<PAGE>

                      US Securities and Exchange Commission
                              Washington, DC 20549
                                   FORM 10-KSB
                                   (Mark One)
            [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                 SECURITIES EXCHANGE ACT OF 1934 [Fee Required]

                  For the fiscal year ended December 31, 1996.

             [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE

                SECURITIES EXCHANGE ACT OF 1934 [No Fee Required]

    For the transition period from __________________ to ____________________
                         Commission File Number 0-12365

                        MEDICAL DEVICE TECHNOLOGIES, INC.
                        ---------------------------------

                 (Name of small business issuer in its charter)
                      Utah                             58-1475517
         ---------------------------------    ---------------------------
         (State or other jurisdiction of           (IRS Employer
          incorporation or organization)            Identification No.)

         9171 Towne Centre Drive, Suite 355, San Diego, California 92122
                    (Address of principal executive offices)

                    Issuer's telephone number: (619) 455-7127

Securities registered under Section 12(b) of the Exchange Act: None

Securities registered under Section 12 (g) of the Exchange Act:

<TABLE>
<CAPTION>

Title of each class                                                    Name of each exchange on which registered
-------------------                                                    -----------------------------------------
<S>                                                                      <C>
Common Stock, $0.15 Par Value                                                The Nasdaq SmallCapSM Market
6% Cumulative Convertible Series A Preferred Stock, $.01 Par Value           The Nasdaq SmallCapSM Market
Redeemable Common Stock Purchase Warrants                                    The Nasdaq SmallCapSM Market
</TABLE>


     Check  whether  the issuer:  (1) filed all reports  required to be filed by
Section 13 or 15(d) of the  Exchange  Act during the past 12 months (or for such
shorter period that the  registrant was required to file such reports);  and (2)
has been subject to such filing requirements for the past 90 days. Yes X No

     Check if there is no disclosure  of  delinquent  filers in response to Item
405 of  Regulation  S-B not contained in this form,  and no  disclosure  will be
contained,  to the  best of  Registrant's  knowledge,  in  definitive  proxy  or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ X ]

     State issuer's revenues for its most recent fiscal year $26,193.

     The  aggregate  market  value of the voting  stock  held by  non-affiliates
computed by reference  to the price at which the stock was sold,  or the average
bid and asked prices of such stock, as of March 12, 1997, was $3,871,085

     As of March 12, 1997, Registrant had outstanding 7,838,632 shares of common
stock,  1,256,080 shares of 6% cumulative  convertible  Series A preferred stock
and 1,972,000 redeemable common stock purchase warrants.

     Transitional Small Business Disclosure Format (check one): Yes     No. X


<PAGE>
<TABLE>
<CAPTION>

                                TABLE OF CONTENTS


PART I
<S>                <C>                                                                              <C>

Item 1.           Description of the Business.........................................................2

Item 2.           Description of Property............................................................16

Item 3.           Legal Proceedings..................................................................16

Item 4.           Submission of Matters to a Vote of Security Holders................................17


PART II

Item 5.           Market for Common Equity and Related Stockholder Matters ..........................17

Additional Item.  Executive Officers and Directors of the Company ...................................18

Item 6.           Management's Discussion and Analysis and Plan of Operation.........................21

Item 7.           Financial Statements...............................................................27

Item 8.           Changes In and Disagreements with Accountants on Accounting and
                  Financial Disclosure...............................................................28


PART III

Item 9.           Directors, Executive Officers, Promoters and Control Persons,
                  Compliance with Section 16(a) of the Exchange Act..................................28

Item 10.          Executive Compensation.............................................................28

Item 11.          Security Ownership of Certain Beneficial Owners and Management.....................28

Item 12.          Certain Relationships and Related Transactions.....................................28


PART IV

Item 13.          Exhibits and Reports on Form 8-K...................................................28

</TABLE>


                                      -1-
<PAGE>

                                     PART I

ITEM 1.  DESCRIPTION OF THE BUSINESS

Corporate History
-----------------

     Medical  Device  Technologies,  Inc. (the  "Company") was  incorporated  on
February 6, 1980, under the laws of the State of Utah,  initially under the name
of Gold Probe,  Inc. In September  1981, the Company and the Hailey Oil Company,
Inc.  a  Mississippi  corporation,   entered  into  an  Agreement  and  Plan  of
Reorganization  whereby  the  Company  acquired  Hailey Oil  Company,  Inc.  and
exchanged  4,500,000  shares  of  its  Common  Stock  for  all  the  issued  and
outstanding  shares  of  Hailey  Oil  Company,   Inc.  Also,   pursuant  to  the
reorganization  in January 1982,  the Company  changed its name to Hailey Energy
Corporation,  effected a one (1) for five (5) reverse split of its Common Stock,
and decreased its authorized  number of shares to  25,000,000.  In October 1986,
the number of authorized shares of the Company was increased to 100,000,000.  In
November 1990,  the Company  effected a one (1) for thirty (30) reverse split of
its Common  Stock and  increased  the par value of its Common Stock to $0.15 per
share.  In November  1992,  the Company  changed  its name from  "Hailey  Energy
Corporation"  to "Cytoprobe  Corporation."  The number of  authorized  shares of
Common Stock  (100,000,000)  remained  unchanged.  In January 1994,  the Company
effected a one (1) for six (6) reverse split of its Common Stock.  The par value
of the  Company's  Common  Stock  remained  at $0.15 per share and the number of
authorized shares remained unchanged.  In May 1995, the Company changed its name
to Medical Device Technologies, Inc. to reflect the Company's broadening base of
medical  products.  In June  1996,  the  Company  effected a one (1) for two (2)
reverse split of its Common Stock.  The par value of the Company's  Common Stock
remained  at $0.15 per  share  and the  number  of  authorized  shares  remained
unchanged.

     The Company is subject to the informational  requirements of the Securities
Exchange  Act of 1934,  as  amended  (the  "Exchange  Act") and,  in  accordance
therewith,  files  reports,  proxy  statements  and other  information  with the
Securities and Exchange Commission (the "Commission"). Reports, proxy statements
and other  information  filed with the Commission can be inspected and copied at
the  public  reference  facilities  of the  Commission  at 450 Fifth  Street NW,
Washington, DC 20549. Such material may also be accessed electronically by means
of the  Commission's  home  page  on the  Internet  at  http://www.sec.gov.  The
Company's Common Stock, the 6% Cumulative Convertible Series A Preferred Stock ,
par value $.01 per share (the "Preferred  Stock") and  redeemable  common stock
purchase  warrants  (the  "Redeemable  Warrants")  are  traded  on the  National
Association of Securities  Dealers Automated  Quotation (Nasdaq) SmallCap Market
under the symbols "MEDD", "MEDDP", and "MEDDW", respectively.


                                      -2-
<PAGE>

Forward-Looking Statements
--------------------------

     The following discussion contains forward-looking  statements regarding the
Company,  its business,  prospects and results of operations that are subject to
certain  risks and  uncertainties  posed by many  factors  and events that could
cause the  Company's  actual  business,  prospects  and results of operations to
differ  materially  from those that may be anticipated  by such  forward-looking
statements.  Factors that may affect such  forward-looking  statements  include,
without limitation:  the Company's ability to successfully  develop new products
for new markets; the impact of competition on the Company's revenues, changes in
law or regulatory  requirements that adversely affect or preclude customers from
using the Company's products for certain  applications;  delays in the Company's
introduction  of new  products;  and  failure  by the  Company to keep pace with
emerging technologies.

     When used in this  discussion,  words  such as  "believes",  "anticipates",
"expects",   "intends"  and  similar   expressions   are  intended  to  identify
forward-looking  statements,  but are not the  exclusive  means  of  identifying
forward-looking statements. Readers are cautioned not to place undue reliance on
these  forward-looking  statements,  which  speak  only  as of the  date of this
report.  The Company  undertakes  no  obligation  to revise any  forward-looking
statements in order to reflect  events or  circumstances  that may  subsequently
arise.   Readers  are  urged  to  carefully  review  and  consider  the  various
disclosures  made by the Company in this report and other reports filed with the
Securities and Exchange  Commission that attempt to advise interested parties of
the risks and factors that may affect the Company's business.

The Company
-----------

     Effective as of January 1, 1994, the Company has been engaged  full-time in
identifying, developing and bringing to market medical devices which the Company
believes are innovative,  represent  improvements over existing products, or are
responsive to a presently  unfulfilled  need in the  marketplace.  The Company's
strategy  consists  of: (i)  identifying  patented  technologies  in the medical
device field that it believes  have  potential  commercial  viability  but still
require  refinement  and  regulatory  clearance,  (ii)  license or  acquire  the
technologies,  (iii)  complete  product  development  and obtain  the  requisite
regulatory  clearance of such  products,  and (iv) attempt to  commercialize  or
sublicense  such  technologies  by  entering  into  agreements  with one or more
entities for clinical development, manufacturing and marketing of such products.
Through this strategy,  the Company believes that it can play a role in bridging
the gap between viable patented  technologies and their  commercialization.  The
Company has  identified  and acquired  three  licenses to develop the  following
products,  the Fluid Alarm System  (FAS),  formerly  the  Personal  Alarm System
(PAS), the Cell Recovery System (CRS) and the Intracranial  Pressure  Monitoring
System (ICP), all of which the Company believes have commercial  viability.  The
primary focus of the Company's activities for the foreseeable future will be the
marketing of the FAS and  completing  the  regulatory  and  development  process
relative to the CRS and ICP,  so that the Company can also bring these  products
to market.  Nevertheless,  the Company also receives  opportunities from time to
time to  license  other  patented  technologies  in the  medical  device  field.
Depending on the specific device and other circumstances,  such as the Company's
then current  financial and operating  situation,  the Company may  pro-actively
attempt,  on a limited  basis,  to  identify  and  license  additional  patented
technologies in the medical device field.


                                      -3-
<PAGE>

The Company's Products
----------------------

         THE FLUID ALARM SYSTEM

     The Fluid Alarm System is a device that monitors the integrity of infection
control  barriers,  such as  surgical  gloves  and  gowns  worn  during  medical
procedures. The FAS is designed to provide notification of fluid contact between
the health care  professional  and patient and thus decrease the  probability of
transmission of fluid-borne  infectious agents,  such as Human  Immunodeficiency
Virus  ("HIV")[  the virus  that  causes  Acquired  Immune  Deficiency  Syndrome
("AIDS")],  Hepatitis B and C viruses, and Staphylococcus ("Staph"). The Company
received the US Food and Drug Administration  ("FDA") clearance,  after filing a
pre-market  notification  under  Section  510(k) of the Federal  Food,  Drug and
Cosmetic  Act (a  "510(k)"),  to market  its  Fluid  Alarm  System in 1995,  and
commenced  production  and  marketing  of the  product in 1996.  The Company has
completed studies that show that fluid contact between health care professionals
and patients  occurs not only when  barriers such as latex  surgical  gloves and
gowns are  breached  by a tear or  puncture,  but also when  such  barriers  are
fluid-saturated.  Further,  the Company believes that all latex surgical gloves,
at some point in time during use, become fluid-saturated, potentially permitting
bacteria and viruses  contained in bodily fluids to pass between the health care
professionals and the patients.

     Hospital and  government  regulations,  as well as good  medical  practice,
require  that  defective  or  compromised  barriers  be  replaced  as quickly as
feasible.  The  immediate  awareness  of fluid  contact  between the health care
professional  and patient  allows action to be taken,  in  accordance  with such
regulations,   to  decrease  the  probability  of  transmission  of  fluid-borne
infectious  agents.  Defective or  fluid-saturated  gloves represent a potential
danger  for both the  health  care  professional  and the  patient.  Regulations
promulgated by the US Government's Occupational Safety and Health Administration
("OSHA")  require a user of sterile barriers to be aware of the status of his or
her protective  barriers at all times during a surgical  procedure.  The user of
sterile  barriers is  required  by OSHA to change any portion of those  barriers
when they have been  compromised.  The Company  believes  that the FAS  provides
users with a high  degree of  accuracy  and  reliability  in  becoming  aware of
compromised infection barriers such as latex surgical gloves.


                                      -4-
<PAGE>

     Presently,  health care professionals rely on visual observations or "feel"
to determine whether the protective  barriers have been compromised.  While this
approach may be effective,  at times, for punctures or tears, it is not reliable
when the integrity of protective  barriers are breached due to unnoticed defects
or fluid-saturation. In the case of surgeons' latex gloves, which are frequently
covered  with  blood  and are  sweaty  inside,  visual  observation,  feel,  and
inspection are difficult and unreliable. Thus, the Company believes that its FAS
device will enable health care  professionals  to  immediately  recognize with a
high degree of accuracy when a protective barrier has been compromised.

     The FAS is designed to be worn  similar to a pager,  and provides two types
of immediate  warnings in order to indicate either  fluid-saturation  or a small
hole  or a  tear  in a  health  care  worker's  glove.  The  FAS  consists  of a
battery-powered  electronic pager-like device that is simultaneously tethered to
the  patient  and the  health  care  professional  that  can  sense  the flow of
extremely  small  electrical  currents  when a fluid contact is made between the
patient and the health  care  professional.  When the FAS senses a current  flow
characteristic  of a tear,  major puncture or fluid  saturation,  the FAS device
generates a  continuous  5-second  vibration.  Alternatively,  when current flow
characteristic of a small puncture or partial fluid saturation is detected,  the
FAS device will vibrate in brief intermittent bursts.

     The Company  presently  intends  that the FAS will be sold for $500 each to
international  distributors,  who in turn may  resell or lease the FAS device to
end users.  In the US, the Company may choose to sell through  distributors,  or
alternatively, it may market directly to end-users at $750 each.

         Potential Market for the FAS Device

     The Company  believes  that the  potential  market for the FAS includes all
hospitals,  physicians'  offices,  dental offices,  emergency  rooms,  and other
medical  facilities.  Given the limited  resources of the  Company,  the initial
strategy  will be to  focus  on  those  markets  where  the  need for the FAS is
greatest.  Consequently,  the Company will initially  market the FAS to hospital
operating rooms and out-patient surgical centers.  Further, the Company believes
that it  needs  to  convince  the  medical  community  of the  unreliability  of
infection  control barriers such as latex surgical  gloves,  particularly in the
absence  of  obvious  breaches  of the  gloves'  integrity  before it can effect
substantial sales of the FAS device. The Company has conducted extensive studies
with  respect  to both the  fluid-saturation  of latex  surgical  gloves and the
passage time of virus and bacteria through such saturated  gloves.  In addition,
the Company is also  seeking  the  endorsement  of or a mandate  from either the
Center for Disease Control in Atlanta, Georgia (the "CDC") or OSHA that a device
like the FAS should be used in  connection  with all surgical and other  medical
procedures  where the  possibility  exists for fluid contact between health care
professionals and patients.  There is no assurance that the Company will be able
to convince the medical  community of the need for a device like the FAS whether
or not the CDC or OSHA endorses or mandates such a device, of which there can be
no assurance, and thus, there can be no assurance that a market will develop for
the FAS device.

                                      -5-
<PAGE>


         License Agreement

     The Company obtained the rights to the FAS effective June 1, 1994, pursuant
to a license agreement ("PAS License Agreement") with Robert Lee Thompson, d/b/a
Thompson  Medical,  whereby Mr.  Thompson  granted to the Company the  exclusive
worldwide  license to  manufacture,  use, sell or otherwise  dispose of the FAS.
Pursuant to an Addendum to the PAS License  Agreement  dated September 19, 1996,
the  Company  made a one time  payment  to Mr.  Thompson  of $81,188 as full and
complete  settlement of all past and future royalties,  and extended the term of
the PAS License  Agreement for an additional year so that it now expires June 1,
2005. In May 1995, the Company also entered into an exclusive  license agreement
with Dietmar P.  Rabussay,  Ph.D.,  a consultant to the Company,  for the Signal
Modulation  Barrier  Monitor (the "SMBM"),  which is a component part of the FAS
device.  Pursuant to this  license  agreement  the Company is  obligated  to pay
royalties  equal to 1% of the average retail sales price on the net sales of all
FAS devices.  The invention disclosure as well as the patent application for the
SMBM have been filed with the Patent and Trademark  Office and the Company filed
a patent application for the SMBM during the fourth quarter of 1996.

         THE CELL RECOVERY SYSTEM

     The  Company's  Cell  Recovery  System is a cell  "brushing"  and retrieval
system which uses an automated  brush for the  collection of specimen cells from
an organ's internal surface for diagnostic purposes,  primarily (but not limited
to) cancer detection.  Presently, in order to obtain diagnostically  significant
tissue cells from an organ's internal surface an excisional biopsy is necessary,
i.e. the patient must check into a hospital for a  $3,000-$5,000  procedure that
requires general  anesthesia and the endoscopic  surgical removal of tissue from
the  patient's  internal  organ.  In  contrast,  the CRS  device is a  minimally
invasive  procedure  that can be  performed  on an  outpatient  basis with local
anesthesia.

