Exhibit 9.3 TDS (DERMATOLOGY) LIMITED DIRECTORS' REPORT AND FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2001 TDS (DERMATOLOGY) LIMITED COMPANY INFORMATION Directors R. Coomber K. Freeman Secretary R.A. Waterer Company number 3687072 Registered office The Innovation Centre University of Wales Swansea Singleton Park Swansea SA2 8PP Auditors BKR Haines Watts 9-21 Princess Street Albert Square Manchester M2 4DN TDS (DERMATOLOGY) LIMITED CONTENTS Page Directors' report F1 - F2 Independent auditors' report F3 Profit an loss account F4 Balance sheet F5 Notes to the financial statements F6 - F9 The following pages do not form part of the audited accounts: Detailed trading profit and loss account F10 Schedule of administrative expenses F11 TDS (DERMATOLOGY) LIMITED DIRECTORS' REPORT FOR THE YEAR ENDED 31 DECEMBER 2001 The directors present their report and financial statements for the year ended 31 December 2001. Principal activities The principal activity of the company during the year was that of remote medical diagnosis. Results The results for the year are set out in the profit and loss account on page 3. During the year the Company changed its year end to 31st December 2001, consequently the comparative figures are for the year ended 30th June 2001. Directors The following directors have held office since 1 January 2001: R. Coomber K. Freeman Directors' interests The directors' interests in the shares of the company were as stated below: Ordinary shares of (pound) 1 each 31 December 2001 1 January 2001 R. Coomber -- -- K. Freeman -- -- K. Freeman and R. Coomber have interests in the shares of the holding company and their interests are shown in the accounts of that company. Auditors BKR Haines Watts were appointed auditors to the company and in accordance with Section 385 of the Companies Act 1985, a resolution proposing that they be re-appointed will be put to the Annual General Meeting. F-1 TDS (DERMATOLOGY) LIMITED DIRECTORS' REPORT (CONTINUED) FOR THE YEAR ENDED 31 DECEMBER 2001 Directors' responsibilities Company law requires the directors to prepare financial statements for each financial year which give a true and fair view of the state of affairs of the company and of the profit or loss of the company for that period. In preparing those financial statements, the directors are required to: - - select suitable accounting policies and then apply them consistently; - - make judgements and estimates that are reasonable and prudent; - - prepare the financial statements on the going concern basis unless it is inappropriate to presume that the company will continue in business. The directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position for the company and to enable them to ensure that the financial statements comply with the Companies Act 1985. They are also responsible for safeguarding the assets of the company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. This report has been prepared in accordance with the special provisions of part VII of the Companies Act 1985 relating to small companies. By order of the board R. A. Waterer Secretary 12 August 2002 F-2 TDS (DERMATOLOGY) LIMITED INDEPENDENT AUDITORS' REPORT TO THE SHAREHOLDERS OF TDS (DERMATOLOGY) LIMITED We have audited the financial statements of TDS (DERMATOLOGY) LIMITED on pages 4 to 9 for the year ended 31 December 2001. These financial statements have been prepared in accordance with the Financial Reporting Standard for Smaller Entities (effective June 2002), under the historical cost convention and the accounting policies set out therein. Respective responsibilities of the directors and auditors. As described in the statement of directors' responsibilities on page 2 the company's directors are responsible for the preparation of the financial statements in accordance with applicable law and United Kingdom Accounting Standards. Our responsibility is to audit the financial statements in accordance with relevant legal and regulatory requirements and United Kingdom Auditing Standards. We report to you our opinion as to whether the financial statements give a true and fair view and are properly prepared in accordance with the Companies Act 1985. We also report to you if, in our opinion, the directors' report is not consistent with the financial statements, if the company has not kept proper accounting records, if we have not received all the information and explanations we require for our audit, or if information specified by law regarding directors' remuneration and transactions with the company is not disclosed. We read the directors' report and consider the implications for our report if we become aware of any apparent misstatements within it. Basis of audit opinion We conducted our audit in accordance with United Kingdom auditing Standards issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements. It also includes an assessment of the significant estimates and judgements made by the directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the company's circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements. Going concern In forming our opinion, we have considered the adequacy of the disclosures made in note 1 of the financial statements concerning the uncertainty as to the continuation and renewal of the company's bank overdraft facility. In view of the significance of this uncertainty we consider that it should be drawn to your attention but our opinion is not qualified in this respect. Opinion In our opinion the financial statements give a true and fair view of the state of the company's affairs as at 31 December 2001 and of its profit for the year then ended and have been properly prepared in accordance with the Companies Act 1985. BKR Haines Watts 12 August 2002 Chartered Accountants 9-21 Princess Street Registered Auditor Albert Square Manchester M2 4DN F-3 TDS (DERMATOLOGY) LIMITED PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31 DECEMBER 2001 Year Year ended ended 31 December 30 June 2001 2001 Notes (pound) (pound) Turnover 753,255 453,807 Cost of sales (411,105) (208,894) --------- --------- Gross profit 342,150 250,913 Administrative expenses (325,580) (285,812) --------- --------- Operating profit/(loss) 2 16,570 (34,899) Interest payable and similar charges (12,760) (3,451) --------- --------- Profit/(loss) on ordinary activities before taxation 3,810 (38,350) Tax on profit/(loss) on ordinary activities 3 -- -- --------- --------- Profit/(loss) on ordinary activities after taxation 9 3,810 (38,350) ========= ========= F-4 TDS (DERMATOLOGY) LIMITED BALANCE SHEET AS AT 31 DECEMBER 2001 Dec 2001 June 2001 Notes (pound) (pound) (pound) (pound) Fixed assets Tangible assets 4 6,501 1,235 Current assets Debtors 5 235,094 292,647 Cash at bank and in hand 200 50 -------- -------- 235,294 292,697 Creditors: amounts falling due within one year 6 (255,654) (295,579) -------- -------- Net current liabilities (20,360) (2,820) ------- -------- Total assets less current liabilities (13,859) (1,647) Creditors: amounts falling due after more than one year 7 (30,833) (33,333) ------- -------- (44,692) (34,980) ======= ======== Capital and reserves Called up share capital 8 100 100 Share premium account 9 14,996 14,996 Profit and loss account 9 (59,788) (50,076) ------- -------- Shareholders' funds (44,692) (34,980) ======= ======== These financial statements have been prepared in accordance with the special provisions of Part VII of the Companies Act 1985 relating to small companies and with the Financial Reporting Standard for Smaller Entities (effective March 2000). The financial statements were approved by the Board on 12 August 2002 R. Coomber K. Freeman Director Director F-5 TDS (DERMATOLOGY) LIMITED NOTES TO FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2001 1 Accounting policies 1.1 Accounting convention The financial statements are prepared under the historical cost convention and in accordance with the Financial Reporting Standard for Smaller Entities (effective March 2000). The company meets its day to day working capital requirements through an overdraft facility and the continued support of the crown and its suppliers. The directors are currently in the process of preparing a prospectus to obtain equity funding in order to provide a cash injection. The directors have reviewed the business projections for 12 months from the date of their approval of these financial statements. On the basis of the business review and discussions with their advisors and main creditors, the directors consider the company will continue to operate as a going concern and have prepared the financial statements on this basis. 1.2 Turnover Turnover represents amounts receivable for goods and services net of VAT and trade discounts 1.3 Tangible fixed assets and depreciation Tangible fixed assets are stated at cost less depreciation. Depreciation is provided at rates calculated to write off the cost less estimated residual value of each asset over its expected useful life, as follows: Medical equipment 20% Straight line Computer and camera equipment 25% Straight line Fixtures, fittings & equipment 20% Straight line 1.4 Leasing Rentals payable under operating leases are charged against income on a straight line basis over the lease term. 1.5 Deferred taxation Deferred taxation is provided at appropriate rates on all timing differences using the liability method only to the extent that, in the opinion of the directors, there is a reasonable probability that a liability or asset will crystallise in the foreseeable future. 1.6 Comparatives This year the company has not taken advantage of the audit exemption available, consequently the comparative figures shown for the year ended 30th June 2001 have not been audited. 