SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-KSB

[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
    OF 1934 [FEE REQUIRED] FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997.

[ ] 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 0-25852
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                           THE MED-DESIGN CORPORATION
                 ----------------------------------------------
                 (Name of small business issuer in its charter)

           Delaware                                      23-2771475
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(State or other jurisdiction of            (I.R.S. Employer Identification No.)
incorporation or organization)

    2810 Bunsen Avenue, Ventura, CA.                        93003
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(Address of principal executive offices)                  (Zip Code)

Issuer's telephone number: (805) 339-0375
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Securities registered under Section 12(b) of the Act:

        Title of each class           Name of each exchange on which registered

               None

Securities registered pursuant to Section 12(g) of the Act:

         Common Stock, Par Value $0.01 Per Share
         ---------------------------------------
                     (Title of Class)

Check whether issuer (1) filed all reports required to be filed by Section 13 or
15(d) of the Securities 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       No    X
                               -----     -----

Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B contained herein, 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 [ ].

The Issuer's revenues for fiscal year ended December 31, 1997:  None

The aggregate market value of voting stock held by non-affiliates of the
registrant (computed by reference to the last reported sale price of such stock
on March 14, 1998): $25,567,979

Documents incorporated by reference:

Certain portions of the registrant's definitive Proxy Statement for the Annual
Meeting of Stockholders (which is expected to be filed with the Commission not
later than 120 days after the end of the registrant's last fiscal year) are
incorporated by reference into Part III of this Report.

             Total number of consecutively numbered pages is______.
                     The Exhibit Index appears on page____.

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                           FORWARD-LOOKING STATEMENTS

         In addition to historical information, this Annual Report contains
forward-looking statements relating to such matters as anticipated business
performance, business prospects, technological developments, product
development, new products, research and development activities and similar
matters. The Private Securities Litigation Reform Act of 1995 provides a safe
harbor for forward-looking statements. In order to comply with the terms of the
safe harbor, The Med-Design Corporation (the "Company") notes that these
forward-looking statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from those reflected in these
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, those discussed in the sections of this Annual Report
entitled "Business - Products Under Development," "Business - Research and
Development," "Business - Competition," "Business - Marketing and Sales," "
Business Manufacturing," "Business - Patents and Proprietary Rights," " Business
- Government Regulation," "Management's Discussion and Analysis or Plan of
Operation - Results of Operation," "Management's Discussion and Analysis or Plan
of Operation - Plan of Operation," "Management's Discussion and Analysis or Plan
of Operation - Liquidity and Capital Resources." Readers are cautioned not to
place undue reliance on these forward-looking statements, which reflect
management's analysis only as of the date hereof. The Company undertakes no
obligation to publicly revise these forward-looking statements, to reflect
events or circumstances that arise after the date hereof. Readers should
carefully review the risk factors described in other documents that the Company
files from time to time with the Securities and Exchange Commission and in
public communications made by the Company.

                                     PART I

ITEM 1. BUSINESS

General Developments of the Company

         The Company was incorporated in Delaware on November 14, 1994. On
February 28, 1995, The Med-Design Corporation, a Pennsylvania corporation,
incorporated on December 13, 1993, was merged with and into the Company.

         The Company was formed to acquire Med-Design, Inc., a California
corporation ("MDI") incorporated on October 26, 1990, which owned patent and
proprietary rights to certain safety medical devices, including the Safety
Syringe, the Safety Phlebotomy Set and the Safety Catheter (as hereinafter
defined).

         On March 14, 1995, the Company organized a wholly-owned subsidiary, MDC
Investment Holdings, Inc. ("MDC Holdings"), under the laws of the State of
Delaware. The Company entered into an Agreement of Merger on April 5, 1995 (the
"Merger Agreement") with MDC Holdings and MDI, pursuant to which MDI merged with
and into MDC Holdings, the surviving corporation (the "Merger"), and the Company
issued and delivered 1,219,742 shares of Common Stock to the MDI shareholders in
exchange for their shares of MDI common stock. In addition, the Company issued a
non-interest bearing promissory note in the principal amount of $1,000,000 (the
"Note") payable to the former MDI shareholders, which was collateralized by all
of the issued and outstanding shares of the common stock, $0.01 par value per
share, of MDC Holdings. In connection with the Merger, the Company issued and
delivered 3,572 shares of Common Stock to a former noteholder of MDI to satisfy
an obligation of MDI. The Company paid the Note in full from the net proceeds of
the Company's Initial Public Offering (as defined below).

         As a result of the Merger, MDC Holdings became the sole owner of all of
the worldwide intellectual property rights of MDI including patents, patent
applications, trademarks and trademark applications relating to the Safety
Syringe, Safety Phlebotomy Set and Safety Catheter.

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<PAGE>

         Immediately following the consummation of the Merger, MDC Holdings
transferred all of the assets it acquired in the Merger, other than its patents
and other intellectual property, and all of its liabilities to MDC Research
Ltd., a California corporation and wholly-owned subsidiary of MDC Holdings.

         In June 1995, the company completed an initial public offering of
3,450,000 shares of Common Stock, par value $0.01 per share (the "Initial Public
Offering"). The net proceeds to the Company from the Initial Public Offering
were approximately $9,526,000.

         On January 23, 1997, the Company completed a sale ("Placement") of
1,000,000 shares of Common Stock at a price of $5.00 per share pursuant to an
offering to certain "accredited investors" (pursuant to Regulation D of the
Securities Act of 1933, as amended). The Company received proceeds of
approximately $4,617,000, net of expenses incurred in connection with the
Placement.

Description of the Business of the Company

         The Company designs and develops safety medical devices intended to
reduce the incidence of accidental needlesticks. The Company has three core
products under development: the Retractable Needle Hypodermic Syringe (the
"Safety Syringe"), the Retractable Needle Vacuum Tube Phlebotomy Set (the
"Safety Phlebotomy Set") and the Retractable Needle Intravenous Catheter
Insertion Device (the "Safety Catheter"). These products are similar in
appearance and size to the standard devices in use. Such products incorporate
the Company's novel proprietary retraction technology that enables a health care
professional, with no substantial change in operating technique and using one
hand, to permanently retract the needle into the body of the device which can
then be safely discarded.

         The Company also has several new products which are in various stages
of development. These new product developments include the Safety Pre-Filled
Vial Injector, Safety PICC Introducer Catheter Insertion Device, Safety
Guidewire Introducer, Safety Winged Set Blood Collection Needle, and Safety
Arterial Blood Gas Syringe and a number of additional products that have not
been prioritized for development as yet. These products also incorporate the
Company's proprietary retraction technology and are designed to reduce the
incidence of accidental needlesticks. The Company has developed various sizes
and designs of these products to accommodate the specific requirements of
potential strategic allies for medical and dental applications.

         The Company believes that its safety medical devices can assist
employers in meeting standards promulgated by Occupational Safety and Health
Administration ("OSHA") to help eliminate or minimize occupational exposure to
bloodborne pathogens. The Company has patent rights and patents pending with
respect to certain of its products in the United States and certain foreign
countries.