     The first application for the CRS device is in urology for the diagnosis of
cancer.  Currently,  the  preliminary  test  for  bladder  cancer  is to  test a
patient's  urine  sample,  which has a very high  incidence of producing  "false
negatives."  As a  consequence,  in most  instances  where there are  persistent
symptoms,  physicians  who receive a negative  result  from a urine  sample when
testing for bladder  cancer will then  conduct a visual,  in-office  examination
using a  cystoscope,  which  is a  catheter-type  instrument.  Even if a  visual
examination  with the cystoscope  does not reveal diseased tissue on the bladder
wall,  the physician may still  complete an excisional  biopsy to test if cancer
cells are present in suspect  areas.  The Company  believes  that its CRS device
provides a reliable  alternative,  or complement  to,  today's  standard  biopsy
procedure  and will be the first  automated  brush  system able to  successfully
retrieve  cell  samples.  Although  products  that  utilize  a  manual,  but not
automated, brushing technique for obtaining organ cells are currently available,
the Company  believes that there is no automated  device that  accomplishes  the
same tasks the CRS is  designed  to perform.  Manual  brushing  is awkward  and,
unlike the CRS,  does not include a system by which the cells that are "brushed"
off the wall of the internal organ are simultaneously and selectively retrieved.
As an  alternative  to a  biopsy,  the  CRS  device,  which  can be  used  in an
outpatient  (office)  setting,  is  intended  to save  time,  and also  give the
physician  an option  that does not  include  the  increased  expense of general
anesthesia and an overnight stay in the hospital, thus representing reduced cost
and  risk  to the  patient.  Accordingly,  as the  CRS  automated  brushing  and
retrieval system is  significantly  less expensive than excisional  biopsy,  the
Company also  believes  that the CRS  procedure is  reimbursable  under  medical
insurance,  although there can be no such assurances.  In addition,  the CRS can
also be used for the follow-up care that bladder cancer patients require.


                                      -6-
<PAGE>

     In March 1996, the Company  received  marketing  clearance from the FDA for
the CRS device for use in the urology market.  Prior to the market launch of the
CRS, the Company  intends to complete  certain  clinical  trials for a follow-up
510(k)  submission to the FDA to establish  claims that the device  assists with
the detection of certain urological diseases, such as bladder cancer, and at the
same  time  commence   manufacturing  for  the  system's   instrumentation   and
disposables. The Company intends to launch the CRS in late 1997. There can be no
assurance that the Company will receive  510(k)  clearance from the FDA for such
additional  claims  or that the FDA will not  require  the  Company  to submit a
pre-market  approval  ("PMA")  application  which is for  products  that are not
comparable  to any other  product in the  market.  A  requirement  by the FDA to
submit a PMA would substantially delay marketing clearance. There can also be no
assurance   that  the  Company  will  be  successful  in   establishing   volume
manufacturing of the CRS system's instrumentation and disposables.

     The Company has not  presently  determined  the price of or manner in which
the CRS device will be marketed and sold.

         Potential Market for the CRS Device

     The Company  believes that in order to successfully  market the CRS device,
the Company will have to establish the device's  capabilities  in assisting with
the  detection  of  certain  urological   diseases,   such  as  bladder  cancer,
particularly in comparison to current cell sampling methods.  In order to do so,
the Company has received commitments to begin clinical studies of the CRS from a
leading clinical research organization (CRO) in the urology market. Furthermore,
the  Company  also  presently  intends  to  develop  other  applications  of the
technologies   underlying  the  CRS  device.   The  Company  believes  that  the
technologies  underlying  the CRS device can  readily be applied to, and adapted
for,  other   diagnostic   procedures  with  relatively   minor   modifications.
Specifically, the Company believes that the technologies underlying the CRS will
be applicable to a large number of diagnostic  procedures amenable to endoscopy,
such as bronchoscopy (lung examination), laparoscopy (abdominal and pelvic organ
examination) and gastro-intestinal endoscopy. No assurance can be given that the
Company will be successful in obtaining FDA clearance or approval for such other
applications.


                                      -7-
<PAGE>

         License Agreement

     In August 1992, the Company entered into an exclusive license agreement, as
amended,  (the "CRS License Agreement") with Robert Langdon,  Nancy Bush and Max
K. Willscher, MD. for the exclusive worldwide rights to develop, manufacture and
market the CRS and any other device based upon the  underlying  patent.  The CRS
License  Agreement is for a term equal to the  currently  remaining  life of the
patent relating to the CRS, which is approximately 13 years.

     On August 7, 1996,  the  Company  entered  into an  Agreement  with  Robert
Langdon to purchase his entire (50% ownership) interest in the CRS for a payment
of  $300,000.  Furthermore,  the Company is obligated to pay to each of Ms. Bush
and the estate of Dr.  Willscher  a royalty  equal to 5% of the  average  retail
sales price on all net sales,  subject an annual minimum of $100,000 starting in
1996 and  ending in 1998.  The  Company is also  required  to pay  royalties  of
$100,000 in 20 equal  quarterly  installments  of $5,000  commencing  January 1,
1997, pertaining to calendar years 1994 and 1995. Through December 31, 1996, the
Company has paid $600,000 and issued  227,966 shares of Common Stock pursuant to
the CRS License  Agreement.  The Company can terminate the CRS License Agreement
with 90 days written notice, at which time all of the Company's patent rights in
the CRS device will cease.

         THE INTRACRANIAL PRESSURE MONITORING SYSTEM

     The Intracranial Pressure Monitoring System is a device that non-invasively
monitors  pressure  inside  the human  skull.  Increased  intracranial  pressure
generally results from either fluid build-up, swelling or abnormal tissue growth
of the  brain,  thereby  cutting  off  blood  flow to the  brain,  resulting  in
increased  risk of cell death.  This cell death results in brain damage,  and in
severe cases, can cause patient death. Presently, intracranial pressure can only
be determined  by  surgically  drilling a hole into or removing a section of the
skull and  inserting a catheter  pressure  transducer  to measure the  pressure.
Thereafter,  if a high level of  intracranial  pressure  is found to be present,
then the same surgical drilling procedure is often used in an attempt to relieve
the  pressure.  Due to the  invasive  nature of such a  procedure,  the  current
practice of drilling a hole in or removing a section of the skull is  considered
risky and expensive, and cannot be used for routine monitoring and examinations.
The Company believes that the ICP, when developed,  can be a valuable diagnostic
tool and will  greatly  assist  health  care  professionals  in  assessing  when
surgical drilling is necessary to relieve intracranial pressure.

     The ICP's non-invasive system utilizes a process of imparting a small known
force on the surface of the skull and sensing the  resulting low frequency (0 to
approximately  1000 Hz.) wave signals at different  points on the skull surface.
The characteristics of the resulting wave signals are a function of the pressure
within  the  skull  and  change  when the  intracranial  pressure  increases  or
decreases.  The Company  presently  anticipates that it will  commercialize  two
distinct versions of the ICP device. The first generation ICP device is designed
to measure changes in the direction and rate of change in intracranial pressure.
The second  generation ICP device,  which will  effectively be an upgrade of the
software  used  in the  first  generation,  is  designed  to  assess  ranges  of
intracranial  pressure  levels as well.  The  Company  believes  non-overlapping
markets  exist for each  generation  of the device.  The ICP system makes use of
proprietary    wave   form    analysis    software    formerly    developed   by
Scientific-Atlanta,  Inc.,  and now  assigned  to Global  Associates,  Ltd.  The
Company  originally  entered into a teaming  agreement with  Scientific-Atlanta,
Inc., which was  subsequently  assigned to Global  Associates,  Ltd. The teaming
agreement is more fully described below.


                                      -8-
<PAGE>

         Potential Market for the ICP Device

     The  Company  believes  that the  potential  market  for both the first and
second  generation ICP device is primarily  hospitals that perform  intracranial
procedures.  Management  believes that the initial users of the first generation
ICP will be neurosurgeons in connection with diagnostic  procedures.  Management
believes that the second  generation ICP will be used not only by  neurosurgeons
but also by emergency room  personnel for patients who have suffered  traumas to
the head,  as well as by  physicians  to monitor  and  record  the  intracranial
pressure of individuals as a standard diagnostic procedure, similar to measuring
an  individual's  blood  pressure.  Clinical  testing  with respect to the first
generation ICP is estimated to be finished in late 1997.  The Company  presently
intends to make its first  submission  to the FDA in late 1997.  It has not been
established if the initial  submission  will take the form of a 510(k) or a PMA.
The Company  intends to continue  clinical trials as required to gain sufficient
data for the  second  generation  ICP.  The  Company  believes  that there is no
product or system presently on the market or under development which has similar
technological advantages as those of the ICP device.


                                      -9-
<PAGE>

         License Arrangements

     The Company has the exclusive right to the ICP. The Company entered into an
agreement in January 1993 with Medys,  Inc., a New  Hampshire  corporation  (the
"Medys  Agreement"),  whereby  the  Company  obtained  the right to acquire  the
worldwide, exclusive, nontransferable license to develop, manufacture and market
the ICP  until  the year  2009,  which is when the  patent  relating  to the ICP
expires.  Under the terms of the  agreement,  the  Company is  obligated  to pay
Medys, Inc. royalties equal to 10% of the net sales proceeds from the ICP with a
minimum  payment of $90,000 for the year ended  December 31, 1996,  and $200,000
for each of the subsequent years through the life of the patent. With respect to
the royalties due for the year ended  December 31, 1996,  $15,000 was prepaid on
December 31, 1995. Further, under the Medys Agreement the Company is responsible
for  clinical  testing  of the ICP and  obtaining  all  required  FDA and  other
required  regulatory  clearances.  The Company can terminate the Medys Agreement
with 90 days written notice at which time all of the Company's  patent rights in
the ICP device will cease.

         Global Associates, Ltd. Agreement

     In  February  1993,  the  Company  entered  into a teaming  agreement  (the
"Teaming  Agreement")  with  Scientific-Atlanta,  Inc.("S-A")  who  subsequently
assigned the agreement to Global  Associates,  Ltd.  ("Global") in July 1996, as
the result of the sale of a division  by S-A to  Global,  to provide  equipment,
technical  expertise and experience  directly  related to the computer  software
which  provides the  signal/data  processing  and modal  analysis  techniques in
developing the ICP. Under the Teaming Agreement, the Company is obligated to use
Global exclusively as its supplier for signal/data processing and modal analysis
techniques,  equipment  and  software  for the first twelve (12) months after it
commences  sales of the ICP and thereafter only if Global's prices are as low as
those offered by any other third party.  The Teaming  Agreement is for a term of
the earlier of five years or a date of two years following initial product sale,
unless sooner terminated.


                                      -10-
<PAGE>

Manufacturing
-------------

     The  Company  has no  manufacturing  capabilities  and does not  intend  to
establish any such capabilities in the foreseeable  future.  The Company intends
to rely on third party original equipment  manufacturers ("OEMs") to produce the
Company's medical devices.  Any such OEMs will have to comply with FDA and other
regulatory  requirements  for  their  facilities,  including  FDA  Current  Good
Manufacturing  Practice  ("CGMP")  regulations.  The Company  entered into a new
agreement with a third party manufacturer effective as of December 15, 1996, for
the manufacture of FAS. The Company  believes that this  manufacturer  satisfies
the  FDA's  CGMP  regulations,   however,   there  can  no  assurance  that  the
manufacturer  will continue to satisfy such  regulations.  In the event that the
Company  experiences  substantial sales of its FAS device, of which there can be
no assurance,  the Company may have to identify other third party  manufacturers
in connection with additional  manufacturing  of the FAS.  Further,  the Company
presently  anticipates  that it will engage other third party  manufacturers  in
connection  with  manufacture  of the  CRS  and  ICP  devices.  There  can be no
assurance  that such  other  manufacturers  can be  identified  on  commercially
acceptable  terms, or at all, or that such other  manufacturers,  if identified,
will be adequate for the Company's  long-term  needs,  or that they can meet all
relevant regulatory  requirements.  Moreover, there can be no assurance that the
Company's  manufacture  of  products  on a  limited-scale  basis  means that the
Company  can  effect  the  successful  transition  to  commercial,   large-scale
production.

Sales, Distribution and Marketing Strategy
------------------------------------------

     The Company is exploring a variety of sales and distribution  strategies in
connection with the anticipate  commercialization  of its medical  devices.  The
precise strategy that the Company eventually adopts may be a combination of some
or all of these  strategies.  In addition,  the Company may also adopt different
strategies for different products. The two fundamental strategies that currently
are being explored are:

     - Forming  strategic  alliances  with  corporate  partners (such as a latex
glove company) with a strong  presence in the market for such a medical  device,
for both domestic and international distribution.

     - Assembling a network of regional independent distributors who have proven
to be successful in effecting the sale of new medical products in the market for
the particular medical device.

     The  Company's  form of  marketing  will be  influenced  by the  sales  and
distribution  strategies  it  eventually  pursues.   Nevertheless,  the  Company
anticipates that for the next 12 months its marketing  efforts will, in addition
to arranging strategic  alliances,  concentrate on making presentations to major
health care users such as large hospitals and hospital  chains,  attending trade
shows and advertising in trade  publications.  The Company's  marketing strategy
will also include textual and audio video sales literature,  general advertising
and publicity and direct mailings.

     With respect to the FAS,  which the Company  began  marketing in 1996,  the
Company  currently  intends to sell this product  directly to end-users  through
trade show appearances and  advertisements in trade  publications and indirectly
to end-users through independent medical products  distributors.  The Company is
endeavoring  to form a strategic  alliance with a corporate  partner,  who would
most likely be a manufacturer or marketer of latex surgical gloves, although the
Company does not presently have any contracts with respect to the FAS.

     Although  the Company  intends to launch the CRS later in 1997,  a specific
market or sales strategy with respect to the CRS device has not yet been decided
on.


                                      -11-
<PAGE>

Competition
-----------

     The medical device industry is intensely competitive, particularly in terms
of price,  quality and marketing.  Most of the Company's  competitors are better
established  and have  substantially  greater  financial,  marketing  and  other
resources than the Company. Further, most of the Company's competitors have been
in  existence  for a  substantially  longer  period  of time  and may be  better
established  in those  markets  where the Company  intends to sell its  devices.
Although the Company is not presently aware of any competitor that  commercially
manufactures  and  sells  any  medical  devices  similar  to those  the  Company
presently  intends  to sell,  the  Company is aware  that  several  technologies
similar  to the Fluid  Alarm  System  are being  developed  and  tested by other
companies.  Due  to  the  Company's  relative  lack  of  experience,  financial,
marketing and other resources, even though it has received FDA clearance for the
FAS,  there can be no  assurance  that the  Company  will be able to market this
device  successfully,  develop and market any of its other medical  devices,  or
compete in the medical device industry in general.

Patents and Intellectual Property Rights
----------------------------------------

     The Company has entered into exclusive  license  agreements with respect to
each of the patents  underlying the Company's  first three  products:  the Fluid
Alarm System; the Cell Recovery System; and the Intracranial Pressure Monitoring
System. There can be no assurance,  however,  that such patents will provide the
Company with significant protection from competitors. Patent protection relative
to medical  devices is  generally  uncertain,  and  involves  complex  legal and
factual questions. To date, there has emerged no consistent policy regarding the
breadth of claims  allowed in connection  with the patent  protection of medical
devices.  Furthermore,  legislation is being  considered  which,  in the future,
might prevent the patenting or enforcement of a patent covering certain surgical
or medical procedures.  Accordingly,  there can be no assurance that any patents
licensed by the Company will afford protection against  competitors with similar
technologies.  Finally, there can be no assurance that the Company will have the
financial resources necessary to enforce its patent rights.

     Even though the Company has been licensed under patents, under the terms of
the  Company's  license  agreements,  the Company is  responsible  for defending
against  charges  of  infringement  of  third  party  patents  by the  Company's
products.  Challenges  may be  instituted  by third  parties as to the validity,
enforceability  and  infringement  of the  patents.  Further,  the  cost  of the
litigation  to defend any  challenge  to the  Company's  licensed  patents or to
uphold the validity and enforceability and prevent infringement of the Company's
licensed patents could be substantial.


                                      -12-
<PAGE>

     The Company may be required to obtain  additional  licenses  from others to
continue to refine, develop,  manufacture, and market new products. There can be
no  assurance  that the  Company  will be able to obtain  any such  licenses  on
commercially  reasonable  terms or at all or that the rights granted pursuant to
any licenses will be valid and enforceable.

     Notwithstanding  the  Company's  exclusive  licenses  with  respect  to the
patents  underlying  the FAS, CRS and ICP, there can be no assurance that others
will not  independently  develop  similar  technologies,  or design  around  the
patents. If others are able to design around the patents, the Company's business
could be  materially  adversely  affected.  Further,  the Company will have very
limited,  if any,  protection of its proprietary  rights in those  jurisdictions
where it has not effected any patent  filings or where it fails to obtain patent
protection despite filing therefor.

