 million for the three months ended December 31, 2011. Excluding the translation impact of fluctuations in foreign currency exchange rates, Net sales decreased by approximately 14%. Net sales to customers outside the U.S. for the nine months ended December 31, 2012 were $4.5 million compared to $5.1 million for the nine months ended December 31, 2011, a decrease of 11%. Excluding the translation impact of fluctuations in foreign currency exchange rates, Net sales decreased by approximately 5%. Macroplastique sales declined 24% to $672,000 in the third fiscal quarter and declined 23% to $2.1 million for the nine months ended December 31, 2012 over the corresponding year ago periods. The decline of the Macroplastique sales is primarily caused by the irregular ordering pattern of one of our main distributors.

Urgent PC sales to customers outside of the U.S. of $556,000 for the three months ended December 31, 2012 decreased 4% from $581,000 for the same period last year. The decrease in sales is mainly attributed to price reduction in one geographic area due to reimbursement challenges as well as to local competition. In addition the last year quarter contained a one-time order for a third party funded clinical study. Urgent PC sales of $1.6 million for the nine months ended December 31, 2012 increased 15% from $1.4 million for the same period last year. Excluding the translation impact of fluctuations in foreign currency exchange rates, Urgent PC sales increased by approximately 21%. The increase in sales is attributed to the increase in adoption of the product by our customers, primarily in the United Kingdom.

Gross Profit: Gross profit was $4.9 million, or 86.9%, of Net sales during the three months ended December 31, 2012, and $4.6 million, or 85.5%, of Net sales for the three months ended December 31, 2011. The increase in the Gross profit percentage is attributed primarily to a favorable impact of approximately 0.3 percentage points from an increase in capacity absorption and reduced overhead costs, and favorable impact of approximately 1.0 percentage points from product

Gross profit was $14.6 million, or 86.6%, of Net sales during the nine months ended December 31, 2012, and $12.7 million, or 85.0%, of Net sales for the nine months ended December 31, 2011. The increase in the Gross profit percentage is attributed primarily to a favorable impact of approximately 0.3 percentage points from an increase in capacity absorption and reduced overhead costs, and a favorable impact of approximately 1.2 percentage points from product mix.

General and Administrative Expenses (G&A): G&A expenses of $1.1 million during the three months ended December 31, 2012, increased $134,000 from $925,000 during the same period in 2011. G&A expenses of $3.2 million during the nine months ended December 31, 2012, increased $289,000 from $2.9 million during the same period in 2011. G&A expenses for both periods increased primarily because of an increase in compensation and travel costs.

Research and Development Expenses (R&D): R&D expenses of $534,000 during the three months ended December 31, 2012, decreased $53,000 from $586,000 during the same period in 2011. R&D expenses of $1.7 million during the nine months ended December 31, 2012, increased $197,000 from $1.5 million during the same period in 2011. The decrease for the three-month period is attributed primarily to a $129,000 charge in the prior fiscal year for costs incurred by a third-party to develop tooling for a product we no longer planned to commercialize, offset by a $32,000 increase in compensation costs. The increase for the nine-month period is attributed primarily to a $340,000 charge for product testing and validation of the planned replacement of components for one of our products, an $85,000 increase in consulting and clinical data validation, and a $51,000 increase in compensation costs, offset by a $182,000 decrease in human clinical study costs and a $129,000 charge in the prior fiscal year for costs incurred by a third-party for the tooling development noted above.

Selling and Marketing Expenses (S&M): S&M expenses of $3.7 million during the three months ended December 31, 2012 decreased $177,000, from $3.9 million, during the same period in 2011. S&M expenses during the three months ended December 31, 2012, decreased primarily because of a $207,000 decrease in compensation-related costs, offset by a $50,000 increase in travel costs. S&M expenses of $11.4 million during the nine months ended December 31, 2012 increased $57,000 compared to the same period last year. S&M expenses during the nine months ended December 31, 2012, increased primarily because of a $255,000 increase in travel costs and a $62,000 increase in marketing related costs to support the increase in personnel in our U.S field sales and support organization, offset by a $317,000 decrease in compensation related costs as a result of reducing our bonus and incentive related costs by $404,000.

Amortization of Intangibles: Amortization of intangibles was $216,000 and $215,000 for the three months ended December 31, 2012 and 2011, respectively. Amortization of intangibles was $647,000 and $642,000 for the nine months ended December 31, 2012 and 2011, respectively. We expect Amortization expense to decline to $24,000 in Fiscal 2014.

Other Income (Expense): Other income (expense) includes Interest income, Interest expense and Foreign currency exchange gains and losses. Net Other income was $13,000 and $3,000 for the three months ended December 31, 2012 and 2011, respectively. Other income increased as a result of a favorable swing of $11,000 in net foreign currency exchange gain during the three months ended December 31, 2012 over the same period last year, offset by a $2,000 decrease in Interest income. Net Other income was $32,000 and $31,000 for the nine months ended December 31, 2012 and 2011, respectively. Other income increased as a result of an $11,000 net Foreign currency exchange gain during the nine months ended December 31, 2012 over the same period last year, offset by a $10,000 decrease in Interest income on lower cash balances and interest rates.

Income Tax Expense: During the three months ended December 31, 2012 and 2011, we recorded Income tax expense of $13,000 and $9,000, respectively. During the nine months ended December 31, 2012 and 2011, we recorded Income tax expense of $36,000 and $32,000, respectively.