         The Company completed relocation of its corporate headquarters to 2810
Bunsen Ave, Ventura, California 93003. The Company's telephone number is (805)
339-0375.

Industry

         Accidental Needlesticks

         Needles for hypodermic syringes, phlebotomy sets and intravenous
catheters are used for introducing drugs and other fluids into the body and
drawing out blood and other bodily fluids. Among the applications for needles
are the injection of drugs (hypodermic syringes), the drawing of blood
(phlebotomy sets) and the infusion of drugs and nutrients (catheters). There is
an increasing awareness of the potential danger of infections and illness that
result from accidental needlesticks and of the need for safer needle devices
which reduce the number of accidental needlesticks that occur each year. Needles
can be broadly categorized as standard needles and safety needles. Safety
needles are designed to perform the same functions as standard needles and to
reduce the risk of accidental needlesticks and the potential danger of
infections and illnesses resulting therefrom.

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<PAGE>

         Infections contracted as a result of accidental needlesticks are a
major concern to healthcare institutions, healthcare workers, sanitation and
environmental services workers and the regulatory agencies charged with the task
of making their working environment safe. Accidental needlesticks may result in
the spread of infectious diseases such as Hepatitis B, HIV, which may lead to
AIDS, diphtheria, gonorrhea, typhus, herpes, malaria, rocky mountain spotted
fever, syphilis and tuberculosis. According to a December 1992 report issued by
the American Hospital Association, an estimated 800,000 occupational
needlesticks occur nationwide each year. The number of reported needlesticks,
however, is believed to be only a portion of the actual number of occurrences.

         The possibility of healthcare workers becoming infected from
contaminated needles has caused, and continues to cause, a great deal of concern
in the healthcare field and the agencies regulating the area. OSHA has adopted
regulations requiring employers to institute universal precautions to prevent
contact with blood and other potentially infectious material. OSHA's regulations
also require employers to establish engineering controls (e.g., sharps disposal
containers and self-sheathing needles) and safe work practices to ensure
compliance with these universal precautions. OSHA does not mandate specific
technologies; rather, employers are permitted to choose the most appropriate and
effective safety control devices to meet their specific institutional needs.
According to OSHA guidelines, while employers do not have to institute the most
sophisticated engineering controls, they must evaluate the effectiveness of
existing controls and evaluate the feasibility of instituting more advanced
engineering controls. OSHA specifically prohibits the recapping, bending or
removal of needles, unless there is no feasible alternative or if required for a
specific medical procedure. If recapping, bending or removal is necessary,
workers must use either a mechanical device or a one-handed technique.

         In April 1992, the United States Food and Drug Administration ("FDA")
issued a safety alert to hospitals warning of the risks of needlestick injuries
from the use of hypodermic needles with intravenous equipment. Among other
things, the safety alert stated that although the FDA could not recommend
specific products, it urged the use of needleless systems or recessed needle
system devices with a fixed safety feature. According to the alert, (1) a fixed
safety feature should provide a barrier between the hands and needle after use;
(2) the safety feature should allow or require the worker's hand to remain
behind the needle at all times; (3) the safety feature should be an integral
part of the device, and not an accessory; (4) the safety feature should be in
effect before disassembly and remain in effect after disposal to protect the
users and trash haulers and for environmental safety; and (5) the safety feature
should be as simple as possible, and require little or no training to use
effectively.

         In addition, the U.S. government's Centers for Disease Control and the
National Institute of Health have published guidelines that specify that needles
should not be re-sheathed, bent, broken, removed from disposable syringes or
otherwise manipulated by hand because of the potential for needle stick injury,
with the associated risk of blood-related infection.

         As a result of the above mentioned regulations and guidelines,
healthcare institutions utilize equipment, including safety needles, and work
practices that offer greater protection for healthcare workers than previously
provided.

         Market for Needles and Safety Needles

         Safety Needle Syringes. The Company's marketing strategy for its Safety
Syringe sales will be directed at the foreign markets, principally Western
Europe and Japan. The Company is also reassessing the possibilities for
marketing the Safety Syringe in United States. Based upon the limited data
available, the Company estimates the market for disposable syringes and needles
in Western Europe and Japan was approximately 5.2 billion units in 1995, and is
projected to increase to approximately 6.0 billion units in 1998. There is
presently no data available to the Company to determine what percentage safety
syringe and needle devices have or will have of the overall disposable syringe
and needle market in Western Europe and Japan.

         Phlebotomy Sets. Based upon the limited data available, the Company
estimates that the annual United States market for vacuum tube phlebotomy sets
was approximately 1.5 billion units in 1995 and that the worldwide market for
phlebotomy sets is two times the size of the United States market, implying a
total annual worldwide market of approximately 3 billion units in 1995. The
Company does not have more current data. There is presently no data available to
the Company to determine what percentage safety phlebotomy sets have or will
have of the overall market for phlebotomy sets.

                                        4

<PAGE>

         Intravenous Catheters. The Theta Corporation, in its January 1996
Report on Catheters, expected 1995 sales of catheters to be approximately 228
million catheters in the U.S. and approximately 620 million catheters worldwide.
The Company believes that its Safety Catheter will have a broad application for
catheter placement which requires insertion of the catheter entry cannula using
a steel needle. The types of catheters which require a catheter insertion device
include intravenous, central venous, oximetry, thermodilution, radiology and
angiographic catheters, which according to a July 1993 Theta Corporation Report,
constitute approximately 50% of the total unit market for catheters. The January
1996 Theta Corporation Report estimates that the unit market annual growth rate
for I.V. catheter devices worldwide to be approximately 10% through 2000. The
January 1996 Theta Corporation Report on Catheters also projected sales for the
market for I.V. catheter devices in 1996 to be approximately 679 million units
worldwide. There is presently no data available to the Company to determine what
percentage safety catheter insertion devices have or will have of the overall
market for catheter insertion devices.

Products Under Development

         The Company continues to modify and improve the design of its three
core products: the Safety Syringe, Safety Phlebotomy Set and Safety Catheter
(collectively, "Core Products"). The Company continues to modify and enhance the
design of such products in order to optimize ergonomic performance, improve
manufacturability and to reduce manufacturing costs. The Company has developed
prototypes for such products, and continues to develop additional generation's
of prototypes to represent any additional modification to their design.

         Safety Syringe. The Safety Syringe is similar in appearance, size and
performance to a standard disposable syringe, but can be rendered safe with no
substantial change in operation technique, using one hand. The operation of the
Safety Syringe is conventional up to the point where the plunger has reached its
full travel, and all the medication has been delivered. Then, by applying
additional pressure to move the plunger beyond the normal stop, the needle
automatically and fully retracts into the body of the syringe. The needle is
sealed in place and is rendered harmless and inoperable. The syringe and needle
cannot thereafter be used again. The entire retraction procedure takes only a
fraction of a second to complete. The Safety Syringe may then be safely handled
so that disposal does not pose a health risk. The Safety Syringe is easy to use
and provides visual and audible confirmation that the needle has been safely
retracted after injection. The Safety Syringe can be manufactured with needles
of various gauges and sizes and with barrel sizes, one through sixty cubic
centimeters.