     Even though the patents underlying the Company's three medical devices have
been issued by the United States Patent and Trademark Office,  challenges may be
instituted  by  third  parties  as to the  validity  and  enforceability  of the
patents.  The Company is not presently  aware of any  challenges to the patents.
Similarly,  the Company  may also have to  institute  legal  actions in order to
protect  infringement  of the  patents  by third  parties.  The  Company  is not
presently aware of any such infringements. The costs of litigation or settlement
in  connection  with the defense of any third party  challenges  relative to the
validity and enforceability of its patents and/or to prevent any infringement of
the patents by third  parties,  which  pursuant to the license  agreements  with
respect to the patents are the Company's  responsibility,  could be substantial.
Moreover, in the event that the Company was unsuccessful in any such litigation,
the Company could be materially adversely affected.

     In  addition to relying on patent  protection  for its  products,  of which
there is no  assurance,  the Company will also attempt to protect its  products,
processes  and   proprietary   rights  by  relying  on  trade  secret  laws  and
non-disclosure and  confidentiality  agreements,  as well as exclusive licensing
arrangements  with  persons  who has  access  to its  proprietary  materials  or
processes,  or who have  licensing  or research  arrangements  exclusive  to the
Company.  Despite these protections,  no assurance can be given that others will
not independently develop obtain access to such materials or processes,  or that
the Company's  competitive  position will not be adversely affected thereby.  To
the extent members of the Company's  Scientific  Advisory Board have  consulting
arrangements with, or are employed by, a competitor of the Company, such members
might  encounter  certain  conflicts  of  interest,  and the  Company  could  be
materially  adversely  affected by the disclosure of the Company's  confidential
information by such Scientific Advisors.


                                      -13-
<PAGE>

Government Regulations
----------------------

     The Company's  medical device products are subject to extensive  government
regulations in the United States and in other countries.  In order to clinically
test,  produce,  and market its  devices,  the  Company  must  satisfy  numerous
mandatory procedures,  regulations, and safety standards established by the FDA,
and comparable state and foreign regulatory agencies.  Typically, such standards
require  that the  products  be  cleared  by the  government  agency as safe and
effective for their intended use prior to being marketed for human applications.
The clearance  process is expensive and time consuming.  Other than with respect
to the FAS and the CRS,  no  assurance  can be  given  that  clearances  will be
granted for any expanded  claims for the CRS or for sale of the ICP or any other
future products, or that the length time for clearance will not be extensive, or
that the cost of attempting to obtain any such clearances will not prohibitive.

     The FDA employs a rigorous system of regulations and requirements governing
the clearance processes for medical devices,  requiring, among other things, the
presentation of substantial evidence,  including clinical studies,  establishing
the safety and efficacy of new medical devices.  The principal  methods by which
FDA clearance is obtained are pre-market approval ("PMA"), which is for products
that  are not  comparable  to any  other  product  in the  market,  or  filing a
pre-market  notification  under  Section  510(k) of the Federal  Food,  Drug and
Cosmetic  Act (a "510(k)")  which is for  products  that are similar to products
that have already  received  FDA  clearance.  Although  both methods may require
clinical  testing of the products in question under approved  protocol,  because
PMA clearance relates to more unique products, the PMA procedure is more complex
and time consuming.  Applicants  under the 510(k)  procedure must prove that the
products for which clearance is sought are substantially  equivalent to products
on the  market  prior  to the  Medical  Device  Amendments  of 1976 or  products
approved  thereafter  pursuant  to the  510(k).  The review  period for a 510(k)
application is  approximately  150 days from the date of filing the application,
although  there can be assurance  that the review  period will not extend beyond
such a period.

     Under the PMA procedure,  the applicant is required to conduct  substantial
clinical  testing to determine  safety,  efficacy and  potential  hazards of the
product.  The review period under a PMA application is 180 days from the date of
filing, and the application is not automatically  deemed cleared if not rejected
during that period.  The preparation of a PMA application is significantly  more
complex,  expensive and time consuming than the 510(k) procedure.  Further,  the
FDA can request additional information, which can prolong the clearance process.

     In order to  conduct  human  clinical  studies  for any  medical  procedure
proposed  for the  Company's  products,  the  Company  could also be required to
obtain an  Investigational  Device  Exemption  ("IDE") from the FDA, which would
further increase the time before potential FDA clearance.  In order to obtain an
IDE,  the  Company  would be  required  to  submit  an  application  to the FDA,
including a complete  description of the product, and detailed medical protocols
that would be used to evaluate the  product.  In the event an  application  were
found to be in order, an IDE would ordinarily be granted promptly thereafter.


                                      -14-
<PAGE>

     The Company  may be  required  to use the PMA process for the  Intracranial
Pressure  Monitoring  System or for  expanded  claims for the CRS in order to be
granted FDA clearance.  The clearance process can take from a minimum of six (6)
months  to  several  or more  years,  and  there  can be no  assurance  that FDA
clearance will be granted for the commercial sale of the  Intracranial  Pressure
Monitoring System or expanded claims for the CRS device.

     The FDA also imposes various  requirements on manufacturers  and sellers of
medical  devices  under  its  jurisdiction,  such  as  labeling,   manufacturing
practices,  record keeping and reporting requirements.  The FDA may also require
post-market  testing and  surveillance  programs to monitor a product's  effect.
There can be no assurance  that the  appropriate  clearance from the FDA will be
obtained,  that the process to obtain  such  clearance  will not be  excessively
expensive or lengthy,  or that the Company will have sufficient  funds to pursue
such  clearances.  Moreover,  failure to  receive  requisite  clearance  for the
Company's  products or processes would prevent the Company from  commercializing
its products as  intended,  and would have a  materially  adverse  effect on the
business of the Company.

     Even after regulatory clearance is obtained, any such clearance may include
significant  limitations on indicated uses. Further,  regulatory  clearances are
subject to continued review,  and later discovery of previously unknown problems
may result in restrictions with respect to a particular product or manufacturer,
including withdrawal of the product from the market, or sanctions or fines being
imposed on the Company.

     Distribution  of the Company's  products in countries other than the United
States  may be  subject  to  regulation  in  those  countries.  There  can be no
assurance  that the Company  will be able to obtain the  approvals  necessary to
market its medical devices outside of the United States.


                                      -15-
<PAGE>

Research and Development
------------------------

     The Company's  expenditures  for research and development  were $893,771 in
1996 and $943,510 in 1995. See "Item 6. Management's Discussion and Analysis and
Plan of Operation."

Number of Employees
-------------------

     As of March 1, 1997, the Company had 10 full-time  employees,  five of whom
were  employed  in  executive  and  management  capacities,  three in sales  and
marketing, and two in general and administrative.

ITEM 2.       DESCRIPTION OF PROPERTY

     The Company leases its executive offices,  which occupy approximately 3,256
square feet, at 9171 Towne Centre  Drive,  Suite 355, San Diego,  CA 92122.  The
Company's  rent is  approximately  $5210 per month through  April 15, 1998.  The
Company  is also  responsible  for its  pro-rata  share of  increased  operating
expenses starting in 1997 predicated upon a 1996 base year.

ITEM 3.       LEGAL PROCEEDINGS

     The Company prevailed in two separate lawsuits in calendar year 1996.

     In one case  instituted in the Superior  Court of the State of  California,
County of San Diego,  the Company was awarded after trial  $1,978,893 in damages
and costs against Chandler Church and Company and affiliated entities based upon
claims sounding in breach of contract and breach of constructive trust.

     In a second case commenced in the United States Bankruptcy Court,  Southern
District  of  California,  San Diego  Division,  the  Court,  in  dismissing  an
Involuntary Petition filed against the Company, found that the Petition had been
filed in "bad faith" and  consequently  awarded the Company punitive damages and
attorneys'  fees against  Chandler  Church and Company and affiliated  entities,
totaling   $761,888.   The  Company  thereafter  entered  into  an  out-of-Court
settlement with one of the parties which provides for the payment to the Company
of the stipulated sum of $25,000.

     The Company is pursuing collection efforts for the damages,  costs and fees
awarded to it in the  aforementioned  cases, but is uncertain whether it will be
able to recover any or all of the monies awarded to it. Accordingly, the Company
has not  recorded  a  receivable  associated  with  this  litigation  due to the
uncertainty.

     There are no other legal  proceedings to which the Company is a party which
could have a material adverse effect on the Company.


                                      -16-
<PAGE>

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

     None.

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     The  Company's  Common  Stock,  the  Preferred  Stock , and the  Redeemable
Warrants are traded on the National  Association of Securities Dealers Automated
Quotation  (Nasdaq)  SmallCap  Market  under the symbols  "MEDD",  "MEDDP",  and
"MEDDW",   respectively.  The  following  table  sets  forth,  for  the  periods
indicated,  the high and low bid prices for the Common Stock, as reported by the
Nasdaq  SmallCap  Market.  Common Stock prices have been adjusted to reflect the
one-for-two reverse split in June 1996.
<TABLE>
<CAPTION>
                                               Bid Price
                                               ---------
                                     High                      Low
                                     -----------------------------
1995
<S>      <C>                        <C>                        <C>

         First Quarter              $2.00                      $1.13
         Second Quarter             $2.63                      $0.75
         Third Quarter              $3.13                      $1.63
         Fourth Quarter             $2.00                      $1.25

1996

         First Quarter              $1.63                      $1.00
         Second Quarter             $2.25                      $1.25
         Third Quarter              $2.00                      $0.88
         Fourth Quarter             $1.38                      $0.38
</TABLE>

     On March 12, 1997,  the closing  price of the Company's  Common  Stock,  as
reported by the Nasdaq Small Cap Market, was $0.53.

     On March 12, 1997,  there were 1,099  holders of record of Common Stock and
41 holders of record of the Preferred  Stock,  according to the Company's  stock
transfer agent.

     The  Company  has not paid any cash  dividends  with  respect to its Common
Stock,  and it is unlikely  that  Company  will pay any  dividends on its Common
Stock in the foreseeable future. The Company is required to pay a 6% cumulative,
semi-annual  dividend  with respect to its  Preferred  Stock in shares of Common
Stock, and, to date, has made each of such dividend payments.  Earnings, if any,
that the  Company  may realize  will be  retained  in the  business  for further
development and expansion.


                                      -17-
<PAGE>

ADDITIONAL ITEM. EXECUTIVE OFFICERS AND DIRECTORS OF THE COMPANY

     The Directors and Executive  Officers and their ages,  positions  held with
the Company, length of time in such positions,  and term of office are set forth
below:
<TABLE>
<CAPTION>

Name and Age        Current Position             Director Since   Officer Since
<S>                 <C>                           <C>               <C>
------------------------------------------------------------------------------
M. Lee Hulsebus     Chairman of the Board,       11/11/94         8/31/94
Age 58              Chief Executive Officer,
                    President

Stephen W. Kenney   Vice President of Sales                       1/23/95
Age 46              and Marketing

Edward C. Hall      Chief Financial Officer                       3/15/96
Age 56              and Secretary

Richard E. Sloan    Vice President of New                         3/15/96
Age 47              Business Development

Don L. Arnwine      Director                      3/6/95
Age 64

Arthur E. Bradley   Director                      9/26/86
Age 63

William A. Clarke   Director                      6/27/96
Age 58

Thomas E. Glasgow   Director                     11/11/94
Age 43

Scott A. Weisman    Director                      8/1/96
Age 42
</TABLE>


                                      -18-
<PAGE>

     The principal  occupations and positions for the past several years of each
of the executive officers and directors of the Company are as follows:

     M. Lee  Hulsebus  has been in the  health  care  field for 31  years.  From
January  1992 until he joined the Company in August 1994,  he was the  President
and owner of his own health care consulting firm. From August, 1993 to November,
1993 Mr. Hulsebus also served as Chief Executive Officer of InCoMed Corporation,
then a small  California-based  medical products company. From 1990 to 1992, Mr.
Hulsebus  served as President  and Chief  Operating  Officer of Sports  Support,
Inc.,  a sports  medicine  company.  From 1988 until 1990,  he served as Medical
Group President for Teleflex,  Inc. For 22 years prior to that, Mr. Hulsebus was
employed  by  Becton-Dickinson  & Co.  and C.R.  Bard,  Inc.,  both of which are
leading  companies in the health care industry.  Mr.  Hulsebus has served in the
capacity of President/Chief  Executive Officer for the past 17 years for various
companies.

     Stephen W.  Kenney has been Vice  President  of Sales and  Marketing  since
January 1995. Prior to joining the Company, Mr. Kenney served as Chief Operating
Officer of Cardio Vista, a medical  products  company  headquartered in Southern
California.  Prior to joining  Cardio  Vista in 1993,  he served as Chairman and
Chief Executive Officer of AMBIS, Inc. ,a research instrumentation company based
in San Diego, California, which he originally joined in 1989. From 1987 to 1989,
Mr. Kenney served as Vice  President,  Sales and Marketing of Digivision,  Inc.,
also  headquartered  in San Diego.  Prior to that Mr.  Kenney  had held  various
management  positions with IVAC  Corporation  (San Diego) and American  Hospital
Supply.

     Edward C. Hall has been the  Company's  Secretary  since April 1996 and its
Chief Financial Officer since March 15, 1996. Mr. Hall has also been a financial
consultant  to the Company  since March  1995.  Since 1994,  Mr. Hall has been a
consultant to high technology  companies in the San Diego area where he acted as
an  interim  chief  financial  officer  and has  provided  financial  turnaround
consulting  services to a wide variety of high technology and other companies in
California and the Southwest.  His experience includes positions and assignments
for medical,  pharmaceutical,  broadband and wireless communications,  specialty
and mail order retailing, and aerospace manufacturing firms.

     Richard E. Sloan has been Vice President of New Business  Development since
March 1996.  Mr. Sloan was also a consultant  to the Company from August 1995 to
March 1996.  From March 1995 to July 1995,  Mr. Sloan served as Chief  Financial
Officer of WorldWide Products, Inc., a private Los Angeles based development and
marketing firm that distributes  pharmaceutical products to plastic surgeons and
dermatologists.  Prior  thereto,  from  March  1992 to March  1995 he  served as
corporate  marketing  director and general  manager for  Industrial  Products of
UniFET Incorporated,  a private company based in San Diego,  California involved
in the development of sensor-based medical products.  From December 1989 through
March 1992,  Mr. Sloan  managed his own mergers and  acquisition  business  with
First Pacific Group, located in Carlsbad,  California, which provided investment
and financial services to privately-held companies in southern California. Prior
to that Mr. Sloan had held  various  management  positions  with Baxter and IVAC
Corporation (San Diego).


                                      -19-
<PAGE>

     Don L. Arnwine has been President of Arnwine Associates of Irving, Texas, a
company he founded to provide  specialized  advisory services to the health care
industry,  since  1988.  The  Company  intends  to launch  the CRS in late 1997.
Mr. Arnwine  served as Chairman and Chief Executive Officer from 1985 until 1988
of Voluntary  Hospitals of America (VHA), a company he joined in 1982.  Prior to
joining VHA, Mr.  Arnwine  served as President  and Chief  Executive  Officer of
Charleston Area Medical Center, a 1000-bed  regional facility care center in the
State of West Virginia. Mr. Arnwine holds a BS degree in Business Administration
from  Oklahoma  Central  State  University  and a  Masters  degree  in  Hospital
Management from Northwestern University.

     Arthur E.  Bradley,  DDS has been a  practicing  dentist  since  1961.  Dr.
Bradley has been  involved  for his own account in real estate  investments  for
twenty years and has been active in oil and gas  investments  for fifteen years.
Dr. Bradley  graduated  from the  University of  Mississippi at Hattiesburg  and
obtained his degree in Dentistry from Loyola University Dental School.

     William A. Clarke held various  positions  with  Johnson & Johnson,  Inc. a
public  medical  products  company since 1967.  Most  recently,  since 1995, Mr.
Clarke has served as a consultant to Johnson & Johnson, Inc. Prior to that time,
from 1986 through 1995,  Mr. Clarke was president of Johnson & Johnson  Medical,
Inc.  a  subsidiary  of  Johnson  &  Johnson,  Inc.,  with  approximately  6,000
employees.

     Thomas E.  Glasgow has been  President  and  co-owner of  Integrated  Trade
Systems ("ITS"), a Chicago, Illinois company from April 1992 to the present. Mr.
Glasgow and another  individual  purchased ITS from its parent  company in 1992.
ITS is a  logistics  management  company  specializing  in the  development  and
marketing of import and export document  generation  systems.  From 1989 through
1991,  Mr.  Glasgow was a partner with Wharton  Resource  Group and a consultant
with ITS. Wharton Resource Group is a strategic  management company specializing
in the development of early stage companies. Prior to these activities, he was a
director  with  Federal  Express  Corporation  for 11  years in  various  senior
management capacities.