2 Operating profit/(loss) Dec 2001 June 2001 (pound) (pound) Operating profit/(loss) is stated after charging: Depreciation of tangible assets 1,955 343 Auditors' remuneration 3,800 -- Directors' emoluments 45,574 111,626 ------- ------- 3 Taxation The directors do not expect a tax liability to crystallise due to trading losses in previous periods. F-6 TDS (DERMATOLOGY) LIMITED NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) FOR THE YEAR ENDED 31 DECEMBER 2001 4 Tangible fixed assets Other Land and tangible buildings fixed assets Total (pound) (pound) (pound) Cost At 1 January 2001 -- 36,698 36,698 Additions 1,569 10,830 12,399 Disposals -- (40,390) (40,390) ---------- --------- ---------- At 31 December 2001 1,569 7,138 8,707 ---------- --------- ---------- Depreciation At 1 January 2001 -- 12,590 12,590 On disposals -- (12,339) (12,339) Charge for the year 314 1,641 1,955 ---------- --------- ---------- At 31 December 2001 314 1,892 2,206 ---------- --------- ---------- Net book value At 31 December 2001 1,255 5,246 6,501 ========== ========= ========== At 30 June 2001 -- 1,235 1,235 ========== ========= ========== 5 Debtors Dec 2001 June 2001 (pound) (pound) Trade debtors 105,578 174,631 Other debtors 129,516 118,016 ---------- ---------- 235,094 292,647 ========== ========== F-7 TDS (DERMATOLOGY) LIMITED NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) FOR THE YEAR ENDED 31 DECEMBER 2001 6 Creditors: amounts falling due within one year Dec 2001 June 2001 (pound) (pound) Bank loans and overdrafts 1,101 20,971 Trade creditors 16,112 12,808 Taxation and social security 91,836 75,474 Other creditors 145,605 186,236 ---------- ---------- 255,654 295,579 ========== ========== The bank overdraft is secured by a fixed and floating charge over all of the company's assets. 7 Creditors: amounts falling due after more than one year Dec 2001 June 2001 (pound) (pound) Other creditors 30,833 33,333 ========== ========== Analysis of loans Wholly repayable within five years 77,833 80,333 Included in current liabilities (47,000) (47,000) ---------- ---------- 30,833 33,333 ========== ========== 8 Share capital Dec 2001 June 2001 (pound) (pound) Authorised 100 Ordinary shares of(pound)1 each 100 100 ========== ========== Allotted, called up and fully paid 100 Ordinary shares of(pound)1 each 100 100 ========== ========== Share Profit and premium loss 9 Statement of movements on reserves account account (pound) (pound) Balance at 1 January 2001 14,996 (63,598) Retained profit for the period - 3,810 ---------- ---------- 14,996 (59,788) ========== ========== F-8 TDS (DERMATOLOGY) LIMITED NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) FOR THE YEAR ENDED 31 DECEMBER 2001 10 Financial commitments AT 31 December 2001 the company had annual commitments under non-cancelable operating leases as follows: Dec 2001 June 2001 (pound) (pound) Expiry date: Between two and five years 51,820 -- ========= ========= 11 Transactions with directors The following directors had interest free loans during the year. The movement on these loans are as follows: Amount outstanding Maximum Dec 2001 June 2001 In period (pound) (pound) Director's current account (debit bal) 14,278 10,039 14,278 Director's current account (debit bal) 20,704 20,327 20,704 ====== ====== ====== Included within consultation costs is (pound)67,128 that was paid to K. Freeman, who is a director of the company, in regard to services provided by himself. 12 Control The ultimate parent company is TDS (Telemedicine) Limited, a company registered in England and Wales. F-9 TDS (DERMATOLOGY) LIMITED DETAILED TRADING AND PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31 DECEMBER 2001 Year ended Year ended 30 June 31 December 2001 2001 (pound) (pound) (pound) (pound) Turnover Consultations 753,255 453,807 Cost of sales Consultations 204,175 78,151 Travel costs 31,903 15,715 Medical sundries 16,759 4,309 Clinic rental 11,596 9,005 Wages and salaries (excl. N.I. 104,528 76,233 Employer's N.I. contributions 9,575 -- Equipment lease 32,569 19,481 ---------- ---------- (411,105) (202,894) --------- --------- Gross profit 45.42% 342,150 55.29% 250,812 --------- --------- Administrative expenses (325,850) (285,812) --------- --------- Operating profit/(loss) 16,570 (34,899) Interest payable Bank interest paid 4,480 1,518 Factor interest paid 2,730 1,933 Other interest paid 5,550 -- ---------- ---------- (12,760) (3,451) --------- --------- Profit/(loss) before taxation 0.51% 3,810 8.45% (38,350) ========= ========= F-10 TDS (DERMATOLOGY) LIMITED SCHEDULE OF ADMINISTRATIVE EXPENSES FOR THE YEAR ENDED 31 DECEMBER 2001 Year Year ended ended 31 December 30 June 2001 2001 (pound) (pound) Administrative expenses Wages and salaries (excl. N.I.) 116,615 59,473 Directors' remuneration 45,574 111,626 Employer's N.I. contributions 13,602 7,888 Rent re operating leases 11,021 5,508 Insurance 3,750 2,618 Repairs and maintenance 147 -- Printing, postage and stationery 33,875 24,240 Advertising -- 1,003 Telephone 22,150 16,073 Computer running costs 948 1,083 Motor vehicle leasing 9,449 -- Travelling & Motor expenses 38,523 30,960 Legal and