Non-GAAP Financial Measures: The following table reconciles our operating loss calculated in accordance with accounting principles generally accepted in the U.S. (GAAP) to Non-GAAP financial measures that exclude non-cash charges for share-based compensation, and depreciation and Amortization expenses from Gross profit, Operating expenses and Operating loss. The Non-GAAP financial measures used by management and disclosed by us are not a substitute for, or superior to, financial measures and consolidated financial results calculated in accordance with GAAP, and you should carefully evaluate our reconciliations to non-GAAP. We may calculate our Non-GAAP financial measures differently from similarly titled measures used by other companies. Therefore, our Non-GAAP financial measures may not be comparable to those used by other companies. We have described the reconciliations of each of our Non-GAAP financial measures described above to the most directly comparable GAAP financial measures.

We use these Non-GAAP financial measures, and in particular non-GAAP operating loss, for internal managerial purposes and incentive compensation for senior management because we believe such measures are one important indicator of the strength and the operating performance of our business. Analysts and investors frequently ask us for this information. We believe that they use these measures to evaluate the overall operating performance of companies in our industry, including as a means of comparing period-to-period results and as a means of evaluating our results with those of other companies.

Our non-GAAP operating loss during the three months ended December 31, 2012 and 2011 was approximately $135,000 and $570,000, respectively. Our non-GAAP operating loss during the nine months ended December 31, 2012 and 2011 was approximately $858,000 and $2.3 million, respectively. The decrease in non-GAAP operating loss for the three months ended December 31, 2012 over the corresponding period a year ago is attributed to the increase in Net sales and Gross profit percent and the decrease in operating spending. The decrease in non-GAAP operating loss for the nine months ended December 31, 2012 over the corresponding period a year ago is attributed to the increase in Net sales and Gross profit percent, which more than offset the increase in operating spending.

                                                                       Expense Adjustments
                                                       Share-based                           Amortization
Three-Months Ended                       GAAP            Expense         Depreciation       of Intangibles       Non-GAAP
December 31, 2012
Gross profit                         $  4,856,000     $       8,000     $        8,000                          $ 4,872,000
% of Net sales                               86.9 %                                                                    87.2 %
Operating expenses
General and administrative              1,059,000          (146,000 )          (50,000 )                            863,000
Research and development                  534,000           (14,000 )           (1,000 )                            519,000
Selling and marketing                   3,725,000           (87,000 )          (13,000 )                          3,625,000
Amortization                              216,000                                          $       (216,000 )             -
                                        5,534,000          (247,000 )          (64,000 )           (216,000 )     5,007,000

Operating loss                       $   (678,000 )   $     255,000     $       72,000     $        216,000     $  (135,000 )

December 31, 2011
Gross profit                         $  4,568,000     $       6,000     $        9,000                          $ 4,583,000
% of Net sales                               85.5 %                                                                    85.8 %
Operating expenses
General and administrative                925,000          (132,000 )          (40,000 )                            753,000
Research and development                  586,000           (11,000 )           (2,000 )                            573,000
Selling and marketing                   3,903,000           (62,000 )          (14,000 )                          3,827,000
Amortization                              215,000                                          $       (215,000 )             -
                                        5,629,000          (205,000 )          (56,000 )           (215,000 )     5,153,000

Operating loss                       $ (1,061,000 )   $     211,000     $       65,000     $        215,000     $  (570,000 )

Operating loss $ (2,333,000 ) $ 611,000 $ 217,000 $ 647,000 $ (858,000 )

December 31, 2011
Gross profit $ 12,720,000 $ 16,000 $ 25,000 $ 12,761,000 % of Net sales 85.0 % 85.3 % Operating expenses
General and administrative 2,889,000 (296,000 ) (119,000 ) 2,474,000 Research and development 1,499,000 (30,000 ) (8,000 ) 1,461,000 Selling and marketing 11,367,000 (161,000 ) (39,000 ) 11,167,000 Amortization 642,000 $ (642,000 ) - 16,397,000 (487,000 ) (166,000 ) (642,000 ) 15,102,000

Operating loss $ (3,677,000 ) $ 503,000 $ 191,000 $ 642,000 $ (2,341,000 )

Liquidity and Capital Resources

Cash Flows.

At December 31, 2012, our Cash and cash equivalents and Short-term investments balances totaled $14.4 million. Our Long-term investments at December 31, 2012 were $1.2 million.

At December 31, 2012, we had working capital of approximately $15.4 million.

For the nine months ended December 31, 2012, we used $632,000 of cash in operating activities, compared to $2.7 million of cash used during the nine months ended December 31, 2011. We used this cash primarily to fund the Operating loss, net of non-cash charges, of $841,000 during the nine months ended December 31, 2012, and $2.3 million during the nine months ended December 31, 2011. We have continued to show an Operating loss because we have continued to invest, primarily in Selling and marketing and Research and development, to grow our U.S. business. We generated approximately $209,000 of cash from changes in operating assets and liabilities in the nine months ended December 31, 2012, compared to cash used of $378,000 in the nine months ended December 31, 2011.

For the nine months ended December 31, 2012, we used $137,000 to purchase Property, plant and equipment compared with approximately $223,000 for the same period a year ago.

For the nine months ended December 31, 2012, we generated $150,000 of cash from exercise of stock options, compared with $209,000 for the nine months ended December 31, 2011.

Sources of Liquidity.

Uroplasty BV, our subsidiary in the Netherlands, has an agreement with Rabobank of The Netherlands for a €150,000 (approximately $198,000) credit line secured by our facility in Geleen, The Netherlands. The bank charges interest on the loan at the rate of one percentage point over the Rabobank base interest rate (4.0% base rate on December 31, 2012), subject to a minimum interest rate of 3.5% per annum. We had no borrowings outstanding on this credit line at December 31, 2012.

We believe we have sufficient liquidity to meet our needs for beyond the next twelve months. Although we have historically not generated cash from operations . . .