     Scott A. Weisman has been Senior Managing Director - Director of Investment
Banking,  Josephthal  Lyon  &  Ross  Incorporated  since  1993.  Before  joining
Josephthal  Lyon & Ross  Incorporated,  he was a partner at Kelley Drye & Warren
specializing in securities law. He began his career at Parker,  Chapin & Flattau
in 1980.  Mr.  Weisman has a Juris Doctor from Albany Law School and a BA degree
from Syracuse University.


                                      -20-
<PAGE>

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS AND PLAN OF OPERATION

     The following  discussion of the Company's  financial condition and results
of operations  should be read in  conjunction  with the  consolidated  financial
statements and the notes thereto appearing in Item 7 in this Form 10-KSB.

Forward-Looking Statements
--------------------------

     The following discussion contains forward-looking  statements regarding the
Company,  its business,  prospects and results of operations that are subject to
certain  risks and  uncertainties  posed by many  factors  and events that could
cause the  Company's  actual  business,  prospects  and results of operations to
differ  materially  from those that may be anticipated  by such  forward-looking
statements.  Factors that may affect such  forward-looking  statements  include,
without limitation:  the Company's ability to successfully  develop new products
for new markets; the impact of competition on the Company's revenues, changes in
law or regulatory  requirements that adversely affect or preclude customers from
using the Company's products for certain  applications;  delays in the Company's
introduction  of new  products;  and  failure  by the  Company to keep pace with
emerging technologies.

     When used in this  discussion,  words  such as  "believes",  "anticipates",
"expects",   "intends"  and  similar   expressions   are  intended  to  identify
forward-looking  statements,  but are not the  exclusive  means  of  identifying
forward-looking statements. Readers are cautioned not to place undue reliance on
these  forward-looking  statements,  which  speak  only  as of the  date of this
report.  The Company  undertakes  no  obligation  to revise any  forward-looking
statements in order to reflect  events or  circumstances  that may  subsequently
arise.   Readers  are  urged  to  carefully  review  and  consider  the  various
disclosures  made by the Company in this report and other reports filed with the
Securities and Exchange  Commission that attempt to advise interested parties of
the risks and factors that may affect the Company's business.


                                      -21-
<PAGE>


General
-------

     From its  incorporation in 1980 until June of 1992, the Company was engaged
exclusively  in oil and gas  activities.  In June 1992,  the  Company  commenced
certain  initial  activities  with  respect  to  the  medical  device  business.
Thereafter,  the Company  continued  to increase its  activities  in the medical
device  field  while  simultaneously  decreasing  its oil  and  gas  activities.
Effective as of January 1, 1994, the Company having  disposed of all its oil and
gas  interests  and  ceased  all  activities  related  thereto,  commenced  on a
full-time basis its current medical device  operations.  The Company changed its
name in April 1995, from Cytoprobe Corporation,  to reflect the change of focus.
On June 1, 1992, the Company was considered,  for accounting  purposes,  to have
re-emerged as a development stage company.

     As development of its medical devices  concludes,  increased  marketing and
sales costs will be incurred and the Company's working capital  requirements can
be expected to grow accordingly. The Company's sales, general and administrative
costs include costs related to marketing,  promotional and sales activities,  in
addition to office, administration and overhead expenses.

     The Company,  which is still in the  development  stage with respect to its
current medical device operations, has not been profitable for the last 10 years
and  expects  to incur  additional  operating  losses in the  coming  year.  The
following  management  discussion  and analysis and plan of operation  should be
read in conjunction with the consolidated financial statements and notes thereto
referred to in Item 7.

     Due to the Company's  recurring losses from operations,  and continued need
for  capital,  the  Company's  independent  certified  public  accountants  have
included an  explanatory  paragraph in their report  stating that these  factors
raise  substantial  doubt  about the  Company's  ability to  continue as a going
concern.

     The Company  plans on  achieving  certain  minimum  sales of the FAS device
during the next  twelve  months,  but the  Company  will be  required to seek to
obtain additional  sources of financing,  which cannot be assured.  In the event
the  Company can not obtain  additional  financing,  the  Company  would have to
substantially  curtail product as well as research and development  plans due to
lack of funds.  The  long-term  viability  of the  Company is  dependent  on its
ability to profitably  develop and market its current products and to obtain the
financing necessary to fund its anticipated growth.


                                      -22-
<PAGE>

Results of Operations
---------------------

     Year ended December 31, 1996 compared to year ended December 31, 1995.

Revenues
--------

     Operating  revenues in 1996 were $26,193,  all from sales of the FAS. There
were no revenues in 1995.

Operating Expenses
------------------

     Research and Development

     Research  and  development  costs in 1996 were  $893,771,  as  compared  to
$943,510 in 1995, representing a decrease of 5.3%. This decrease was principally
due to a  decreased  amount  of  research  and  development  on the FAS in 1996,
whereas a full year of research  and  development  expense  was  incurred on all
three products in 1995.

     Sales, General and Administrative

     Sales, general and administrative costs were $2,774,679 in 1996 as compared
to $2,194,393 in 1995,  representing  an increase of 26.4% This increase was the
result of increased legal,  professional and public accounting costs required to
update the Company's accounting systems and procedures, and to complete a bridge
financing  and two  registration  statements  prior to the  Company's  June 1996
public offering, as well as increased sales,  marketing and promotional expenses
to introduce the FAS device; and higher general office expenses.

     Losses

     The Company's net loss for 1996 was $4,589,413 as compared to $3,140,828 in
1995, representing an increased loss of 46.1%. This increased loss was primarily
attributable to an increase in sales,  general and administrative costs and to a
$1,021,082 net increase in interest expense associated with the bridge financing
and short-term  notes prior to the Company's  public offering in June 1996. Loss
per common share was $0.98 in 1996 as compared to $0.94 in 1995, representing an
increased per share loss of 4.3%.  This increase was primarily  attributable  to
the increased losses and preferred  dividends in 1996 which more than offset the
reduction in loss per share due to the increase in the average  number of shares
outstanding in 1996 as compared to 1995.


                                      -23-
<PAGE>

Liquidity and Capital Resources
-------------------------------

     To date,  the Company has funded its capital  requirements  for its current
medical  device  operations  from the public and private sale of debt and equity
securities  and the  issuance of common  stock in  exchange  for  services.  The
Company's  cash  position at December  31,  1996 was  $2,889,233  as compared to
$306,851 at December 31, 1995, representing more than an eight-fold increase. In
1996, $2,512,357 of net cash was used for operating activities plus $521,460 was
invested in patents and property and equipment.  The Company received $5,616,199
from net financing  activities  represented by proceeds from the public offering
in June 1996 of  Preferred  Stock and  Redeemable  Warrants,  after  taking into
effect the repayment of short-term  borrowings in the amount of $2,000,000.  Net
cash used in operating activities in 1996 consisted principally of a net loss of
$4,589,413,  less a decrease in other net assets  (excluding  cash) of $200,918,
plus $605,295 in Common Stock paid for services in lieu of cash, plus the net of
depreciation,  amortization of loan origination fees and original issue discount
and fixed asset  writeoff  totaling  $1,876,138.  Changes in current  assets and
current  liabilities  resulted in an increase in the Company's  working  capital
position  to  $2,652,599  at  December  31,  1996 from a deficit of  $417,120 at
December 31, 1995. The Company's  working capital  requirements will increase as
it brings its products to market and continues to fund research and  development
on products not yet ready for market.  The Company plans to fund these and other
capital  needs in the next 12 months  from the  proceeds of  additional  private
placements  of debt  and/or  equity  securities  it seeks to obtain and  certain
minimum sales of the FAS.

     In the second  quarter of 1995, the Company  completed a private  placement
(the "1995 Private  Placement")  of its  securities and received net proceeds of
$974,769  in  connection  with the sale of 20.75  units at a  purchase  price of
$50,000  per unit.  Each unit  consisted  of 35,715  shares of Common  Stock and
12,500  three-year  warrants  to purchase  12,500  shares of Common  Stock.  The
warrants  are  exercisable  for $2.00 per share of Common Stock The Company also
issued to the  broker-dealer  which  assisted the Company in effecting  the 1995
Private  Placement 28,125 two-year  warrants to purchase 28,125 shares of Common
Stock at an exercise price of $2.00 per share.

     In June and July 1995,  the  Company  issued an  aggregate  of  $275,000 of
short-term  convertible  debt which, if not converted into Common Stock,  was to
mature  in six  months  and  bore  interest  at the rate of 48% per  annum  (the
"Convertible  Debt")  payable on maturity.  As of December 27, 1995,  all of the
Convertible  Debt had  converted  into Common Stock at the rate of 2.5 shares of
Common Stock for each $1.00 of  indebtedness,  or an aggregate of 687,500 shares
of Common Stock. In connection  with the issuance of the  Convertible  Debt, the
Company  also issued an  aggregate  of 68,750  warrants  exercisable  for 68,750
shares  of Common  Stock at $1.20  per  share.  Prior to the  expiration  of the
warrants on May 28, 1996,  62,500  warrants were exercised  resulting in $75,000
proceeds to the Company. The remaining 6,250 warrants expired unexercised.

     Pursuant to a Confidential  Private Placement  Memorandum dated October 27,
1995, the Company  effected  between  December 14, 1995 and December 27, 1995, a
private placement of short-term notes and 153,750 shares of Series I convertible
preferred stock. Of the $1,025,000 gross proceeds, $384,375 was allocated to the
preferred  stock and  represented  the original  issue  discount on the notes at
December  31,  1995.  The  proceeds of the private  placement  provided  working
capital.


                                      -24-
<PAGE>

     On January 24, 1996, the Company completed the private placement and issued
additional  short-term notes and 93,750 shares of Series I convertible preferred
stock. Of the additional $625,000 gross proceeds,  $234,375 was allocated to the
preferred stock and represented additional original issue discount on the notes.
The Company also utilized these proceeds for working capital.  Notes sold in the
private  placement  bore interest at 10% per annum and matured at the earlier of
(i) the  expiration of twelve months after their issuance or (ii) receipt by the
Company of at least  $3,000,000  in gross  proceeds from (a) a public or private
sale of its securities,  (b) a joint venture, or (c) a licensing agreement.  The
unamortized  original issue discount was $0 and $384,375 as of December 31, 1996
and 1995,  respectively.  Subsequent  to the public  offering in June 1996,  the
Company repaid these private placement notes in full.

     During the second quarter of 1996, the Company issued $350,000 in principal
amount of six-month 12% unsecured  short-term  notes payable to four individuals
and two of the Company's  directors to finance its  operations  until its public
offering could be completed. Subsequent to the public offering in June 1996, the
Company repaid these  short-term  notes in full (see Note 8 to the  consolidated
financial statements).  Interest paid related to these notes amounted to $10,500
for the year ended  December  31,  1996.  In  connection  with the  issuance  of
short-term  notes,  the  Company  also  issued  to the six  individuals  137,180
warrants  to  purchase  137,180  shares of Common  Stock,  at a exercise  prices
ranging  from $1.26 to $1.38,  which vested  immediately  and expire three years
from issuance.  In connection with the issuance of these  warrants,  the Company
recognized,  based on a valuation  of these  warrants,  $143,870  as  additional
interest expense during the year ended December 31, 1996.

     On June 24,  1996,  the Company  completed a public  offering of  1,500,000
shares of 6%  cumulative  convertible  Series A  preferred  stock and  1,500,000
redeemable  warrants  resulting in gross proceeds of $7.65 million.  The Company
received  approximately  $4 million after repayment of short-term debt and costs
associated with the offering.  The Preferred Stock is convertible  into four (4)
shares of Common Stock at $1.25 per share and each warrant enables the holder to
purchase two shares of Common  Stock for a total price of $3.75.  As part of the
terms of this offering,  the holders of the Series I convertible preferred stock
exchanged their preferred stock for Preferred Stock on a one for one basis at no
cost. Each share of Preferred Stock will by its terms automatically convert into
four (4) shares of Common Stock on July 24, 1997,  unless  earlier  converted by
its holder.

     In August 1996, the Company received net proceeds of $459,800 as the result
of the underwriter's  exercise of its  over-allotment  option under the June 24,
1996 public offering to purchase an additional 225,000  Redeemable  Warrants and
an additional  100,000 shares of Preferred Stock.  These proceeds were offset by
additional  offering costs of $93,203  related to the June 1996 public  offering
that were recorded during the third quarter.

     The Company  plans on  achieving  certain  minimum  sales of the FAS device
during the next twelve months,  but will be required to seek additional  sources
of financing through private placements of debt and/or equity securities,  which
cannot be assured. In the event the Company cannot obtain additional  financing,
the Company  would have to curtail  product as well as research and  development
plans substantially due to lack of funds. The long-term viability of the Company
is  dependent  on its  ability to  profitably  develop  and  market its  current
products and to obtain the financing necessary to fund its anticipated growth.


                                      -25-
<PAGE>

Net Operating Loss Carryforward
-------------------------------

     At  December  31,  1996,  the  Company  had  approximately  $16,430,000  in
operating loss carryovers to offset future taxable income. These carryovers will
expire in various  years  through  2011.  As a result of a change in  ownership,
federal tax rules impose  limitations  on the use of net operating  losses.  The
limitations  will reduce the amount of these  benefits that will be available to
offset future taxable  income each year,  starting with the year of an ownership
change,  which the issuance of the Preferred  Stock in the  Company's  June 1996
public  offering  was deemed to be. The dollar  amount of these  limitations  is
indeterminable  at this time.  In  addition,  the  Company  provides a valuation
allowance  for a deferred  tax asset when it is more likely  than not,  based on
available evidence,  that some portion or all of the deferred tax asset will not
be realized.  In management's  opinion, it cannot determine if it is more likely
than not that the Company will generate  sufficient future taxable income before
2011,   the  year  after  which  all  current   available  net  operating   loss
carryforwards  expire,  to  utilize  all  of the  Company's  deferred  asset.  A
valuation  allowance has been recognized for the full amount of the deferred tax
asset of $6,150,468.

New Accounting Pronouncements
-----------------------------

     Statement of Financial  Accounting  Standards No. 121,  "Accounting for the
Impairment of  Long-Lived  Assets and for  Long-Lived  Assets to be Disposed of"
(SFAS No. 121) issued by the  Financial  Accounting  Standards  Board  (FASB) is
effective for financial statements for fiscal years beginning after December 15,
1995.  The new standard  establishes  new guidelines  regarding when  impairment
losses on long-lived  assets,  which include  plant and  equipment,  and certain
identifiable  intangible assets,  should be recognized and how impairment losses
should be  measured.  The  Company  does not expect  adoption to have a material
effect on its financial position or results of operations.

     Statements  of Financial  Accounting  Standards  No. 123,  "Accounting  for
Stock-Based  Compensation"  (SFAS No.  123) issued by the  Financial  Accounting
Standards  Board  (FASB)   establishes  a  fair  value  method   accounting  for
stock-based  compensation plans and for transactions in which an entity acquires
goods or services from  non-employees  in exchange for equity  instruments.  The
Company  adopted  this  accounting  standard  on January 1, 1996.  SFAS 123 also
encourages,  but does not  require  companies  to record  compensation  cost for
stock-based employee compensation. The Company has chosen to continue to account
for stock-based  compensation utilizing the intrinsic value method prescribed in
Accounting  Principles  Board  Opinion No. 25,  "Accounting  for Stock Issued to
Employees."  Accordingly,  compensation  cost for stock  options and warrants is
measured as the excess,  if any, of the fair market price of the Company's stock
at the date of the grant over the  amount an  employee  must pay to acquire  the
stock.

     Statements  of Financial  Accounting  Standards  No. 125,  "Accounting  for
Transfers and Servicing of Financial Assets and  Exstiguishments of Liabilities"
(SFAS No. 125) is effective for transfers and servicing of financial  assets and
extiguishments  of liabilities  occurring  after December 31, 1996, and is to be
applied prospectively. Earlier or retroactive applications is not permitted. The
new standard  provides  accounting  and  reporting  standards  for transfers and
servicing of financial assets and extiguishment of liabilities. The Company does
not expect  adoption  to have a material  effect on its  financial  position  or
results of operations.


                                      -26-
<PAGE>

PLAN OF OPERATION

Emergence from a Development Stage Company
------------------------------------------

     The Company  anticipates  emerging in 1997 from a  development  stage to an
operating company upon achieving revenues from its first medical device product,
the FAS, which the Company began marketing in 1996.

The Company's Capital Requirements
----------------------------------

     The Company's  greatest cash  requirements  during 1997 will be for funding
the introduction and working capital associated with the market  introduction of
the FAS, and additional clinical testing, continued development,  FDA filings of
the CRS and ICP, and selling,  general and administrative  expenses. The funding
for  costs  and  build-up  of  working   capital   associated  with  the  market
introduction  of the FAS is expected  to be  partially  supplemented  by certain
minimum anticipated sales of the FAS in 1997.