         Safety Phlebotomy Set. Phlebotomy sets (Blood Collection Needles) are
used to obtain a sufficient volume of blood for a variety of diagnostic
procedures. The Company's Safety Phlebotomy Set is similar in appearance, size
and performance to a standard phlebotomy set and works with substantially all
standard phlebotomy set accessories. The MDC Safety Phlebotomy set is similar in
appearance, size, and performance to a standard disposable device, except that
it can be rendered safe by activating the proprietary mechanism. The operation
of the Safety Phlebotomy set is conventional up to the point where sufficient
fluids have been extracted. Then, by depressing a button on the barrel, the
needle automatically and fully retracts into the device, where it is then held
in place and is rendered harmless and inoperable. The Safety Phlebotomy Set and
needle cannot thereafter be used again. The entire retraction procedure takes
only a fraction of a second to complete. The Safety Phlebotomy Set then may be
safely handled so that disposal does not pose a health risk. The Safety
Phlebotomy Set is easy to use and provides visual and audible confirmation that
the needle has been safely retracted after use.

         Safety Catheter. An intravenous catheter includes a flexible tube that
is used to inject or continuously deliver fluids into a patient. Intravenous
catheters are inserted by catheter insertion devices into a patient by a needle
within the flexible catheter tube. The Med-Design Safety Catheter is similar in
appearance, size and performance, to a standard disposable device, except that
it can be rendered safe by activating the proprietary mechanism. The operation
of the Safety Catheter is conventional until after the insertion needle is
partially removed from the flexible catheter. Then, upon further removal from
the catheter, the needle automatically and fully retracts into the body of the
Insertion Device. This actuation method is totally passive and insures that the
safety feature (needle retraction) is deployed. The needle is held in place and
is rendered harmless and inoperable. The Safety Catheter and needle cannot
thereafter be used again. The entire retraction procedure takes only a fraction
of a
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<PAGE>

second to complete. The Safety Catheter then may be safely handled so that
disposal does not pose a health risk. The Safety Catheter is easy to use and
provides visual and tactile confirmation that the needle has been safely
retracted after use.

         In addition, the Company has focused on a number of new products for
development. Five of these products have been designated for priority
development, including the Safety PICC Introducer Catheter Insertion Device, the
Safety Guidewire Introducer, the Safety Winged Set Blood Collection Needle, the
Safety Arterial Blood Gas Syringe Needle and the Safety Pre-Filled Vial Injector
(collectively, the "New Products"). The New Products are in various stages of
development, and prototyping.

         Safety PICC Introducer Catheter Insertion Device. The Safety PICC
("Peripherally Inserted Central Catheter") Introducer Catheter Insertion Device
is used to place an axially splitable flexible introducer catheter. The
introducer is used to place a PICC for long term venous access to deliver fluids
into a patient. The splitable introducer catheter is inserted by the insertion
device into patients, by a needle within the splitable flexible catheter. Once
placed, a PICC is inserted within the splitable catheter and into the patient's
vein. The splitable catheter is withdrawn from the patient and peeled apart for
removal from the PICC. The Safety PICC Introducer Catheter Insertion Device is
similar in appearance, size and performance to a standard disposable device,
except that it can be rendered safe by activating the proprietary mechanism. The
operation of the device is conventional until after the insertion needle is
partially removed from the splitable flexible catheter. Then, with activation of
the proprietary retraction, the needle automatically and fully retracts into the
body of the device, where the needle is held in place and is rendered harmless
and inoperable. The Safety PICC Introducer Catheter Insertion Device cannot
thereafter be used again. The entire retraction procedure takes only a fraction
of a second to complete. The device may then be safely handled so that disposal
does not pose a health risk. The Safety PICC Introducer Catheter Insertion
Device is easy to use and provides visual and audible confirmation that the
needle has been safely retracted after use.

         Safety Guidewire Introducer. The Safety Guidewire Introducer includes a
thin stainless steel guidewire attached in a slidable fashion to the back end of
the barrel. The guidewire slides through the needle of the Introducer and is
used to place the guidewire in the patients vein. Once the guidewire is placed,
a mid-line or other long term type indwelling catheter is slid over the wire,
and the guidewire is removed. The Safety Guidewire Introducer needle is
withdrawn from the patient's vein once the guidewire is advanced to the desired
position. When the Safety Guidewire Introducer is pulled rearward completely off
the guidewire, the introducer needle can be safely and easily retracted within
the device. The operation of the device is conventional until after the
insertion needle is removed from the guidewire. Then, with a simple action of
releasing a safety latch and pushing the plunger, the needle automatically and
fully retracts into the body of the device, where the needle is held in place
and is rendered harmless and inoperable. The Safety Guidewire Introducer cannot
thereafter be used again. The entire retraction procedure takes only a fraction
of a second to complete. The device may then be safely handled so that disposal
does not pose a health risk. The Safety Guidewire Introducer is easy to use and
provides visual and audible confirmation that the needle has been safely
retracted after use.

         Safety Winged Set Blood Collection Needle. The Safety Winged Set Blood
Collection Needle is used to obtain a sufficient volume of blood for a variety
of diagnostic procedures. The Company's Safety Winged Set Blood Collection
Needle is similar in appearance, size and performance to a standard non-safety
winged set, except that it can be rendered safe by activating the proprietary
mechanism. The device works with substantially all standard phlebotomy set
accessories. The operation of the Safety Winged Set Blood Collection Needle is
conventional up to the point where sufficient fluids have been extracted. Then,
when retraction is actuated by depressing a button on the side of the barrel,
the needle automatically and fully retracts into the device, where the needle is
held in place and is rendered harmless and inoperable. The Safety Winged Set
Blood Collection Needle cannot thereafter be used again. The entire retraction
procedure takes only a fraction of a second to complete. The Safety Winged Set
Blood Collection Needle may then be safely handled so the disposal does not pose
a health risk. The Safety Winged Set Blood Collection Needle is easy to use and
provides visual and audible confirmation that the needle has been safely
retracted after use.

         Safety Arterial Blood Gas Syringe Needle. The Safety Arterial Blood Gas
Syringe Needle is used to

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obtain a small (0.5 - 3.0 ml) sample of arterial blood, as opposed to venous
blood. This type of blood sampling requires a unique procedure that insures
accurate blood analyzing. The Safety Arterial Blood Gas Syringe Needle is
designed to be attached to any standard non-safety blood gas syringe as you
would attach a non safety needle. The Safety Arterial Blood Gas Syringe Needle
is used in the same way as a standard non-safety device needle, except that it
can be rendered safe by activating the proprietary mechanism. Essentially, the
syringe plunger is preset to the desired fill level by pulling the plunger
rearward. Then arterial access is made and the syringe fills due to blood
pressure, allowing the trapped air to escape through a hydrophobic vent located
on the plunger seal. Once full, the flow of blood stops upon contact with the
vent and the needle is withdrawn. Immediately, while still holding the syringe
somewhat like a pencil, the actuator button is pushed and the needle retracts
within the needle housing. The sealed needle housing can then be safely
discarded into an appropriate sharps container. A venting or sealing cap is
attached to the syringe and then placed in an ice tray for delivery to the
laboratory. Processing at the laboratory is conventional, since the front of the
syringe barrel is fitted with a standard Luer taper. This design eliminates the
requirement of removing a contaminated sharp needle before mounting a vent or
cap to the syringe.