prof fees - allowable 7,377 -- Accountancy 8,663 10,265 Audit fees 3,800 -- Bank charges 6,281 12,007 Factoring charges 10,418 5,688 Sundry expenses - allowable 2,137 2,952 Subscriptions - allowable 2,023 2,364 Depreciation on plant and machinery 1,395 -- Depreciation on FF & E 560 343 Profits/losses on disp of tangibles (12,728) (8,279) --------- --------- 325,580 285,812 ========= ========= F-11 tds (Telemedicine) Limited FINANCIAL REPORT DECEMBER 31, 2001 CONTENTS Page INDEPENDENT AUDITOR'S REPORT..............................................F-13* FINANCIAL STATEMENTS Consolidated Balance Sheet...........................................F-14 Consolidated Statement of Operations.................................F-15 Consolidated Statement of Changes in Members' Equity.................F-16 Consolidated Statement of Cash Flows.................................F-17* Notes to Consolidated Financial Statements...........................F-18 * to be filed by amendment F-12 tds (TELEMEDICINE) LIMITED CONSOLIDATED BALANCE SHEET DECEMBER 31, 2001 ASSETS CURRENT ASSETS Cash $ 290 Trade accounts receivable 246,996 Receivable from directors 50,863 Prepaid expenses 8,960 --------- Total current assets 307,109 PROPERTY AND EQUIPMENT, at cost Medical equipment 2,275 Other 10,354 --------- 12,629 Less accumulated depreciation 3,203 --------- 9,426 --------- TOTAL ASSETS $ 316,535 ========= LIABILITIES AND MEMBERS' EQUITY CURRENT LIABILITIES Notes payable $ 112,858 Checks issued in excess of bank balances 1,596 Accounts payable 105,409 Taxes payable 133,162 Other accrued expenses 62,380 --------- Total liabilities 415,405 MEMBERS' EQUITY Ordinary shares of 50 pence each; 2,000,000 shares authorized and issued; 100 shares outstanding 158 Additional paid-in capital 23,695 Accumulated other comprehensive income (1,696) Accumulated deficit (121,027) --------- (98,870) --------- TOTAL LIABILITIES AND MEMBERS' EQUITY $ 316,535 ========= F-14 tds (TELEMEDICINE) LIMITED CONSOLIDATED STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 2001 OPERATING REVENUES Medical consultations $ 1,085,290 ----------- Total operating revenues 1,085,290 COST OF SALES 592,320 ----------- Gross profit 492,970 GENERAL AND ADMINISTRATIVE 502,947 ----------- Loss from operations (9,977) OTHER INCOME (EXPENSE) Interest expense (18,385) ----------- Loss before income tax (28,362) INCOME TAX -- ----------- Net loss ($28,362) =========== Loss per share: Basic $ 283.62 =========== Weighted average number of shares outstanding Basic 100 =========== F-15 tds (TELEMEDICINE) LIMITED CONSOLIDATED STATEMENT OF CHANGES IN MEMBERS' EQUITY YEAR ENDED DECEMBER 31, 2001 Other Additional Accumulated Common Stock Paid-in Comprehensive Accumulated Shares Amount Capital Income Deficit Total ------ ------ ------- ------ ------- ----- Balance, January 1, 2001 100 $158 $23,695 ($3,940) ($92,665) ($72,752) Other comprehensive income -- -- -- 2,244 -- Net loss -- -- -- -- (28,362) Total comprehensive income -- -- -- -- -- (26,118) ------ ------ ------- ------ --------- -------- Balance, December 31, 2001 100 $158 $23,695 ($1,696) ($121,027) ($98,870) ====== ====== ======= ====== ========= ======== F-16 tds (TELEMEDICINE) LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation and Presentation tds (Telemedicine) Limited (the Company) is a private company incorporated under the Companies Act 1985 in the United Kingdom. The consolidated financial statements include the accounts of tds (Telemedicine) Limited and its wholly owned subsidy, tds (Dermatology) Limited. All intercompany transactions and balances have been eliminated upon consolidation. Nature of Operations The Company utilizes the internet and digital and voice communication technology to bridge the separation between medical patients and diagnosing physicians when medical conditions exist in which the patient and the physician are separated by space, time or both. Since 1998, the Company has been providing these services to the National Health Service in the United Kingdom. Expansion of these services to the United States of America is anticipated in future years. Revenue Revenue from medical consultations are recognized as services are rendered. Property and Equipment Property and equipment are stated at cost. Depreciation is provided over the estimated useful lives of the assets primarily by the straight-line method as follows: Computer equipment 4 years Medical equipment 5 years Other 5 years Earnings (Loss) Per Common Share Basic earnings (loss) per common share are computed based on the weighted average number of common shares outstanding for the period. The Company does not have any other potential common shares. Cash Flows Presentation For purposes of the statement of cash flows, the Company considers all highly liquid investments purchased with maturities of three months or less to be cash equivalents. Advertising The Company expenses all advertising costs as incurred. Expense for the year