     In order to satisfy the Company's capital needs for the next 12 months, the
successful  completion in 1997 of additional  private  placements of debt and/or
equity securities and the Company achieving certain minimum sales of the FAS, is
essential.  The private  placement  is subject to favorable  market  conditions,
which can not be assured.

     If the anticipated private placement is not completed,  the Company will be
required  to  seek  alternative  financing  sources  which  cannot  be  assured.
Consequently,   the  Company  might  have  to   substantially   curtail  product
development and market introduction plans due to lack of funds.

     Subsequent to the next 12 months,  the Company  currently  plans to finance
its long-term  operations  and capital  requirements  with the profits and funds
generated  from  the  sales  of its  products  as well as  through  new  private
financings and public offerings of debt and equity securities.

ITEM 7. FINANCIAL STATEMENTS

                                      INDEX
<TABLE>
<CAPTION>

                                                                     Page No.
                                                                     --------
<S>                                                                   <C>
Reports of Independent Certified Public Accountants                   F-1

Consolidated Balance Sheets as of December 31, 1996 and 1995          F-3

Consolidated Statements of Operations for the
Years Ended December 31, 1996 and 1995                                F-5

Consolidated Statements of Changes in Stockholders' Equity for the
Years Ended December 31, 1996 and 1995                                F-6

Consolidated Statements of Cash Flows for the
Years Ended December 31, 1996 and 1995                                F-9

Summary of Accounting Policies                                        F-12

Notes to Consolidated Financial Statements                            F15 - F25
</TABLE>


                                      -27-
<PAGE>

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
        AND FINANCIAL DISCLOSURE

         None
                                                     PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS,
        COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

     The  information  required by this Item,  which will be set forth under the
captions  "Proposal  No. 1- Election of  Directors,"  "Executive  Officers"  and
"Compliance  with Section  16(a) of the  Exchange  Act" in the  Company's  Proxy
Statement for its 1997 Annual Meeting of Shareholders, is incorporated herein by
reference.

ITEM 10. EXECUTIVE COMPENSATION

     The  information  required by this Item,  which will be set forth under the
caption  "Executive  Compensation" in the Company's Proxy Statement for its 1997
Annual Meeting of Shareholders, is incorporated herein by reference.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The  information  required by this Item,  which will be set forth under the
caption "Voting Securities and Principal Holders Thereof" in the Company's Proxy
Statement for its 1997 Annual Meeting of Shareholders, is incorporated herein by
reference.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     During the year ended  December  31,  1996,  two  directors  of the Company
loaned the  Company  $200,000  and  $25,000,  respectively,  in order to provide
financing to the Company prior to its public offering.  The notes were repaid by
the Company in 1996 once the public  offering  was  complete.  Interest  paid to
these  directors  amounted to $6,750 for the year ended  December 31,  1996.  As
additional  consideration for these loans, the directors,  consistent with terms
to the other four individual lenders,  were awarded an aggregate of 89,301 three
year warrants to purchase  89,301 shares of Common Stock at exercise prices from
$1.26  to  $1.29  (see  Note 3 to the  consolidated  financial  statements).  In
connection with the issuance of the warrants to the six individuals, the Company
recognized,  based on a valuation  of these  warrants,  $143,870  as  additional
interest  expense during the year ended December 31, 1996. The interest rate and
terms  of these  notes  were  made at arms  length.  A  director  also  received
compensation of $7,500 for general  corporate  consulting  services.  During the
year ended December 31, 1995, a director  received  compensation  of $25,297 for
computer and other general corporate consulting services.

                                     PART IV

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

Exhibits             None
--------

Reports on Form 8-K  See Forms 8-K dated January 15, 1996 and January 31, 1996.
-------------------


                                      -28-
<PAGE>

                                   SIGNATURES

     In accordance  with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.


MEDICAL DEVICE TECHNOLOGIES, INC.
<TABLE>
<CAPTION>


SIGNATURE                 TITLE                              DATE
---------                 -----                              ----
<S>                       <C>                                <C>
/s/ M. Lee Hulsebus       Chief Executive Officer,           March 31, 1997
-------------------       President and Chairman
M. Lee Hulsebus


/s/ Edward C. Hall        Chief Financial Officer,           March 31, 1997
-------------------       Secretary and Prinicpal
Edward C. Hall            Accounting Officer


/s/ Don L. Arnwine        Director                           March 31, 1997
-------------------
Don L. Arnwine


/s/ Arthur E. Bradley     Director                           March 31, 1997
-------------------
Arthur E. Bradley


/s/ William A. Clarke     Director                           March 31, 1997
-------------------
William A. Clarke


/s/ Thomas E. Glasgow     Director                           March 31, 1997
-------------------
Thomas E. Glasgow


/s/ Scott A. Weisman      Director                           March 31, 1997
-------------------
Scott A. Weisman

</TABLE>


                                      -29-
<PAGE>

               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS



Board of Directors
Medical Device Technologies, Inc. and subsidiary
San Diego, California

     We have  audited the  accompanying  consolidated  balance  sheet of Medical
Device  Technologies,  Inc. and  subsidiary (a  development  stage company) (the
"Company")  as of  December  31,  1996  and 1995  and the  related  consolidated
statements of  operations,  changes in  stockholders'  equity and cash flows for
each of the two  years  then  ended.  We have also  audited  the  statements  of
operations and cash flows for the period from June 1, 1992 through  December 31,
1996,  except that we did not audit these  financial  statements  for the period
from June 1, 1992 to December 31, 1994;  those  statements were audited by other
auditors whose report dated February 17, 1995 contained an explanatory paragraph
raising  substantial  doubt as to the  Company's  ability to continue as a going
concern.  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 audits. Our opinion,  insofar as
it relates to the amounts for the period from June 1, 1992 to December 31, 1994,
is based solely on the report of other auditors.

     We conducted  our audits in accordance  with  generally  accepted  auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the consolidated  financial statements.  An audit
also includes assessing the accounting principles used and significant estimates
made by  management,  as well as  evaluating  the  overall  financial  statement
presentation.  We believe  that our audits  provide a  reasonable  basis for our
opinion.

     In our opinion,  based on our audit and the report of other  auditors,  the
consolidated  financial  statements  referred to above  present  fairly,  in all
material respects,  the financial position of Medical Device Technologies,  Inc.
and subsidiary (a  development  stage company) at December 31, 1996 and 1995 and
the  results  of their  operations  and their  cash flows for the two years then
ended and the period June 1, 1992 through  December 31, 1996 in conformity  with
generally accepted accounting principles.

     The accompanying  financial statements have been prepared assuming that the
Company  will  continue  as a  going  concern.  As  discussed  in  Note 1 to the
financial  statements,  the Company's  recurring  losses from  operations  raise
substantial  doubt about the Company's  ability to continue as a going  concern.
Management's  plans in regard to this matter are also  described  in Note 1. The
financial  statements do not include any adjustments  that might result from the
outcome of this uncertainty.



Los Angeles, California
January 31, 1997


By /s/ BDO SEIDMAN, LLP
-----------------------
BDO SEIDMAN, LLP

                                      F-1
<PAGE>


               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS



Board of Directors
Medical Device Technologies, Inc. (formerly known as Cytoprobe Corporation)
San Diego, CA

     We have audited the accompanying  consolidated  statement of operations and
cash flows for the period  June 1, 1992  through  December  31,  1994 of Medical
Device  Technologies,  Inc. and subsidiary (a development stage company formerly
known as CytoProbe Corporation). 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 audits.

     We conducted  our audit in  accordance  with  generally  accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the consolidated  financial statements.  An audit
also includes assessing the accounting principles used and significant estimates
made by  management,  as well as  evaluating  the  overall  financial  statement
presentation.  We believe  that our audits  provide a  reasonable  basis for our
opinion.

     In our  opinion the  consolidated  financial  statements  referred to above
present fairly, in all material respects, the consolidated results of operations
and cash flows of Medical  Device  Technologies,  Inc.  and  subsidiary  for the
period June 1, 1992 through  December 31, 1994,  in  conformity  with  generally
accepted accounting principles.

     The accompanying  financial statements have been prepared assuming that the
company  will  continue  as a  going  concern.  As  discussed  in  Note 1 to the
financial  statements,  the  Company  is in the  development  stage  and  has no
operating revenues.  This situation raises substantial doubt as to the Company's
ability to continue  as a going  concern.  Management's  plans in regard to this
situation are also described in Note 1. The financial  statements do not include
any adjustments that might result from the outcome of this uncertainty.



/s/Robert Early & Company, P.C.
-------------------------------
Robert Early & Company, P.C.
Abilene, Texas


February 17, 1995

                                      F-2
<PAGE>

                MEDICAL DEVICE TECHNOLOGIES, INC. AND SUBSIDIARY
                          (A DEVELOPMENT STAGE COMPANY)

                           CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>


                                                           December 31, 1996    December 31, 1995
                                                           ------------------   -----------------
<S>                                                              <C>               <C>
ASSETS
CURRENT ASSETS
   Cash and cash equivalents                                   $ 2,889,233      $ 306,851
   Accounts receivable                                               8,563              -
   Inventory                                                       100,379        147,593
   Prepaid royalties (Note 5)                                            -         60,000
   Prepaid expenses and other assets                               134,309         28,082
-----------------------------------------------------------------------------------------------------------------------------------
Total current assets                                             3,132,484        542,526
-----------------------------------------------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT:
   Furniture and  fixtures                                         101,854        112,149
   Machinery and equipment                                         190,179         17,136
   Equipment under capital lease                                     5,349          5,349
-----------------------------------------------------------------------------------------------------------------------------------
                                                                   297,382        134,634

   Less accumulated depreciation                                   (76,046)       (37,309)
-----------------------------------------------------------------------------------------------------------------------------------
NET PROPERTY AND EQUIPMENT                                         221,336         97,325
-----------------------------------------------------------------------------------------------------------------------------------
LICENSE AGREEMENTS
  (net of accumulated amortization of $903,149
   and $627,887) (Note 2)                                        1,864,168      1,598,242

PREPAID ROYALTIES (Note 5)                                               -        115,000

LOAN ORIGINATION FEES (Note 3)                                           -        117,500

OTHER ASSETS                                                        15,003         44,341
-----------------------------------------------------------------------------------------------------------------------------------
                                                               $ 5,332,991    $ 2,514,934
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       F-3


<PAGE>


                        MEDICAL DEVICE TECHNOLOGIES, INC.
                          (A DEVELOPMENT STAGE COMPANY)

                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>

                                                                 December 31, 1996   December 31, 1995
                                                                 ------------------  -----------------
<S>                                                                   <C>                 <C>
LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
   Accounts payable                                                  $    185,046    $    276,366
   Accrued expenses and taxes                                             145,736          40,927
   Short-term notes payable, net of unamortized discount of
    $384,375 at December 31, 1995 (Note 3)                                      -         640,625
   Current obligation under termination agreement (Note 5)                148,000               -
   Current obligation under capital lease (Note 4)                          1,103           1,728
-----------------------------------------------------------------------------------------------------------------------------------

Total current liabilities                                                 479,885         959,646

OTHER LIABILITIES
   Termination agreement obligation (Note 5)                               98,667               -
   Capital lease obligation (Note 4)                                            -           1,755
-----------------------------------------------------------------------------------------------------------------------------------
Total other liabilities                                                    98,667           1,755

COMMITMENTS (Note 5)
STOCKHOLDERS' EQUITY (Note 6)

   Series I convertible preferred stock (247,500 shares authorized,
    0 and 153,750 issued and outstanding)                                       -         384,375
   6% cumulative convertible Series A preferred stock; $.01 par
    value(1,343,500 shares authorized, issued and outstanding)             13,435               -
   Preferred stock, 10,000,000 shares authorized, $.01 par value,
    0 shares issued and outstanding                                             -               -
   Common stock, $.15 par value (100,000,000 shares authorized,
    6,897,963 and 4,196,600 outstanding)                                1,034,694         629,490
   Stock to be issued (25,000 shares)                                      16,730          23,440
   Additional paid-in capital                                          20,650,306      12,776,389
   Deferred stock compensation                                            247,500         247,500
   Accumulated deficit ($13,390,372 and $8,800,959 accumulated losses
    during the development stage through December 31, 1996
    and December 31, 1995)                                            (17,331,666)    (12,507,661)
-----------------------------------------------------------------------------------------------------------------------------------

Total stockholders' equity                                              4,654,439       1,553,533
-----------------------------------------------------------------------------------------------------------------------------------
                                                                     $  5,232,991    $  2,514,934
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>


          See accompanying notes to consolidated financial statements.

                                       F-4


<PAGE>

                MEDICAL DEVICE TECHNOLOGIES, INC. AND SUBSIDIARY
                          (A DEVELOPMENT STAGE COMPANY)

                      CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>

                                               Year Ended December 31,      June 1,1992 to
                                               -----------------------     December 31,1996
                                                   1996          1995        (cumulative)
-----------------------------------------------------------------------------------------------
<S>                                                <C>           <C>              <C>
SALES                                         $    26,193   $         -      $   26,193
Cost of sales                                      15,493             -          15,493
-----------------------------------------------------------------------------------------------
Gross profit                                       10,700             -          10,700

OPERATING EXPENSES:
Research and development                          893,771       943,510       2,950,275
Sales, general and administrative               2,774,679     2,194,393       8,541,287
-----------------------------------------------------------------------------------------------
LOSS FROM CONTINUING OPERATIONS                (3,657,750)   (3,137,903)    (11,480,862)

OTHER INCOME (EXPENSE):
Interest income                                    92,344             -          98,440
Interest expense                               (1,024,007)       (2,925)     (1,030,890)
Loss on sale of marketable securities                   -             -         (20,790)
Net unrealized loss on marketable securities            -             -         (64,500)
-----------------------------------------------------------------------------------------------
LOSS BEFORE DISCONTINUED OPERATIONS
AND DISPOSAL OF OIL AND GAS OPERATIONS         (4,589,413)   (3,140,828)    (12,498,602)

DISCONTINUED OPERATIONS                                 -             -        (520,396)

LOSS FROM DISPOSAL OF OIL AND GAS OPERATIONS            -             -        (371,374)
-----------------------------------------------------------------------------------------------
NET LOSS                                    $  (4,589,413) $ (3,140,828)    $(13,390,372)
-----------------------------------------------------------------------------------------------
LOSS PER SHARE:

Less: 6% cumulative convertible preferred
      series A stock dividends (Note 6)           234,592             -
Loss attributable to common stock           $  (4,824,005) $ (3,140,828)
-----------------------------------------------------------------------------------------------
Net loss per common share (Note 11)         $       (0.98) $      (0.94)
-----------------------------------------------------------------------------------------------
Weighted average of common shares outstanding   4,944,469     3,357,084
-----------------------------------------------------------------------------------------------
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       F-5

<PAGE>
                MEDICAL DEVICE TECHNOLOGIES, INC. AND SUBSIDIARY
                          (A DEVELOPMENT STAGE COMPANY)

                  STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
                                                                                              Additional
                                                  Preferred Stock          Common Stock          Paid-In
                                                  ---------------          ------------          -------
                                                 Shares     Amount     Shares       Amount       Capital
                                                 ------     ------     ------       ------       -------
<S>                                              <C>         <C>         <C>           <C>           <C>
BALANCE, MAY 31, 1992                               -      $   -       1,429,508      $220,004  $4,472,062
Common stock issued for:
     Cash                                           -          -         358,834        48,247     510,697
     Research and development and services          -          -         227,966        34,195     393,241
     Patent and licensing costs                     -          -         175,000        26,250     105,000
     Prepaid market research                        -          -         575,000        86,250     345,000
Common stock to be issued                           -          -               -             -     163,958
Net loss from June 1 through December 31, 1992      -          -               -             -           -

                                               ------------------------------------------------------------
BALANCE, DECEMBER 31, 1992                          -          -       2,766,308       414,946   5,989,958
                                               ============================================================

Common stock issued for:
     Cash                                           -          -         312,750        46,913     284,312
     Patent and licensing costs                     -          -         500,000        75,000     714,000
     Research and development, compensation
     and services                                   -          -         362,500        54,375     759,669
Common stock to be issued                           -          -               -             -           -
Net loss for 1993                                   -          -               -             -           -

                                               ------------------------------------------------------------
BALANCE, DECEMBER 31, 1993                          -      $     -     3,941,558      $591,234  $7,747,939
                                               ============================================================

</TABLE>

<TABLE>
<CAPTION>
                                                      Common          Deferred
                                                       Stock           Compen-    Accumulated
                                                   To Be Issued        sation       Deficit       Total
                                                   ------------        ------       -------       -----
<S>                                                  <C>                  <C>           <C>         <C>
BALANCE, MAY 31, 1992                          $    -                $    -        ($3,706,702)   $985,364
Common stock issued for:
     Cash                                           -                     -            -           558,944
     Research and development and services          -                     -            -           427,436
     Patent and licensing costs                     -                     -            -           131,250
     Prepaid market research                        -                     -            -           431,250
Common stock to be issued                           37,500                -            -           238,958
Net loss from June 1 through December 31, 1992      -                     -           (791,994)   (791,994)

                                               ------------------------------------------------------------
BALANCE, DECEMBER 31, 1992                          37,500                -         (4,498,696)  1,981,208
                                               ============================================================

Common stock issued for:
     Cash                                          (37,500)               -            -           256,225
     Patent and licensing costs                     -                     -            -           789,000
     Research and development, compensation
     and services                                   -                     -            -           814,044
Common stock to be issued                           21,000                -            -            42,000
Net loss for 1993                                   -                     -         (1,779,841) (1,779,841)

                                               ------------------------------------------------------------
BALANCE, DECEMBER 31, 1993                         $21,000           $       -     ($6,278,537) $2,102,636
                                               ============================================================
</TABLE>

          See accompanying notes to consolidated financial statements.