         Safety Pre-Filled Vial Injector. The Safety Pre-Filled Vial Injector is
a syringe type device, which allows medication to be injected into the patient
directly from a pre-filled vial. The pre-filled vial is an existing product used
by many pharmaceutical manufacturers and contains fluid medication. These
pre-filled vials have an elastomeric piston comprising a slidable fluid seal
within the forward end of the vial to allow for injection directly from the
vial. The slidable piston is threaded onto the rear end of the stationary
plunger and, upon injection, is moved rearward into the vial by pushing the vial
forward into the main housing and delivering the fluid through a tubular needle
extending from the forward end of the main housing. The operation of the Safety
Pre-Filled Vial Injector is identical to the operation of a conventional syringe
up the point where the vial has reached its full travel, and all the medication
has been delivered. The safety retraction is actuated by moving the vial further
forward, causing the needle to automatically and fully retract into the body of
the device, where the needle is held in place and is rendered harmless and
inoperable, and the Safety Pre-Filled Vial Injector cannot be used again. The
Safety Pre-Filled Vial Injector may be safely handled so that disposal does not
pose a health risk. The Safety Pre-Filled Vial Injector is easy to use and
provides visual and audible confirmation that the needle has been safely
retracted after injection, and can be manufactured for vials and needles of
various sizes.

         In addition to the Company's three core products and the New Products,
the Company has identified several additional product applications where its
proprietary retraction technology can be incorporated and plans to devote
available research and development resources in 1998 to research and develop
such products.

Research and Development

         The Company has devoted substantially all of its research and
development efforts since its formation to development related to safety needles
and the designs and development of the equipment necessary to assemble the
safety needle devices. Research and development expenses amounted to $1,605,668
in 1997 and $1,554,096 in 1996.

         In 1995, the Company completed a research and development laboratory in
its facility in Ventura, California which is equipped with assembly and test
equipment for product development and creation of models of products to prove
their feasibility. In addition, the Company completed a machine shop equipped
with machine tools for fabrication of new product parts for concept modeling and
assembly and test fixtures. The Company also installed a Class 100,000 clean
room at the Ventura facility which is currently used for the hand assembly of
prototypes of the Company's products and will ultimately be used in connection
with the pilot manufacturing of various products of the Company on a
semi-automated assembly system or a fully automated robotic assembly system, if
the Company installs such a system.

         The Company intends to continue to modify and improve the design of the
Safety Syringe, Safety Phlebotomy Set and Safety Catheter driven by additional
market research and in response to needs developed in discussions with potential
strategic partners. The Company also intends to continue its research and
development of the New Products, which are in various stages of development,
design and prototyping. In addition, the Company intends to devote resources to
the research and development of additional safety needle devices and products
which incorporate the Company's proprietary retraction technology for use in the
healthcare industry.

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Marketing and Sales

         The Company currently intends through strategic alliances, licensing or
joint ventures with third parties to market and sell the Safety Phlebotomy Set
and Safety Catheter in the United States and all three of its core safety needle
products in select foreign countries. To avoid the possibility of a charge of
patent infringement, the Company originally elected to market through alliance,
licensing or joint ventures, the Safety Syringe only outside the United States.
In 1996, however, the Company re-engineered certain aspects of the Safety
Syringe and eliminated a potential U.S. patent conflict identified in its
Initial Public Offering prospectus and purchased certain patent rights from Dr.
Kulli. As a result, the Company is reassessing the possibilities for licensing
the Safety Syringe in the United States. See "Patents and Proprietary Rights".

         The Company is currently investigating opportunities with third parties
in the United States and abroad to manufacture, market and distribute the Safety
Syringe, the Safety Phlebotomy Set and the Safety Catheter and certain of its
other products under licensing agreements or through other forms of joint
venture. The Company has entered into a significant number of confidentiality
agreements with other companies for the purpose of exploring such opportunities.
The Company anticipates that entering into alliances and licensing arrangements
with third parties would enable the Company to increase the market penetration
of its products more quickly than the Company could achieve on its own.

         The Company is not permitted to sell any of its products for commercial
use in the United States until, and only if, such products are cleared for
marketing by the FDA. See "Government Regulation" below. From June 1995 to
December 1996, the Company focused its efforts on the preparation of a 510(k)
pre-market notification for submission to the FDA for the Safety Catheter,
Safety Phlebotomy Set and Safety Syringe. The Company filed the 510(k)
pre-market notification for the Safety Catheter and Safety Phlebotomy Set with
the FDA on December 28, 1995. On February 13, 1996, the FDA notified the Company
that it may begin marketing the Safety Catheter. On March 15, 1996, the FDA
notified the Company that is was holding the 510(k) pre-market notification for
the Safety Phlebotomy Set for 30 days pending receipt of the additional
information requested by the Office of Device Evaluation ("ODE"). A written
request for additional information from the ODE was received by the Company on
March 13, 1996. The Company responded by requesting a ninety day extension,
which was granted on April 18, 1996. The Company voluntarily withdrew the 510(k)
pre-market notification because of modifications and improvements made to the
original design of the Safety Phlebotomy Set. The Company filed a new 510(k)
premarket notification for the modified Safety Phlebotomy Set with the FDA on
August 12, 1997. On November 10, 1997, the FDA notified the Company that it may
begin marketing the Safety Phlebotomy Set. The Company anticipates that it will
complete and file a 510(k) pre-market notification with the FDA during 1998
for the improved design of the Safety Catheter.

         In addition to being subject to the U.S. government's Food, Drug and
Cosmetic Act (the "FD&C Act") and the regulations promulgated thereunder, the
Company must comply with the laws and regulations of the various foreign
countries in which the Company plans to sell or license the Safety Catheter,
Safety Phlebotomy, Safety Syringe and other products prior to selling such
products in such foreign countries. Certain foreign countries may only require
the Company to submit evidence of the FDA's pre-market clearance of the
Company's products, prior to selling in such countries. However, some foreign
countries may have more stringent requirements and require additional testing
and approvals.

         The Company signed an agreement on February 23, 1998 with Graphic
Controls Corporation for the development and licensing of its proprietary Safety
Intravenous Catheter Insertion Device. The signing of this agreement, and the
completion of a series of mutually agreed upon milestones will result in
payments to the Company totaling as much as $3.72 million, with continuous
royalties for the life of the patents. The Company would receive $1.82 million
of the $3.72 million during the completion of milestones associated with the
development phase and $1.9 million in milestone payments associated with the
granting of the exclusive North American License.