ended December 31, 2001 was immaterial. F-18 tds (TELEMEDICINE) LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued Allowance for Doubtful Accounts All receivables for which collection is doubtful have been written off by management. Thus, no allowance is included in the accompanying financial statements. Use of Estimates The preparation of consolidated 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Financial Instruments Financial instruments of the Company consist of cash and cash equivalents, accounts receivable, accounts payable and notes payable. Recorded values of cash, receivables and payables approximate fair values due to short maturities of the instruments. Long-lived Assets Long-lived assets to be held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company continuously evaluates the recoverability of its long-lived assets based on estimated future cash flows and the estimated liquidation value of such long-lived assets, and provides for impairment if such undiscounted cash flows are insufficient to recover the carrying amount of the long-lived assets. Foreign Currency Translation Assets, liabilities and operations of subsidiaries are recorded based on the functional currency of each entity. For the foreign operations, the functional currency is the local currency, in which case the assets, liabilities, and operations are translated, for consolidation purposes, at current exchange rates from the local currency to the reporting currency, the U. S. dollar. The resulting gains or losses are reported as a component of stockholders' equity. NOTE 2. CONCENTRATIONS OF CREDIT RISK Financial instruments, which potentially subject the Company to concentrations of credit risk, consist of cash equivalents and trade receivables. All cash is maintained in banks in the United Kingdom. Concentrations of credit risk with respect to trade receivables consist principally of medical service customers operating within the United Kingdom. No allowance for doubtful accounts has been provided for trade accounts receivable since recorded amounts are determined to be fully collectible. NOTE 3. NOTES PAYABLE Notes payable consist of the following at December 31, 2001: Note payable to an individual, interest at 15%, no stated payment terms, classified in accompanying financial statements as due on demand $ 10,150 F-19 tds (TELEMEDICINE) LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3. NOTES PAYABLE-continued Note payable to an individual, unsecured, due January 15, 2002, with interest at 15% 43,500 Note payable to a financial institution, unsecured, interest at 1.25% above the prevailing bank base rate at time of borrowing; original term for five years; classified in accompanying financial statements as due on demand due to default under loan agreement 59,208 Total notes payable $112,858 ======== NOTE 4. INCOME TAXES Deferred income tax assets and liabilities are computed annually for differences between financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities. The Company federal tax provision consists of the following: Current $ -- Deferred -- ------- $ -- ======= The income tax provision differs from that computed by applying statutory rates to net income as follows: Taxes at statutory rates $ 9,643 Losses no providing tax benefits (9,643) ------- -- Tax provision $ -- ======== At March 31, 2002, the deferred tax asset and liability balances are as follows: Deferred tax asset Net operating loss $35,448 Deferred tax liability Depreciation (9,280) ------- Net deferred tax asset 26,168 Valuation allowance (26,168) ------- $ -- ======= The net change in the valuation allowance for 2001 is an increase of approximately $9,600. The deferred tax asset is due to the net operating loss carryover. The Company has a net operating loss carryover of approximately $100,000 available to offset future income for income tax reporting purposes. F-20 tds (TELEMEDICINE) LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 5. COMPREHENSIVE INCOME Comprehensive income consists of the following for the year ended December 31, 2001: Other comprehensive income: Foreign currency translation gain $ 2,244 Reclassification adjustment -- Tax effect -- ------- Net foreign currency translation gain $ 2,244 ======== Accumulated other comprehensive income (loss) consists entirely of foreign currency translation adjustments. NOTE 6. SUBSEQUENT EVENT On December 18, 2002, the Company and its parent, tds (Telemedicine) Inc. consummated a merger with Surf Group Inc., a United States corporation. NOTE 7. TRANSFER OF TRADE RECEIVABLES The Company has entered into a factoring agreement with Royal Bank of Scotland Commercial Services Limited. This agreement does not meet the criteria for sales recognition and, accordingly, is accounted for as a secured borrowing with a pledge of collateral. Included in accounts payable is $93,908 of proceeds from factoring $111,142 of trade accounts receivable at December 31, 2001. F-21