                                      F-6
<PAGE>

                MEDICAL DEVICE TECHNOLOGIES, INC. AND SUBSIDIARY
                          (A DEVELOPMENT STAGE COMPANY)

                  STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
                                                  Preferred Stock          Common Stock
                                                  ---------------          ------------          Paid-In
                                                 Shares     Amount     Shares       Amount       Capital
                                                 ------     ------     ------       ------       -------
<S>                                              <C>         <C>         <C>         <C>           <C>
BALANCE, JANUARY 1, 1994                            -      $   -       3,941,558      $591,234  $7,747,939
Reverse stock split                                 -          -      (3,284,561)     (492,684)    492,684
Common stock issued for:
     Cash                                           -          -         384,820        57,723     426,539
     Research and development, compensation
        and services                                -          -         605,914        90,887   1,039,961
     Patent and licensing costs                     -          -         450,000        67,500     285,833
     Conversion of debt                             -          -          47,250         7,087      45,277
Common stock to be issued                           -          -          -            -            -
Accrued stock issuance                              -          -          -            -            -
Net loss for 1994                                   -          -          -            -            -
                                               ------------------------------------------------------------
BALANCE, DECEMBER 31, 1994                          -          -       2,144,981       321,747  10,038,233
                                               ============================================================

Common stock to be issued                           -          -          -            -            -
Common stock issued for: (Notes 6 and 7)
     Cash                                           -          -          43,000         6,450      23,550
     Patent and licensing costs                     -          -          20,000         3,000      47,000
     Research and development, compensation
        and services                                -          -         903,781       135,567   1,427,563
     Conversion of debt                             -          -         343,750        51,563     223,437
     Private placement                              -          -         741,088       111,163     863,606
Accrued stock issuance (Note 5)                     -          -          -            -            -
Issuance of warrants (Note 6)                       -          -          -            -           153,000
Issuance of preferred stock (Note 6)               153,750   384,375      -            -            -
Net loss for 1995                                   -          -          -            -            -
                                               ------------------------------------------------------------
BALANCE, DECEMBER 31, 1995                         153,750  $384,375   4,196,600      $629,490 $12,776,389
                                               ============================================================
</TABLE>
<TABLE>
<CAPTION>
                                                      Common          Deferred
                                                       Stock           Compen-    Accumulated
                                                   To Be Issued        sation       Deficit       Total
                                                   ------------        ------       -------       -----
<S>                                                    <C>               <C>          <C>          <C>
BALANCE, JANUARY 1, 1994                           $21,000           $    -        ($6,278,537) $2,102,636
Reverse stock split                                 -                     -            -            -
Common stock issued for:
     Cash                                          (21,000)               -            -           442,262
     Research and development, compensation
        and services                                -                     -            -         1,130,848
     Patent and licensing costs                     -                     -            -           353,333
     Conversion of debt                             -                     -            -            52,364
Common stock to be issued                          398,125                -            -           796,250
Accrued stock issuance                              -                     66,406       -            66,406
Net loss for 1994                                   -                     -         (3,088,296) (3,088,296)
                                               ------------------------------------------------------------
BALANCE, DECEMBER 31, 1994                         398,125                66,406    (9,366,833)  1,855,803
                                               ============================================================

Common stock to be issued                          100,980                -            -           201,959
Common stock issued for: (Notes 6 and 7)
     Cash                                           -                     -            -            30,000
     Patent and licensing costs                     -                     -            -            50,000
     Research and development, compensation
        and services                                -                     -            -         1,563,130
     Conversion of debt                             -                     -            -           275,000
     Private placement                            (487,385)               -            -            -
Accrued stock issuance (Note 5)                     -                    181,094       -           181,094
Issuance of warrants (Note 6)                       -                     -            -           153,000
Issuance of preferred stock (Note 6)                -                     -            -           384,375
Net loss for 1995                                   -          -          -         (3,140,828) (3,140,828)
                                               ------------------------------------------------------------
BALANCE, DECEMBER 31, 1995                         $11,720              $247,500  ($12,507,661) $1,553,533
                                               ============================================================
</TABLE>
           See accompanying notes to consolidated financial statements

                                       F-7

<PAGE>
                MEDICAL DEVICE TECHNOLOGIES, INC. AND SUBSIDIARY
                          (A DEVELOPMENT STAGE COMPANY)

                  STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY


<TABLE>
<CAPTION>
                                                                                              Additional
                                                  Preferred Stock          Common Stock          Paid-In
                                                  ---------------          ------------          -------
                                                 Shares     Amount     Shares       Amount       Capital
                                                 ------     ------     ------       ------       -------
<S>                                              <C>          <C>        <C>           <C>           <C>
(Note 6)
BALANCE, JANUARY 1, 1996                           153,750  $384,375   4,196,600      $629,490 $12,776,389
Stock issued for:  (Note 7)
     Research and development, compensation
        and services                                -          -         451,205        67,680     537,615
     Issuances of convertible preferred stock       93,750   234,375      -            -            -
     Exercise of warrants                           -          -         162,500        24,375     250,625
Series I convertible preferred conversion to 6%
     cumulative convertible Series A preferred
     stock                                        (247,500) (618,750)     -            -           618,750
Issuance of 6% cumulative convertible Series A
     preferred stock                             1,847,500    18,475      -            -         6,261,504
Issuance of redeemable warrants                     -          -          -            -           295,670
Common stock dividend issued to 6% cumulative
     convertible Series A preferred stockholders    -          -          71,658        10,749      90,002
Common stock dividend distributable to 6%
     cumulative convertible Series A preferred
     stockholders                                   -          -          -            -           117,111
Common stock issued for conversion of 6%
     cumulative convertible Series A preferred
     stock                                        (504,000)   (5,040)  2,016,000       302,400    (297,360)
Accrued stock issuance (Note 5)                     -          -          -            -            -
Net loss for 1996                                   -          -          -            -            -

                                               ------------------------------------------------------------
BALANCE DECEMBER 31, 1996                        1,343,500   $13,435   6,897,963    $1,034,694 $20,650,306
                                               ============================================================
</TABLE>
<TABLE>
<CAPTION>
                                                      Common          Deferred
                                                       Stock           Compen-    Accumulated
                                                   To Be Issued        sation       Deficit       Total
                                                   ------------        ------       -------       -----
<S>                                                   <C>                <C>          <C>          <C>
(Note 6)
BALANCE, JANUARY 1, 1996                           $23,440              $247,500  ($12,507,661) $1,553,533
Stock issued for:  (Note 7)
     Research and development, compensation
        and services                                -                     -            -           605,295
     Issuances of convertible preferred stock       -                     -            -           234,375
     Exercise of warrants                           -                     -            -           275,000
Series I convertible preferred conversion to 6%
     cumulative convertible Series A preferred stock-                     -            -            -
Issuance of 6% cumulative convertible Series A
     preferred stock                                -                     -            -         6,279,979
Issuance of redeemable warrants                     -                     -            -           295,670
Common stock dividend issued to 6% cumulative
     convertible Series A preferred stockholders    -                     -           (100,751)     -
Common stock dividend distributable to 6%
     cumulative convertible Series A preferred
     stockholders                                   16,730                -           (133,841)     -
Common stock issued for conversion of 6%
     cumulative convertible Series A preferred
     stock                                          -                     -            -            -
Accrued stock issuance (Note 5)                     -                     -            -            -
Net loss for 1996                                   -                     -         (4,589,413) (4,589,413)

                                               ------------------------------------------------------------
BALANCE DECEMBER 31, 1996                          $40,170              $247,500  ($17,331,666) $4,654,439
                                               ============================================================
</TABLE>

          See accompanying notes to consolidated financial statements.

                                      F-8

<PAGE>
                MEDICAL DEVICE TECHNOLOGIES, INC. AND SUBSIDIARY
                          (A DEVELOPMENT STAGE COMPANY)

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>

                                                                                                            June 1, 1992 to
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                      Year Ended December 31,              December 31, 1996
                                                                        1996             1995                 (Cumulative)
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                   <C>             <C>                      <C>

CASH FLOWS FROM OPERATING ACTIVITIES
 Net loss                                                           $(4,589,413)     $(3,140,828)             $(13,390,372)
 Adjustments to reconcile net loss
   to net cash provided by (used in) operations:
     Loss from discontinued operations from
     January 1 through May 31,1992                                            -                -                  (100,599)
     Common stock paid for services                                     605,295        1,563,130                 4,128,036
     Compensation recognized relating to
       accrued employee common stock grants & warrants                        -          334,094                   400,500
     Bad debt expense                                                         -                -                   394,720
     Depreciation and amortization                                      320,850          369,139                 1,603,558
     Amortization of loan origination fees and
       original issue discount                                          942,620                -                   942,620
     Loss on disposal of fixed assets                                     7,373                -                   109,968
     Reversal of litigation outstanding at end of prior year                  -         (286,996)                 (286,996)
     Loss on sale of marketable securities                                    -                -                    48,290
     Net unrealized loss on marketable securities                             -                -                    37,000
     Loss on disposal of oil and gas operations                               -                -                   368,894
     Increase (decrease) from changes in:
       Accounts receivable                                               (8,563)               -                    (6,048)
       Interest receivable                                                    -                -                     8,053
       Amounts due from related party                                         -                -                     1,682
       Inventory                                                         47,214         (147,593)                 (100,379)
       Prepaid royalties                                                 15,000         (175,000)                 (160,000)
       Prepaid expenses and other current assets                       (106,227)         (28,082)                 (310,651)
       Other assets                                                      (6,662)         (36,000)                  (51,003)
       Accounts payable                                                 (91,320)         111,408                    97,964
       Termination agreement liability                                  246,667                -                   246,667
       Accrued expenses and taxes                                       104,809           (1,283)                  148,636
------------------------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities                                (2,512,357)      (1,435,445)               (5,869,460)
------------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
       Patent and marketing licensing costs                            (381,188)         (50,000)                 (906,298)
       Purchase of property and equipment                              (140,272)         (54,270)                 (282,646)
       Other (proceeds from sale of marketable
         securities and loan repayments)                                      -                -                   175,188
------------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities                                 $(521,460)       $(104,270)              $(1,013,756)
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
           See accompanying notes to consolidated financial statements
                                       F-9


<PAGE>
                MEDICAL DEVICE TECHNOLOGIES, INC. AND SUBSIDIARY
                          (A DEVELOPMENT STAGE COMPANY)

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>

                                                                                                             June 1, 1992 to
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                      Year Ended December 31,               December 31, 1996
                                                                      1996              1995                  (Cumulative)
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                               <C>                  <C>                       <C>

CASH FLOWS FROM FINANCING ACTIVITIES
       Net borrowings from related party                   $              -       $          -             $        22,608
       Proceeds from preferred stock and warrant
          issurance (net of offering costs)                       6,431,079                  -                   6,431,079
       Proceeds from notes payable                                  912,500          1,182,500                   2,195,000
       Principal payments on notes payable                      (2,000,000)            (50,000)                 (2,050,000)
       Proceeds from common stock to be issued                            -            201,959                   1,237,167
       Proceeds from issuing common stock                                 -             30,000                   1,364,052
       Proceeds from warrant exercise                               275,000                  -                     275,000
       Capital lease financing                                      (2,380)             (1,504)                      1,103
       Advances on private common stock placement                        -                   -                     296,440

------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities                         5,616,199          1,362,955                   9,772,449
------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents              2,582,382           (176,760)                  2,889,233

Cash and cash equivalents, beginning of period                      306,851            483,611                           -
------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period                         $2,889,233           $306,851                  $2,889,233
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       F-10

<PAGE>

                MEDICAL DEVICE TECHNOLOGIES, INC. AND SUBSIDIARY
                          (A DEVELOPMENT STAGE COMPANY)

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>

                                                                     Year Ended December 31,
                                                                           1996         1995
--------------------------------------------------------------------------------------------
<S>                                                                        <C>           <C>
SUPPLEMENTAL DISCLOSURES:

PAYMENTS FOR:

     Interest                                                         $   81,387     $   4,281
     Income taxes                                                     $    1,600     $       -

STOCK ISSUED FOR:

     Research and development                                         $  323,709     $ 806,587
     Public relations and marketing services                              97,202       390,806
     Legal and professional services                                     125,320       151,260
     Directors' fees                                                      59,064        63,839
     Contract payable                                                          -        50,000
     Note payable                                                              -        50,000
     Prepaid expenses and inventory                                            -        50,638
                                                                         -------     ---------
                                                                        $605,295    $1,563,130
                                                                         -------     ---------

     Common stock dividends issued and distributable to 6%
     cumulative convertible Series A  preferred stockholders            $234,592    $        -

NON-CASH INVESTING ACTIVITY:

Application of prepaid royalties to the purchase of license agreements: $160,000    $        -
Application of deposit to the purchase of property and equipment:       $ 36,000    $        -
</TABLE>

Non-cash financing activity:

     During the year ended  December  31,  1995,  the  Company  issued  Series I
convertible preferred stock valued at $384,375 in conjunction with notes payable
issued in a private  placement  (Notes 3 and 6).  This  amount is recorded as an
original issue discount.

     Additional short term notes in the amount of $625,000 were added in January
1996 along with  preferred  stock stated at $234,375 which was added to the 1995
year end original issue discount.

     During  the  second  quarter of 1996,  additional  short-term  notes in the
amount of  $350,000  were  issued  along with common  stock  warrants  valued at
$143,870,  which was added to the 1995 year end  original  issue  discount for a
total of $762,620.

     During the year ended  December  31, 1995,  $275,000 of debt was  converted
into common stock (Note 6).

     During the years ended  December 31, 1996 and 1995,  deferred  compensation
expense of $0 and  $181,094  was recorded  relating to accrued  employee  common
stock grants in order to value such shares at the fair market value (Notes 5 and
7).

     During the years ended December 31, 1996 and 1995,  compensation expense of
$0 and  $153,000  was  recorded  relating to the  issuance  of warrants  with an
exercise price below fair market value at the date of issuance (Note 6).


          See accompanying notes to consolidated financial statements.

                                       F-11

<PAGE>

                MEDICAL DEVICE TECHNOLOGIES, INC. AND SUBSIDIARY
                          (A DEVELOPMENT STAGE COMPANY)

                         SUMMARY OF ACCOUNTING POLICIES

Description of Business

     Medical  Device  Technologies,  Inc. (the  "Company"),  is a public company
incorporated  in Utah on  February  6,  1980  and  headquartered  in San  Diego,
California.  The Company's  securities  currently  trade on the Nasdaq  SmallCap
Market under the symbols (MEDD,  MEDDP and MEDDW).  Prior to 1992, the Company's
business was the exploration and production of hydrocarbons. As of June 1, 1992,
the Company  re-entered the development  stage.  Effective  January 1, 1994, the
Company  completed  the  divestiture  of all oil and gas  properties  and was no
longer in the  hydrocarbon  business.  Since that  time,  the  Company  has been
exclusively  a medical  device  company.  The Company  changed its name in April
1995, from Cytoprobe Corporation, to reflect the change of focus.

     The Company has developed three  innovative  medical device  products.  The
first product, the Fluid Alarm System (FAS),  formerly called the Personal Alarm
System  (PAS),  is a device which  monitors the  integrity of infection  control
barriers, such as surgical gloves and gowns worn during medical procedures.  The
second  product,  the Cell  Recovery  System  (CRS),  is a cell  "brushing"  and
retrieval  system using an automated biopsy brush for the collection of specimen
cells for diagnostic purposes,  primarily (but not limited to) cancer detection.
The third  product,  the  Intracranial  Pressure  Measuring  System (ICP),  is a
diagnostic  device that measures pressure within the skull  non-invasively.  The
Company  received FDA clearance  for the FAS during the year ended  December 31,
1995 and received FDA clearance for the CRS in March 1996.