                                        8

<PAGE>

          The Company has provided a limited quantity of its Safety Syringes,
Safety Catheters, Safety Phlebotomy Sets, and certain of the New Products to
third parties in the United States and selected foreign countries under
confidentiality agreements for market research purposes.

Manufacturing

         In 1995, the Company leased approximately 26,000 square feet of space
in Ventura, California. In addition to administrative offices, the Ventura
facility contains a research and development laboratory equipped with assembly
and test equipment for concept modeling and product development and a machine
shop equipped with machine tools for fabrication of new products for concept
modeling and assembly and test fixtures. The Company also installed a 3,120
square foot Class 100,000 clean room at the Ventura facility, which is currently
being used for the assembly of prototypes and products. The Company installed a
semi-automated assembly system to pilot manufacture its products.

         The semi-automated assembly system, which consists of a series of
manual and semi-automatic stations, will be capable of producing up to 3,000,000
units per year. The assembly system can produce one or more of the Company's
products at a time, and has the capability of being converted at a reasonable
cost with minimal delay to pilot manufacture a different product at such time as
the Company may decide. During the fourth quarter of 1996, the Company partially
completed the installation of the semi-automated assembly system for the
production of one of the Company's products. The Company completed installation
of the system during the third quarter of 1997. The objective of the Company in
installing the assembly system is to demonstrate to potential third party
manufacturers the economic feasibility of the commercial production of its
product.

         Although the Company's plans may change as a result of future
discussions with third parties, the Company's current plan is to produce on the
semi-automated assembly system limited quantities each of one or more of its
products in order to demonstrate to potential third party manufacturers the
economic feasibility of the commercial production of its products and such
number of its products necessary for FDA clearance. Although the Company
originally planned to manufacture and distribute the Safety Phlebotomy Set and
Safety Catheter directly, the Company may ultimately contract with third parties
for all or a portion of the needed production of such products on a contract
manufacturing basis, licensing arrangement or other form of joint venture.

         The Company may require that any third party manufacturer of its
products use the semi-automated assembly system designed by the Company in order
to maintain quality control over its products. In addition, the Company has
established a quality control and quality assurance program designed to assure
that the Company's products are manufactured in accordance with the FDA's
regulations related to current Good Manufacturing Practices and other applicable
domestic and foreign regulations; however, the Company will be dependent upon
any such third party manufacturers to comply with such procedures and
regulations.

Patents and Proprietary Rights

         The Company's success will depend in part on its ability to obtain and
maintain patent protection for its products, to preserve its trade secrets and
to operate without infringing the proprietary rights of third parties. The
Company's policy is to attempt to protect its intellectual property and maintain
the proprietary nature of its technology by, among other things, filing patent
applications for technology that it considers important to the development of
its business and requiring certain employees and key consultants to execute
non-disclosure and non-compete agreements.

         The Company's U.S. patent rights currently consist of six United States
patents, one relating to the Safety Syringe, another relating to the Safety
Phlebotomy Set, the third relating to the Safety Catheter, and a fourth patent
issued in 1997 relating to the Y-Port Intravenous access device. The remaining
two patents which were purchased in 1997, relate to additional safety syringe
needle arrangements. The Company has been granted patents relating to the Safety
Syringe in Europe, Japan, Australia, Bulgaria, Hungary and in Romania.
Corresponding regional and national patent applications relating to the Safety
Syringe are pending six member countries of the Patent Cooperation Treaty.

                                        9

<PAGE>

         In 1995, the Company filed an international patent application, and a
corresponding Taiwanese patent application which has been granted, directed to
its Safety Catheter, which incorporates several modifications and changes from
the original design on which it obtained a U.S. patent. This application is now
pending in Canada, China, Europe, Japan, Mexico, and Singapore. Also in 1995,
the Company filed a U.S. patent application and a corresponding Taiwanese patent
application directed to its retractable needle Inline Y-Port Injector Access
Needle. In 1996, the Company filed a U.S. patent application directed to its
Self-Contained Pre-Filled Syringe and its MDC Closed Injection System. Also, in
1996, the Company filed a U.S. patent application relating to a new and improved
version of its Safety Phlebotomy Set and two U.S. patent applications directed
to alternative designs for its Pre-Filled Vial Injector System.

         The Company filed nine U.S. patent applications in 1997. Of these nine
applications, three relate to various pre-filled injection devices, four relate
to improvements made to the Safety Catheter, and two relate to improvements made
to the Blood Collection Needle. A pending U.S. application covering pre-filled
injection devices has been allowed and is proceeding toward issue.

         On April 23, 1997, the European Patent Office granted the Company's
European patent application for its Safety Syringe, which was based on an
international application filed November 20, 1990. The European Patent
designates the countries of Austria, Belgium, Switzerland, Liechtenstein,
Germany, Denmark, Spain, France, Great Britain, Greece, Italy, Netherlands, and
Sweden for protection. The European patent coverage complements the patents that
had already been granted in Romania and Bulgaria. A further European application
is pending aspects of the device covered in the issued European patent. In 1997,
the Company filed three international applications under the Patent Cooperation
Treaty ("PCT"). The Patent Cooperation Treaty includes a total of countries. The
three PCT applications relate to respective pre-filled injection devices, Blood
Collection Needles, and catheter insertion devices.

         There can be no assurance that the Company's current patent
applications and provisional patent applications will result in patents being
issued.

         As the Company proceeds toward final designs for its Safety Syringe,
Safety Phlebotomy Set and Safety Catheter devices, the Company is having
searches conducted in the United States for unexpired patents owned by others
that may conflict with such final product designs. The Company, however, has not
conducted any infringement searches in any foreign country for the purpose of
finding unexpired patents or pending patent applications that may raise a
possibility of infringement or conflict with the Company's planned activities.
Furthermore, the Company is considering appropriate modification to the product
designs to optimize the final products and to avoid conflicts with patents of
others. To the extent that such final product designs may not be protected by
the Company's existing patents and patent applications, the Company will file
new patent applications relative to its final products. There can be no
assurance that all of the potentially relevant patents of others have been
identified or that the Company will be able to obtain patent protection for its
products.

         There can also be no assurance that any patents owned by or issued to
the Company, or that may issue to the Company in the future, will provide a
competitive advantage or will afford protection against competitors with similar
technology, or that competitors of the Company will not circumvent, or challenge
the validity of any patents issued to the Company. There also can be no
assurance that any patents issued to or licensed by the Company will not be
infringed upon or designed around by others, that others do not have or will not
obtain patents that the Company will need to license or design around, that the
Company's products will not inadvertently infringe upon the patents of others,
or that others will not make the Company's patented devices upon expiration of
such patents. Moreover, although the Company utilizes non-disclosure agreements
and other safeguards to protect its proprietary information and trade secrets,
there can be no assurance that they will protect such information or provide
adequate remedies for the Company in the event of unauthorized use or disclosure
of such information, or that others will not be able to independently develop
such information. As is the case with the Company's patent rights, the
enforcement by the Company of its non-disclosure agreements can be lengthy and
costly, with no guarantee of success.