Inventory

     The inventory  balance  shown at December 31, 1996  consisted of $20,685 of
finished goods, net of reserve of $7,900, $20,643 of work in process and $59,051
of parts and materials.  The inventory balance at December 31, 1995 consisted of
parts and  materials.  Inventory is valued at the lower of cost or market,  on a
first-in, first-out basis.

Property and Equipment

     Property and equipment are stated at cost.  Depreciation  is being provided
on a straight line basis over the estimated  useful lives of the related  assets
which range from three to seven years.

                                      F-12
<PAGE>

Loan Origination Fees and Original Issue Discount

     In conjunction  with the Company's  private  placements of short-term notes
payable and preferred stock (Note 3), the Company incurred loan origination fees
of  $180,000  ($62,500  in 1996 and  $117,500  in 1995).  Further,  the  Company
recorded  original issue  discounts of $378,245 and $384,375 in 1996 and 1995 on
the two sets of notes  payable.  These amounts were  amortized over the expected
term of the notes (approximately five months in 1996). All short-term notes were
repaid  with the  proceeds of the  Company's  public  offering of 6%  cumulative
convertible Series A preferred stock and redeemable warrants,  completed in June
1996 (See Notes 3 and 6).

License Agreements

     The Company has entered into various license agreements whereby the Company
has  acquired  the  exclusive   worldwide   rights  to  develop   commercialize,
manufacture, and sell its three products. In addition, the Company paid finder's
fees relating to two of the three products.  These costs, along with legal costs
to register the related  patents,  have been capitalized and are being amortized
over the estimated useful life of the license agreement.

     The Company  will  continue to monitor  the markets for its  products,  the
emergence of competitive  products and technologies and associated  events,  and
will adjust the lives of its patent licenses accordingly.

Income Taxes

     Income taxes are accounted for in  accordance  with  Statement of Financial
Accounting  Standards  (SFAS) 109  "Accounting  for Income Taxes." The statement
employs an asset and liability  approach for financial  accounting and reporting
of deferred income taxes. Generally, SFAS 109 allows for recognition of deferred
tax assets in the current  period for the future  benefit of net operating  loss
carryforward  and items for which  expenses have been  recognized  for financial
statement  purposes  but will be  deductible  in  future  periods.  A  valuation
allowance  is  recognized,  if on the weight of  available  evidence  it is more
likely than not that some  portion or all of the deferred tax assets will not be
realized.

Cash Flows

     For purposes of the  statement  of cash flows,  the Company  considers  all
highly liquid debt instruments with an original maturity of three months or less
to be cash equivalents.

                                      F-13
<PAGE>

Accounting Estimates

     The  preparation  of financial  statements  in  conformity  with  generally
accepted  accounting  principles  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.

Loss Per Common Share

     Loss  per  common  share  data is  computed  by  dividing  net  loss  (less
cumulative  preferred stock  dividends) by the weighted average number of common
shares  outstanding  during  each  period.  Warrants  outstanding  have not been
considered  in the average  number of common  shares  since the effect  would be
anti-dilutive.  Weighted average common shares  outstanding at December 31, 1996
and 1995 includes the stock to be issued.

Fair Value of Financial Instruments

     The carrying  amounts of financial  instruments  including  cash,  accounts
receivable,  and accounts  payable and accrued  expenses  approximate fair value
because of their short maturity.

 New Accounting Pronouncements

     Statement of Financial  Accounting  Standards No. 121,  "Accounting for the
Impairment of  Long-Lived  Assets and for  Long-Lived  Assets to be Disposed of"
(SFAS No. 121) issued by the  Financial  Accounting  Standards  Board  (FASB) is
effective for financial statements for fiscal years beginning after December 15,
1995.  The new standard  establishes  new guidelines  regarding when  impairment
losses on long-lived  assets,  which include  plant and  equipment,  and certain
identifiable  intangible assets,  should be recognized and how impairment losses
should be  measured.  The  Company  does not expect  adoption to have a material
effect on its financial position or results of operations.

     Statements  of Financial  Accounting  Standards  No. 123,  "Accounting  for
Stock-Based  Compensation"  (SFAS  No.  123)  establishes  a fair  value  method
accounting for stock-based  compensation  plans and for transactions in which an
entity  acquires  goods or services  from  non-employees  in exchange for equity
instruments.  The Company adopted this  accounting  standard on January 1, 1996.
SFAS 123 also encourages,  but does not require companies to record compensation
cost for stock-based employee  compensation.  The Company has chosen to continue
to account for  stock-based  compensation  utilizing the intrinsic  value method
prescribed in Accounting  Principles Board Opinion No. 25, "Accounting for Stock
Issued to  Employees."  Accordingly,  compensation  cost for stock  options  and
warrants  is measured  as the  excess,  if any, of the fair market  price of the
Company's stock at the date of the grant over the amount an employee must pay to
acquire the stock.

     Statements  of Financial  Accounting  Standards  No. 125,  "Accounting  for
Transfers and Servicing of Financial Assets and  Exstiguishments of Liabilities'
(SFAS No. 125) is effective for transfers and servicing of financial  assets and
extiguishments  of liabilities  occurring  after December 31, 1996, and is to be
applied prospectively. Earlier or retroactive applications is not permitted. The
new standard  provides  accounting  and  reporting  standards  for transfers and
servicing of financial  assets and  extiguishments  of liabilities.  The Company
does not expect adoption to have a material effect on its financial  position or
results of operations.

Reclassifications

     Certain  reclassifications  have been  made to  conform  the  prior  year's
amounts to the current year's presentation.

                                      F-14
<PAGE>

                MEDICAL DEVICE TECHNOLOGIES, INC. AND SUBSIDIARY
                          (A DEVELOPMENT STAGE COMPANY)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Going Concern

     These  financial  statements  have been prepared  assuming that the Company
will  continue  as a going  concern.  The  Company  has  recurring  losses  from
operations  and is dependent on the success of its three  medical  devices which
have yet to generate any significant  sales.  These conditions raise substantial
doubt about the Company's ability to continue as a going concern.

     The Company  plans on  achieving  certain  minimum  sales of the FAS device
during the next twelve months, but to meet its capital needs for this period the
Company will be required to obtain , and intends to seek,  additional sources of
financing,  which  cannot be  assured.  In the event the  Company can not obtain
additional financing, the Company would have to substantially curtail product as
well as  research  and  development  plans due to lack of funds.  The  long-term
viability of the Company is dependent on its ability to  profitably  develop and
market its current  products and to obtain the  financing  necessary to fund its
anticipated growth.

     The  financial  statements do not include any  adjustments  relating to the
recoverability  and  classification  of recorded  asset amounts or the amount of
liabilities  that might be necessary should the Company be unable to continue in
existence.

2. License Agreements

License agreements costs are as follows:
<TABLE>
<CAPTION>

                                           December 31,
               Useful Life           1996              1995
               -----------           ----              ----
<S>               <C>                 <C>               <C>
CRS            10 Years           $1,338,624        $1,038,624
ICP            10 Years              942,505           942,505
FAS            10 Years              486,188           245,000
                                  ----------        ----------
                                  $2,767,317        $2,176,129
Less: Accumulated amortization       903,149           627,887
                                  ----------        ----------
                                  $1,864,168        $1,598,242
                                  ==========        ==========
</TABLE>

Amortization expense was $275,262 and $222,612 for the years ended December 31,
1996 and 1995.

                                      F-15
<PAGE>

3. Short-term Notes Payable

     Pursuant to a Confidential  Private Placement  Memorandum dated October 27,
1995, the Company  effected  between  December 14, 1995 and December 27, 1995, a
private placement of short-term notes and 153,750 shares of Series I convertible
preferred stock. Of the $1,025,000 gross proceeds, $384,375 was allocated to the
preferred  stock and  represented  the original  issue  discount on the notes at
December  31,  1995.  The  proceeds of the private  placement  provided  working
capital.

     On January 24, 1996, the Company completed the private placement and issued
additional  short-term notes and 93,750 shares of Series I convertible preferred
stock. Of the additional $625,000 gross proceeds,  $234,375 was allocated to the
preferred stock and represented additional original issue discount on the notes.
The Company also utilized these proceeds for working capital.

     Notes sold in the  private  placement  bore  interest  at 10% per annum and
matured at the  earlier  of (i) the  expiration  of twelve  months  after  their
issuance,  (ii) receipt by the Company of at least  $3,000,000 in gross proceeds
from (a) a public or private sale of its securities, (b) a joint venture, or (c)
a licensing  agreement.  The  unamortized  original  issue  discount  was $0 and
$384,375  as of  December  31, 1996 and 1995,  respectively.  Subsequent  to the
public  offering in June 1996, the Company repaid these private  placement notes
in full.

     During the second quarter of 1996, the Company issued $350,000 in principal
amount  of 12%  short-term  notes  payable  to four  individuals  and two of the
Company's directors to finance its operations until its public offering could be
completed.  Subsequent to the public  offering in June 1996,  the Company repaid
these  short-term  notes in full (see Note 8).  Interest  paid  related to these
notes  amounted to $10,500 for the year ended  December 31, 1996.  In connection
with the issuance of these  short-term  notes,  the Company also issued  137,180
warrants to purchase  137,180  shares of common stock to the six  individuals at
exercise  prices from $1.26 to $1.38 which vested  immediately  and expire three
years from  issuance.  In  connection  with the  issuance of these  warrants the
Company  recognized,  based  on a  valuation  of  these  warrants,  $143,870  as
additional interest expense during the year ended December 31, 1996.

     During the year ended  December 31, 1995, the Company repaid a note payable
in the principal amount of $50,000 which existed at December 31, 1994.

4. Capital Lease Obligation

     Minimum  future lease  payments  under a capital lease for next year and in
aggregate are as follows:
<TABLE>
<CAPTION>
                                            Amount
                                            ------
<S>                                           <C>

Year-ending December 31, 1997               $1,660

Less:  Amount representing interest            557

Present value of minimum lease payments     $1,103
</TABLE>

                                      F-16
<PAGE>

5. Commitments

Operating Leases

     The Company is currently  leasing its offices under a three year  operating
lease which ends in April 1998.  Future  minimum lease  payments  under this and
other operating leases are as follows:
<TABLE>
<CAPTION>

Year-ending December 31,                Amount
------------------------                ------
<S>                                      <C>
        1997                           $69,851
        1998                            22,961
        1999                             7,331
        2000                             7,331
        2001                             4,576
                                       -------
                                      $112,050
                                      ========
</TABLE>
     Rent expense,  including month to month leases, was $88,157 and $54,642 for
the years ended December 31, 1996 and 1995, respectively.

Royalty Agreements

     In  June  1994,  the  Company  entered  into a  royalty  agreement  when it
purchased the exclusive  license and received the  technology  and  developments
relating to the FAS  device.  In 1996,  the  agreement  was revised  wherein the
Company purchased all past and future royalty  obligations from the licensor for
an additional  $81,188 and was also  extended for an additional  year so that it
now expires June 1, 2005. Accordingly,  previous payments made by the Company of
$160,000 at December 31, 1995 ($60,000 was classified as short-term and $100,000
as long-term)  have been  reclassified  to License  Agreements  (see Note 2). In
addition,  the Company  entered  into a royalty  agreement  when it obtained the
exclusive license to the Signal Modulation Barrier Monitor, which is a component
part of the FAS.  Pursuant  to this  license  agreement,  the  Company  will pay
royalties of 1% of the average retail sales price on all net sales,  through the
life of the future  patent,  when  registered.  The  Company  has  obtained  FDA
clearance for the FAS and began marketing the device in 1996.

     In August  1992,  the  Company  entered  into a royalty  agreement  when it
purchased the exclusive  license and  technological  rights  relating to the CRS
device. The Company will pay royalties to a party amounting to 5% of the average
retail  sales price on all net sales  subject to a minimum of $100,000  per year
starting  from 1996 and  ending in 1998.  The  Company is also  required  to pay
royalties of $100,000 in twenty equal quarterly installments of $5,000 beginning
January 1, 1997,  pertaining to calendar years 1994 and 1995.  Through  December
31,  1996,  the company has paid  $600,000 and issued  227,966  shares of common
stock pursuant to the original CRS license agreement.  The Company can terminate
this  agreement with 90 days written notice at which time all patent rights will
cease.  In 1996,  the  Company  purchased  the  future  royalty  rights  from an
individual for $300,000 and have capitalized this amount into License Agreements
(see Note 2). This payment reduced the royalty  percentage payable on the CRS by
50% of the original amount.

                                      F-17
<PAGE>

     In January  1993,  the Company  entered  into a royalty  agreement  when it
exercised  its option to enter into an exclusive  license  agreement for the ICP
device.  Under the terms of the agreement,  the Company will pay royalties equal
to 10% of the net sales proceeds from the ICP.  Minimum  payments of $75,000 and
$15,000 were made by the Company for the years ended December 31, 1996 and 1995.
The Company is  required to pay  additional  royalties  of $200,000  for each of
subsequent years through the life of the patent.  The Company can terminate this
agreement  with 90 days  written  notice,  at which time all patent  rights will
cease.

     Further, in accordance with a finder's agreement,  the Company is obligated
to pay royalties  equal to 8% of the gross sales of the ICP, as well as to issue
an  additional  1,000,000  restricted  shares of common stock to the finder when
gross sales of the ICP reach $10,000,000. The Company believes, on the advice of
counsel,  that it is not obligated to pay the 8% royalty or the 1,000,000 shares
of restricted  stock based on a breach of contract by the finder,  as the finder
failed to  reimburse  the Company for  consulting  fees in  accordance  with the
agreement.

Medical Advisory Agreements

     On January 1, 1997, the Company had agreements  with five medical  advisors
for a one- to two-year term. The agreements  provide for 15,000 shares of common
stock to be issued to each advisor per year, issued semi-annually.

Employment Agreements

     In August  1994,  the Company  entered  into an  exclusive  four-year  term
employment with the Chief Executive Officer.  The employment  agreement provides
for a base  salary of $162,000  per year in addition to one hundred  twenty-five
thousand  (125,000)  shares  of the  common  stock  at the end of two  years  of
continuous  satisfactory employment by the Company. On August 2, 1996, the Board
of Directors  changed the date which the Chief Executive  Officer is entitled to
received  these  shares to January 2, 1997.  In  addition,  the Chief  Executive
Officer  received  100,000 common stock purchase  warrants which are exercisable
over a five (5) year period ending August 31, 1999 at $2.00 per share.

     In addition,  in 1994, the Company entered into a severance  agreement with
the Chief  Executive  Officer.  The severance  agreement  provides,  among other
things, that in the event a change in control of the Company occurs or the Chief
Executive  Officer  is  involuntarily  terminated,  suffers a  disability  while
employed by the Company or dies while  employed by the  Company,  then the Chief
Executive Officer is entitled to receive certain benefits from the Company. Such
benefits may include some or all of the  following:  an amount based on the base
salary as provided for in the employment agreement; an amount based on the bonus
paid or payable to the Chief Executive Officer as provided for in the employment
agreement;  the right to receive common stock that shall vest  immediately;  and
the right to exercise  any  warrants or stock  options held by or granted to the
Chief Executive Officer under the employment  agreement or any stock option plan
of the Company or both,  health  insurance and disability  insurance.  The Chief
Executive Officer will not receive any benefits upon voluntarily  termination of
employment  with the Company or if the Company  terminates  the Chief  Executive
Officer "for cause",  which is defined as the conviction of the Chief  Executive
Officer after appeal of a felony.

                                      F-18

<PAGE>

     On August 2, 1996,  the Board of  Directors  extended  the  Employment  and
Severance  Agreements with the Chief Executive Officer for an additional one (1)
year period or until August 31, 1999.

     In March 1996, the Company terminated the services of a former officer. The
Company  entered into a  termination  agreement  with the former  officer  which
terminated his existing employment and severance  agreements,  and also provided
for mutual general releases. Under the termination agreement, the former officer
is  entitled  to receive  grants  awarded to him under his  original  employment
agreement of 100,000 shares of the Company's common stock on August 31, 1996 and
75,000 common stock purchase  warrants,  which expire on August 31, 1999 and are
exercisable at a price of $2.00 per share,  after the earlier of August 31, 1996
or the  completion  of a  public  offering  of  the  Company's  securities.  The
termination  agreement also provides for the former officer to receive  $357,667
over a 29 month period  commencing  on April 1, 1996 and ending August 31, 1998,
and 37,500 common stock purchase warrants which are exercisable, from August 31,
1998 through  August 31,  2001, at a price of $.80 per share. As of December 31,
1996 the obligation is $246,667.