         If the Company becomes involved with patent infringement litigation,
either to enforce the Company's patents or defend against patent infringement
suits, such litigation would be lengthy and expensive, and if it occurs, would
divert Company resources from planned uses. Further, any adverse outcome in such
litigation could have a

                                       10

<PAGE>

material adverse effect on the Company. If any of the Company's products are
found to infringe upon the patents or proprietary rights of another party, the
Company may be required to obtain licenses under such patents or proprietary
rights. No assurance can be given that any such licenses would be made available
on terms acceptable to the Company, if at all. In addition, patent applications
filed in foreign countries and patents granted in such countries are subject to
laws, rules and procedures which differ from those in the United States. Patent
protection in such countries may be different from patent protection provided by
the United States laws and may not be as favorable to the Company. There can be
no assurance that the Company's program of patent protection and non-disclosure
agreements will be sufficient to protect the Company's proprietary technology
from competitors.

         With respect to trademarks, the Company has filed an intent to use
trademark application for the mark "Safe Step" with the United States Patent and
Trademark Office. The application for the Safe Step mark has been allowed and
the Statement of Use has been filed to secure the registration. The Company may
apply for other trademarks in the future.

Competition

         The needle market is highly competitive. The Company will compete in
the United States and abroad with medical product companies, including Becton
Dickinson and Company, Sherwood Davis and Geck, Terumo Medical, Johnson &
Johnson, and Bio-Plexus, Inc. Four of these companies also manufacture safety
needles. The Company's Safety Syringe, Safety Phlebotomy Set and Safety Catheter
would compete with the standard and safety syringes, phlebotomy sets and
intravenous catheter devices manufactured by these and other companies in the
United States and in certain foreign countries. Many of the Company's
competitors have better name recognition in the market, longer operation
histories, and are substantially larger and better financed than the Company.
Such competitors may use their economic strength to influence the market to
continue to buy their existing products or new products developed by them. One
or more of these competitors also could use such resources to improve their
current products or develop additional products which may compete more
effectively with the Company's products. New competitors may arise and may
develop products which compete with the Company's products. In addition, new
technologies may arise which could lower or eliminate the demand for the
Company's products. The Company cannot predict the development of future
competitive products or companies.

         Historically, the needle market has been price competitive with little
differentiation between products. In addition to price, safety needles compete
for market share based on operating features and safety. In recent years, the
medical industry has adopted infection control practices which encourage the use
of safe medical devices due principally to the high cost of treating infection
and potential liability resulting from accidental needlesticks.

         Safety needle devices are generally estimated to cost two to three
times the price of their counterpart standard needle devices. A major factor in
the introduction of new products designed to reduce the risk of accidental
needlesticks to healthcare workers is whether the increased expense of a safer
device is offset by the savings of preventing accidental needlesticks. According
to the American Hospital Association report dated December 1992 ("AHA Report"),
the direct costs for medical evaluation and follow-up after a single needlestick
injury ranges from $200 to $1,200. This figure does not include indirect costs,
such as time lost from work and other administrative activities. Although it is
difficult to estimate the total costs associated with accidental needlestick
injuries with any degree of confidence, the Report on Medical Needles and
Syringes dated January 1994 by Theta Corporation estimates that the total cost
associated with treating accidental needlesticks in the United States averages
$3 billion each year. The AHA report and other authorities have stated that the
benefit resulting from the prevention of accidental needlesticks cannot be
measured solely by savings in costs of medical treatment, because of the costs
of treating persons who contract an illness or infection from an accidental
needlestick, the time lost from work and death. Although the Company cannot
predict with certainty the prices of its products, currently available safety
needle devices are priced at approximately two to three time times that of
standard devices. Notwithstanding the price differential, the Company believes
that, based upon estimated costs associated with accidental needlesticks, its
products should be considered cost effective by the marketplace.

         Except for the Company's products, the Company believes that most of
the current safety needles use an external sheath design or require manual
retraction of the needle. The external sheath design generally requires the
operator to move a protective sheath over the needle after removing the needle
from the patient (a sliding sleeve) or manipulate the device to cover the used
needle tip (a disappearing needle). However, new safety needle products

                                       11

<PAGE>

which employ automatic needle retraction have been recently introduced to the
marketplace, and could effectively compete with the company's products. The
methods of use and disposal of the Safety Syringe, Safety Phlebotomy Set and
Safety Catheter are virtually identical to the present methods of use and
disposal for standard syringes, phlebotomy sets and intravenous catheter
insertion devices.

Government Regulation

         As medical devices, the Company's products are subject to regulation by
the FDA under the U.S. government's Food, Drug and Cosmetic Act ("FD&C Act") and
implementing regulations. Pursuant to the FD&C Act, the FDA regulates, among
other things, the manufacture, labeling, distribution, and promotion of the
Company's products in the United States. The FD&C Act requires that a medical
device must (unless exempted by regulations) be cleared or approved by the FDA
before being commercially distributed in the United States. The FD&C Act also
requires manufacturers of medical devices to, among other things, comply with
labeling and promotion requirements and to manufacture devices in accordance
with Good Manufacturing Practices ("GMPs"), which require that companies
manufacture their products and maintain related documentation in a prescribed
manner with respect to manufacturing, testing and quality control activities.
The FDA inspects medical device manufacturers and distributors, to enjoin and/or
impose civil penalties on manufacturers and distributors marketing noncomplying
medical devices, and to criminally prosecute violators.

         Pursuant to the FD&C Act, the FDA classifies medical devices intended
for human use into three classes, Class I, Class II, and Class III. In general,
Class I devices are products the safety and effectiveness of which the FDA
determines can be reasonably assured by general controls under the FD&C Act
relating to such matters as adulteration, misbranding, registration,
notification, records and reports, and GMPs. Class II devices are products for
which FDA determines that these general controls are insufficient to provide
reasonable assurance of safety and effectiveness, and that require special
controls such as the promulgation of performance standards, post-market
surveillance, patient registries, or such other actions as FDA deems necessary.
Class III devices are devices for which FDA has insufficient information to
conclude that either general controls or special controls would be sufficient to
assure safety and effectiveness, and which are life-supporting, life-sustaining,
or substantial importance in preventing impairment of human health (e.g., a
diagnostic device to detect a life-threatening illness), or present a potential
unreasonable risk of illness or injury. Devices in this case require pre-market
approval, as described below.

         The FD&C Act further provides that, unless exempted by regulation,
medical devices may not be commercially distributed in the United States unless
they have been approved or cleared by the FDA. There are two review procedures
by which medical devices can receive such approval or clearance. Some products
may qualify for clearance under a Section 510(k) procedure, in which the
manufacturer submits to the FDA a pre-market notification that it intends to
begin marketing the product, and shows that the product is substantially
equivalent to another legally marketed product (i.e., that it has the same
intended use and that it is as safe and effective as legally marketed device,
and does not raise different questions of safety and effectiveness than does a
legally marketed device). In some cases, the 510(k) notification must include
data from human clinical studies. In March 1995, the FDA issued a draft guidance
document on 510(k) notifications for medical devices with sharps injury
prevention features, a category that would cover all of the Company's existing
and new products. The draft guidance provisionally placed this category of
products into Tier 3 for purposes of 510(k) review, meaning that such products
will be subject to the FDA's most comprehensive and rigorous review for 510(k)
products. The draft guidance also states that in most cases, the FDA will
accept, in support of a 510(k) notification, data from tests involving simulated
use of such a product by health care professionals, although in some cases the
agency might require actual clinical data.

         Marketing may commence when the FDA issues a clearance letter finding
such substantial equivalence. According to FDA regulations, the agency has 90
days to respond to a 510(k) notification. There can be no assurance, however,
that the FDA will provide a response within that time, or that the agency will
reach a finding of substantial equivalence.

         If a product does not qualify for the 510(k) procedure (either because
it is not substantially equivalent to a legally marketed device or because it is
a Class III device), the FDA must approve a pre-market approval ("PMA")
application before marketing can begin. PMA applications must demonstrate, among
other matters, that the medical

                                       12

<PAGE>

device is safe and effective. A PMA application is typically a complex
submission, usually including the results of clinical studies, and preparing an
application is a detailed and time-consuming process. Once a PMA application has
been submitted, the FDA's review may be lengthy and may include requests for
additional data. By statute and regulation, the FDA may take 180 days to review
a PMA application although such time may be extended. Furthermore, there can be
no assurance that a PMA application will be reviewed within 180 days or that a
PMA application will be approved by the FDA.

         Although the 510(k) pre-market clearance process is ordinarily simpler
and faster than the PMA application process, there can be no assurance that the
Company will obtain 510(k) pre-market clearance to market Safety Syringe or
other new products, or that such products will be classified as Class II
devices, or that, in order to obtain 510(k) clearance, the Company will not be
required to submit additional data or meet additional FDA requirements that may
substantially delay the 510(k) process and add to the Company's expenses.
Moreover, such 510(k) pre-market clearance, if obtained, may be subject to
conditions on the marketing or manufacturing of the corresponding products that
may impede the Company's ability to market and/or manufacture such products.

         In addition to the requirements described above, the FD&C Act requires
that all medical device manufacturers and distributors register with the FDA
annually and provide the FDA with a list of those medical devices which they
distribute commercially. The FD&C Act also requires that all manufacturers of
medical devices comply with labeling requirements and manufacture devices in
accordance with GMPs, which require that companies manufacture their products
and maintain their documents in a prescribed manner with respect to
manufacturing, testing, and quality control activities. The FDA's Medical Device
Reporting regulation requires that companies provide information to the FDA on
death or serious injuries alleged to have been associated with the use of their
products, as well as product malfunctions that would likely cause or contribute
to death or serious injury if the malfunction were to recur. The FDA further
requires that certain medical devices not cleared for marketing in the United
States have FDA approval before they are exported.

         The FDA inspects medical device manufactures and distributors, and has
broad authority to order recalls of medical devices, to seize noncomplying
medical devices, to enjoin and/or to impose civil penalties on manufacturers and
distributions marketing non-complying medical devices, and to criminally
prosecute violators.

         The Company will be required under FDA regulations to register the
pilot manufacturing facility with the FDA before engaging in the commercial
distribution of any of its products. As such, the facilities will be subject to
inspection on a routine basis to assure compliance with the FDA's GMP
regulations.

         In addition to laws and regulations enforced by the FDA, the Company is
subject to government regulations applicable to all businesses, including, among
others, regulations related to occupational health and safety, workers' benefits
and environmental protection.

         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 needle devices or any other product outside the United States.

Employees

         As of March 15, 1998, the Company employed 21 people on a full-time
basis and one person on a part-time basis. The Company believes its employee
relations are satisfactory. The company does not anticipate increasing the
number of employees in the areas of product development, manufacturing, sales
and marketing at this time. The Company will however reassess its personnel
requirements as business activity dictates.

Environmental Matters

         The Company believes its operations are currently in compliance in all
material respects with applicable Federal, state, and local laws, rule,
regulations, and ordinances regarding the discharge of material into the
environment. Such compliance has no material impact upon the Company's capital
expenditures, earnings or competitive position, and no capital expenditures for
environmental control facilities are planned.

                                       13

<PAGE>

Subsequent Events

         On February 23, 1998, the company signed an agreement with Graphic
Controls Corporation for the development and licensing of its proprietary Safety
Intravenous Catheter Insertion Device. The signing of this agreement, and the
completion of a series of mutually agreed upon milestones would result in
payment to Med-Design totaling as much as $3.72 million with continuous
royalties for the life of the patents. Med-Design would receive $1.82 million of
the $3.72 million during the completion of milestones associated with the
development phase and $1.9 million in milestone payments associated with the
granting of an exclusive for North America.

ITEM 2. PROPERTIES

         The Company leases approximately 26,000 square feet of space in
Ventura, California ("Ventura Facility") for the Company's corporate
headquarters, pilot manufacturing plant, research and development facilities and
offices for a base rent of $11,708 per month. At the present time, approximately
8,700 square feet of the space is being used by the Company for research and
development, engineering and administrative offices, approximately 2,200 square
feet is being used exclusively for research and development and approximately
3,120 square feet is being used as a clean room for the assembly of prototypes
of the Company's products and ultimately will be used to pilot manufacture its
products. The remaining space is being used for shipping and handling, quality
control inspections and storage parts, furnished products and equipment. The
Company has installed a semi-automated assembly system to pilot manufacture
certain of its products in the clean room. The lease expires on October 31,
2000, although the Company has the option to extend the term for two additional
36 month periods as well as the option to purchase this facility.

         The Company leased approximately 3,236 square feet of office space in
Philadelphia, PA., which until recently, was the corporate headquarters for the
Company. In March 1998, the Company completed the relocation of its corporate
headquarters to Ventura, California, although it still maintains an office in
Philadelphia. The balance of the office space previously used by the Company in
Philadelphia was subleased.

         The Company believes that its facilities are adequate for its current
needs and that suitable additional or substitute space will be available as well
as needed.

ITEM 3. LEGAL PROCEEDINGS

         There are no material legal proceedings pending or, to the knowledge of
management, threatened against the Company.

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

         No matters were submitted to a vote of security holders during the
fourth quarter ended December 31, 1997 through the solicitation of proxies or
otherwise.