     In January 1995, the Company entered into an exclusive employment agreement
with the Vice  President of Marketing and Sales for a three-year  term providing
for a base salary of $110,000 per annum.  This agreement also provides for fifty
thousand  (50,000)  shares of the Company's  common stock to be issued on August
31, 1996. On August 2, 1996,  the Board of Directors  changed the date which the
Vice  President  of  Marketing  and Sales is  entitled  to receive the shares to
January  2,  1997.   The  agreement  also  provides  for  warrants  to  purchase
thirty-seven thousand five hundred (37,500) shares of the Company's common stock
at $2.00 per share.  One-third of the  warrants  were issued on January 4, 1996,
and one-third  (1/3) of the warrants are to be issued on each of January 4, 1997
and 1998. The warrants are  exercisable  for a period of five (5) years from the
date of issuance.

     In March 1996, the Company entered into an exclusive  employment  agreement
with the Vice  President  of New  Business  Development  for a  three-year  term
providing for a base salary of $108,000 per annum.  The agreement  also provides
for twenty-five  thousand (25,000) shares of the Company's common stock;  12,500
shares of common  stock  will vest on March 15,  1997 and the  remaining  12,500
shares will vest on March 15, 1998.  In  addition,  the  agreement  provides for
warrants to purchase  thirty-seven  thousand five hundred (37,500) shares of the
Company's common stock at $.80 per share.  One-quarter (1/4) of the warrants are
to be issued on each of March 15, 1997,  1998,  1999 and 2000.  The warrants are
exercisable for a period of six (6) years from the date of issuance.

     In  March  1996,  the  Company  entered  into  a  non-exclusive  employment
agreement with the Chief Financial Officer for a three-year term providing for a
base salary of $60,000 per annum based upon a three day work week.  In the event
the Chief Financial  Officer's services are required by the Company in excess of
three days per week,  he is to be  compensated  at $600 per day. The  employment
agreement  provides  for twelve  thousand  five hundred  (12,500)  shares of the
Company's common stock; 6,250 shares of common stock will vest on March 15, 1997
and the  remaining  6,250 shares will vest on March 15, 1998.  In addition,  the
Chief Financial Officer is entitled to receive warrants to purchase  twenty-five
thousand  (25,000)  shares  of the  Company's  common  stock at $.80 per  share.
One-quarter  (1/4) of the  warrants  are to be issued on each of March 15, 1997,
1998,  1999 and 2000. The warrants are exercisable for a period of six (6) years
from the date of issuance.

                                      F-19
<PAGE>

Litigation

     The Company prevailed in two separate lawsuits in calendar year 1996.

     In one case  instituted in the Superior  Court of the State of  California,
County of San Diego, the Company was awarded after trial  $1,978,893  million in
damages and costs against  Chandler  Church and Company and affiliated  entities
based upon  claims  sounding in breach of  contract  and breach of  constructive
trust.

     In a second case commenced in the United States Bankruptcy Court,  Southern
District  of  California,  San Diego  Division,  the  Court,  in  dismissing  an
Involuntary Petition filed against the Company, found that the Petition had been
filed in "bad faith" and  consequently  awarded the Company punitive damages and
attorneys'  fees against  Chandler  Church and Company and affiliated  entities,
totaling   $761,888.   The  Company  thereafter  entered  into  an  out-of-Court
settlement with one of the parties which provides for the payment to the Company
of the stipulated sum of $25,000.

     The Company is pursuing collection efforts for the damages,  costs and fees
awarded to it in the  aforementioned  cases, but is uncertain whether it will be
able to recover any or all of the monies awarded to it. Accordingly, the Company
has not  recorded  a  receivable  associated  with  this  litigation  due to the
uncertainty.

     There are no other legal  proceedings to which the Company is a party which
could have a material adverse effect on the Company.

6. Stockholders' Equity

Preferred Stock

     In April  1995,  the  Company  amended its  Articles  of  Incorporation  to
authorize 10,000,000 shares of $.01 par value preferred stock. In December 1995,
the Company further amended its Articles of Incorporation  to authorize  187,500
of  Series I  convertible  preferred  stock  in  conjunction  with  its  private
placement  of  short-term  notes  payable  (Note 3). As a result of this private
placement  offering,  the Company  issued 153,750 shares of Series I convertible
preferred  stock with an assigned value of $384,375 (see Note 3). On January 19,
1996,  the Company again amended its Articles of  Incorporation  to increase the
authorized  shares of Series I  convertible  preferred  stock  from  187,500  to
247,500.  On January 24, 1996, the Company issued an additional 93,750 shares of
Series I convertible  preferred stock. These preferred shares were considered an
original  issue  discount  associated  with the notes payable and were amortized
over approximately the first five months of 1996 (see Note 3).

     On June 24,  1996,  the Company  completed a public  offering of  1,500,000
shares of 6% cumulative  convertible  Series A preferred  stock (the  "Preferred
Stock") and 1,500,000 redeemable common stock purchase warrants (the "Redeemable
Warrants")  resulting in gross proceeds of $7.65 million.  The Company  received
approximately $4 million after repayment of short-term debt and costs associated
with the offering.  The Preferred  Stock is convertible  into four (4) shares of
common stock at $1.25 per share and each  Redeemable  Warrant enables the holder
to  purchase  two  shares  for a total of  $3.75.  As part of the  terms of this
offering,  the holders of the Series I  convertible  preferred  stock  exchanged
their preferred stock for the Preferred Stock on a one for one basis at no cost.
Each share of Preferred Stock will by its terms automatically  convert into four
(4) shares of common stock on July 24,  1997,  unless  earlier  converted by its
holder.

     In August 1996, the Company received net proceeds of $459,800 as the result
of the underwriter's  exercise of its  over-allotment  option under the June 24,
1996 public offering to purchase an additional 225,000  Redeemable  Warrants and
an additional  100,000 shares of Preferred Stock.  These proceeds were offset by
additional  offering costs of $93,203  related to the June 1996 public  offering
that were recorded during the third quarter.

                                      F-20
<PAGE>

Common Stock

     On June 20,  1996,  the  directors  of the Company  approved a  one-for-two
reverse split of the common stock.  All share  balances have been  retroactively
adjusted to reflect the reverse stock split.

     During the second  quarter of 1995,  the Company  raised  $974,769  for the
issuance of 741,088 shares of common stock.

     During June and July 1995, the Company raised $275,000 from the issuance of
convertible debentures. These notes were converted into 687,500 shares of common
stock during December 1995.

     During the year ended  December  31,  1995,  the Company  received  cash of
$30,000 for the issuance of 43,000 shares of common stock.

     During  the year  ended  December  31,  1996,  as a result  of  individuals
exercising 162,500 private warrants, the Company issued 162,500 shares of common
stock for $275,000.

     On September 9, 1996, the Company issued 71,658 shares of common stock as a
dividend for the period through  August 31, 1996 for the Preferred  Stockholders
of record as of August 12, 1996.  On November 11, 1996,  the Company  declared a
second common stock  dividend of 111,534  shares for Preferred  Stockholders  of
record as of December 10, 1996.  The shares were issued  subsequent  to year end
and, accordingly,  have been recorded as common stock dividend  distributable in
additional paid-in capital at December 31, 1996. The number of shares to be paid
on the Preferred  Stock as a dividend is  calculated  based on the 10 day moving
average  price of the common stock  during the 30 days prior to the  declaration
date,  subject to a maximum price of $3.00 and minimum price of $1.20 per share.
Fractional shares are rounded up.

     During the fourth quarter of 1996,  individuals  exercised their rights and
converted  504,000 shares of the Preferred Stock into 2,016,000 shares of common
stock.

                                      F-21
<PAGE>

Warrants

     The  Company  has  issued  warrants  in  connection  with  various  private
placements,  the secondary public offering in 1996, and certain other agreements
with and  compensation  to employees  and  consultants.  The  Company's  private
warrants allow the holder to purchase one share of the Company's common stock at
a specified  price and the public warrants each allow the holder to purchase two
shares at $1.875 per share.

Private and public warrants granted and issued by the Company consisted of:
<TABLE>
<CAPTION>


                                                  Number of     Per share        Exercise
                                                  warrants      Exercise price   period
<S>                                                 <C>           <C>              <C>
-----------------------------------------------------------------------------------------------------
Outstanding at January 1, 1995                    410,000        $2.00           8/31/94-9/23/99
     Granted                                      476,250        $1.85           8/31/94-1/4/01
-----------------------------------------------------------------------------------------------------
Outstanding at December 31, 1995                  886,250        $1.92           8/31/94-1/4/01
     Granted                                      439,680        $1.00           4/22/96-8/1/03
     Issued (public-Redeemable Warrants)        1,972,500        $1.88           6/24/96-6/23/99
     Exercised (private only)                   (162,500)        $1.69           8/31/94-8/31/97
     Expired (private only)                       (6,250)        $1.20           5/28/96
-----------------------------------------------------------------------------------------------------
Warrants outstanding at December 31, 1996       3,129,680        $2.96           8/31/94-8/1/03
     Equivalent common shares                   5,102,180        $1.81           8/31/94-8/1/03
-----------------------------------------------------------------------------------------------------
     Warrants exercisable                         835,930        $1.86           8/31/94-8/7/01
     Equivalent shares resulting                  835,930
-----------------------------------------------------------------------------------------------------
</TABLE>

     With regard to the  issuance of 150,000  warrants to an officer at $.80 per
warrant  during  the year  ended  December  31,  1995,  compensation  expense of
$153,000  was  recorded  as  the  fair  market  value  of  the  warrants  at the
measurement date.  Compensation  expense was not recorded for any other issuance
of warrants to officers or  employees  as the fair market  value of the warrants
was below the exercise price at December 31, 1996.

                                      F-22
<PAGE>

     Information relating to warrants at December 31,1996 summarized by exercise
price is as follows:
<TABLE>
<CAPTION>

                                    Outstanding                                 Exercisable
                               ------------------------------          ----------------------------
Exercise Price    Equiv.              Weighted Average                 Equiv.    Weighted Average
Per Share         Shares       Life (Year)     Exercise Price          Shares    Exercise Price
 --------------------------------------------------------------------------------------------------
<S>              <C>             <C>              <C>                  <C>            <C>

 $.80           435,000           6              $0.80               150,000         $0.80
 1.26            99,684           3               1.26                99,684          1.26
 1.29            19,380           3               1.29                19,380          1.26
 1.38            18,116           3               1.38                18,116          1.38
 1.88         3,945,000           3               1.88                     0           N/A
 2.00           460,000         4.6               2.00               437,750          2.00
 2.50            25,000           2               2.50                25,000          2.50
 3.00            50,000           2               3.00                50,000          3.00
$4.00            50,000           2              $4.00                50,000         $4.00
              -------------------------------------------------------------------------------------
                 5,102,180      3.6              $2.96               835,930         $1.86
</TABLE>

     Had compensation cost for stock-based compensation been determined based on
the fair value at the grant dates  consistent  with the method of SFAS 123,  the
Company's  net income and  earnings  per share for the years ended  December 31,
1996 and 1995 would have been reduced to the pro forma amounts  presented below:
<TABLE>
<CAPTION>

                                             1996                   1995
--------------------------------------------------------------------------------
<S>                                          <C>                     <C>
Net loss
    As reported                           $(4,589,413)          $(3,140,828)
    Pro forma                             $(4,706,420)          $(3,777,091)

Net loss attributable to common stock
    As reported                           $(4,824,005)          $(3,140,828)
    Pro forma                             $(4,941,012)          $(3,777,091)

Loss per share
    As reported                           $(.98)                $(.94)
    Pro forma                             $(1.00)               $(1.13)
</TABLE>

     The fair value of warrants is estimated on the date of grants utilizing the
Black-Scholes option pricing with the following weighted average assumptions for
years  ended  December  31, 1996 and 1995:  expected  life of 5.4 and 3.7 years,
expected  volatility  of 98% and 114%,  risk-free  interest  rate of 6% and a 0%
dividend  yield.  The  weighted  average  fair value at the date of grant of the
warrants granted during 1996 and 1995 approximated $1.13 and $1.76 per warrant.

     Due to the fact that the  Company's  warrants  vest over several  years and
additional  awards  are made each  year,  the  above  proforma  numbers  are not
indicative of the  financial  impact had the  disclosure  provisions of FASB 123
been applicable to all years of previous  warrant  grants.  The above numbers do
not include the effect of warrants granted prior to 1995 that vested in 1995 and
1996.

                                      F-23
<PAGE>

7. Employee Benefit Plans

Compensatory Stock Benefit Plans

     In each of the four most current  years,  the Company's  board of directors
have  annually  approved  a stock  compensation  plan,  the  most  recent  which
registered  750,000 shares under Form S-8 on January 10,  1997, whereby services
are  obtained in exchange  for  issuance of free  trading  stock of the Company.
Shares may be awarded under this plan until  January 10, 1999.  During the years
ended December 31, 1996 and 1995, 451,205 and 605,914 shares,  respectively,  of
common  stock  under Form S-8  registrations  were  issued for  directors  fees,
research  and  development,   advertising  and  public  relations,   legal,  and
professional services provided to the Company.

     Beginning in 1997,  compensation  recognized  relating to accrued  employee
stock  grants and  warrants is based on the  pro-rata  common stock and warrants
earned and the market value of the Company's stock at the time of issuance (fair
value method) and amortized over the applicable period.

Defined Contribution Plan

     In August 1996, the Company adopted the Medical Device  Technologies,  Inc.
Employee Retirement Savings and Profit Sharing Plan (the "Plan").  The Plan is a
defined   contribution   profit  sharing  plan  which  allows  the  employee  to
participate once hired. Total expense for its 10 full time employees amounted to
$1,197 for the year ended December 31, 1996.

8. Related Party Transactions

     During the year ended  December  31,  1996,  two  directors  of the Company
loaned the Company $200,000 and $25,000,  respectively,  until the Company could
complete its public  offering (see Note 3). The interest rate and terms of these
notes were made at arms  length.  The notes were  repaid by the  Company in 1996
once the offering was complete.  Interest paid to these individuals  amounted to
$6,750  for  the  year  ended  December  31,  1996.  A  director  also  received
compensation of $7,500 for general  corporate  consulting  services.  During the
year ended December 31, 1995, a director  received  compensation  of $25,297 for
computer and other general corporate consulting services.

                                      F-24
<PAGE>

9. Income Taxes

     The types of  temporary  differences  between  the tax bases of assets  and
liabilities  and their  financial  reporting  amounts  that give rise to the net
deferred tax asset and  liability,  and their  approximate  tax effects,  are as
follows:
<TABLE>
<CAPTION>

December 31,                                    1996                1995
------------                                    ----                ----
<S>                                              <C>                 <C>

Inventory reserve                   $           3,421       $        -
Accrued vacation                                4,385                -
Excess tax depreciation over book                -                 (9,715)
Investment tax credit carryforward               -                  6,941
Other                                             975                -
Net operating loss carryforwards            6,141,687           4,640,045
Valuation allowance                        (6,150,468)         (4,637,271)
                                           -----------         -----------

TOTAL                               $            -          $        -
                                           ===========         ===========
</TABLE>

     At  December  31,  1996,  the  Company  had  approximately  $16,430,000  in
operating loss carryovers to offset future taxable income. These carryovers will
expire in various  years  through  2011.  As a result of a change in  ownership,
federal tax rules impose  limitations  on the use of net operating  losses.  The
limitations  will reduce the amount of these  benefits that will be available to
offset future taxable  income each year,  starting with the year of an ownership
change,  which the issuance of the preferred  stock in the  Company's  June 1996
public  offering  was deemed to be. The dollar  amount of these  limitations  is
indeterminable  at this time.  In  addition,  the  Company  provides a valuation
allowance  for a deferred  tax asset when it is more likely  than not,  based on
available evidence,  that some portion or all of the deferred tax asset will not
be realized.  In management's  opinion, it cannot determine if it is more likely
than not that the Company will generate  sufficient future taxable income before
2011,   the  year  after  which  all  current   available  net  operating   loss
carryforwards  expire,  to  utilize  all  of the  Company's  deferred  asset.  A
valuation  allowance has been recognized for the full amount of the deferred tax
asset of $6,150,468.

10. Fourth Quarter Adjustments and Transactions

     During the fourth  quarter of the year ended December 31, 1995, the Company
recorded net  adjustments in the amount of $748,577  relating to the reversal of
an estimated loss accrual for litigation of $286,996,  an adjustment to deferred
compensation of $118,969,  the recording of prepaid  royalties of $120,000,  and
the recording of amortization expense of $222,612. The adjustments decreased net
loss by $.20 per share for the year ended December 31, 1995.

11. Supplemental Earnings Per Share Data

     On  December  18,  1995,  $275,000  of  convertible  promissory  notes were
converted into common stock. Had this conversion  occurred on June 23, 1995, the
date of  issuance,  the  reported  net loss per common  share for the year ended
December 31, 1995 would have decreased $.04 to ($.90).

                                      F-25