                                       14

<PAGE>

                                     PART II


ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

         The Company's common stock has been approved for trading in the NASDAQ
SmallCap Market under the symbol ("MEDC") since the Company's Initial Public
Offering on June 7, 1995. The following table sets forth for the fiscal quarters
indicated since the date of the Initial Public Offering, the range of high and
low bid information for the Company's Common Stock in the NASADAQ SmallCap
Market:

Market Information

<TABLE>
<CAPTION>

              Fiscal year ended December 31, 1996                   High        Low
              -----------------------------------                   ----        ---

<S>                                                                <C>        <C>
First Quarter (January 1, 1996 to March 31, 1996) . . . . . . .    $20        $ 9 1/2

Second Quarter (April 1, 1996 to June 30, 1996) . . . . . . . .     21 3/4     15 1/2

Third Quarter (July 1, 1996 to September 30, 1996) . . . . . . .    15 3/4      9 1/2

Fourth Quarter (October 1, 1996 to December 31, 1996) . . . . .     11 3/4      4 7/8


              Fiscal year ended December 31, 1997                   High        Low
             ------------------------------------                   ----        ---

First Quarter (January 1, 1997 to March 31, 1997) . . . . . . .    $10 1/4      5 1/8

Second Quarter (April 1, 1997 to June 30, 1997). . . . . . . . .     9 3/8      6

Third Quarter (July 1, 1997 to September 30, 1997) . . . . . . .     7 1/2      3 5/8

Fourth Quarter (October 1, 1997 to December 31, 1997) . . . . .      6 3/4      2 3/4
</TABLE>


         On January 31, 1996, the Company declared a 100% Common Stock dividend,
which was distributed on February 26, 1996 to stockholders of record as of
February 12, 1996. All share and per share data in this Annual Report have been
retroactively adjusted to reflect that stock dividend.

Holders

         As of March 14, 1998, the Company had 142 holders of record of the
Common Stock. Since a portion of the Company's Common Stock is held in "street"
or nominee name, the Company is unable to determine the exact number of
beneficial holders.

Dividends

         The Company has never declared or paid a cash dividend on its Common
Stock. The Company currently anticipates that it will retain any earnings to
finance the operation and expansion of its business, and therefore does not
intend to pay dividends on its Common Stock in the foreseeable future. Any
determination to pay dividends in the future is at the discretion of the
Company's Board of Directors and will depend upon the Company's financial
conditions, results of operations, capital requirements, limitations contained
in loan agreements and such other factors as the Board of Directors deems
relevant.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS

         The following discussion and analysis should be read in conjunction
with the consolidated financial statements and notes thereto of the Company
which appear elsewhere herein.

                                       15

<PAGE>

         To date, the Company has received no revenues from product sales. The
Company does, however, anticipate that revenues will be recorded during the next
twelve months from its agreement with Graphic Controls Corporation in accordance
with meeting agreed upon milestones.

Plan of Operation

         The Company plans to focus primarily on the completion of all
milestones related to the agreement with Graphic Controls Corporation. This
includes the completion of engineering development and the production of a
limited number of Safety Catheters for proof of functionality, validation
testing, market acceptance and manufacturability. The engineering development
and proof of functionality, validation testing and manufacturability of the
Safety Catheter will also contribute to the development of the Safety PICC
Introducer Catheter Insertion Device, and to some degree to other of the
Company's safety products, because of the commonality of the retraction
technology features. The Company plans to complete all issues pertaining to the
filing and prosecution of the patents on the Safety Catheter, as well as refile
a 510(k) pre-market notification with the FDA.

         The Company also plans to continue discussions and negotiations with
third parties regarding the licensing or joint venture of its other products.
The Company plans to support these discussions and negotiations with avialable
funds, including the building of necessary prototypes.

         The Ventura Facility contains a research and development laboratory
equipped with assembly and test equipment for concept modeling and product
development and a machine shop equipped with machine tools for fabrication of
new product parts for concept modeling and assembly and test fixtures. The
Company also installed a 3,120 square foot Class 100,000 clean room at the
Ventura facility, which is currently being used for the assembly of prototypes
and products. The Company had originally planned to install in the clean room a
fully automated robotic assembly system to pilot manufacture its products. The
Company, however, elected not to install the fully automated robotic assembly
system at this time because it is currently investigation opportunities with
third parties in the United States and abroad to manufacture the Safety Syringe,
the Safety Phlebotomy Set and the Safety Catheter and certain of its other
products under development either on a contract manufacturing basis, under
licensing agreements or through other forms of joint ventures. The Company has
entered into a significant number of confidentiality agreements with other
companies for the purpose of exploring such opportunities. The Company is also
investigating opportunities with third parties to manufacture, market and
distribute the Company's products. The Company anticipates that entering into
alliances and licensing arrangements with third parties would enable the Company
to increase the market penetration of its products more quickly than the Company
could achieve on its own. The Company has entered into such arrangements with
Graphic Controls Corporation as has been previously mentioned.

         As a result of discussions which it has had with third parties, the
Company has installed a semi-automated assembly system at the Ventura Facility
to pilot manufacture its products. The objective of the Company in installing
the assembly system is to demonstrate to potential third party manufacturers the
economic feasibility of the commercial production of its products. The
semi-automated assembly system, which consists of a series of manual and
semi-automatic stations, is capable of producing up to 3,000,000 units per year.
The assembly system will produce one or more of the Company's products at a
time, and has the capability of being converted at a reasonable cost with
minimal delay to manufacture a different product at such time as the Company may
decide. During the fourth quarter of 1996, the Company partially completed the
installation of the semi-automated assembly system for the pilot manufacturing
of one of the Company's products. The Company completed the system during the
third quarter of 1997.

           The Company anticipates earning revenues in 1998 from its licensing
and development agreement with Graphic Controls Corporation in accordance with
meeting agreed upon milestones.

         As of March 15, 1998, the Company employed 21 people on a full-time
basis and one person on a part-time basis. The Company does not anticipate
increasing the number of employees in the areas of product development,
manufacturing, sales and marketing. The Company will however reassess its
personnel requirements as business activity dictates.

                                       16

<PAGE>

Liquidity and Capital Resources

         At December 31, 1997, the Company had an accumulated deficit during the
development stage of $18,967,241, which includes a one-time, nonrecurring
write-off of $5,932,770 for purchase research and development incurred in
connection with the acquisition of MDI by the Company. The Company has financed
its activities through December 31, 1997 principally through debt, the private
placement of equity securities, and the Initial Public Offering.

         As of December 31, 1997, the Company's working capital was $1,181,513
including cash and cash equivalents of $114,079, short-term investments of
$546,591, and available-for-sale securities of $5,617,284, as compared to
working capital of $934,637, at December 31, 1996, including cash and cash
equivalents of $1,648,639 short-term investments of $535,248, and
available-for-sale securities of $5,638,498 an increase of $246,876.

         The current ratio of current assets to current liabilities was 1.23 to
1 at December 31, 1997, as compared to 1.13 to 1 at the end of 1997. The
Company's primary source of cash in 1996 consisted of (1) proceeds from
short-term borrowings, $184,000; (2) proceeds of private placement $4,617,497;
(3) proceeds from long-term borrowings, $14,410; and (4) funds received from the
issuance of Common Stock in connection with exercise of stock options and
warrants, $254,800. The Company's primary uses of cash in 1997 consisted of (1)
cash used in operations, $4,042,104; (2) payments on debt obligations,
$2,246,933; (3) patents, $215,432; and (4) capital expenditures, $115,195.

         Of the $6,277,954 in cash and cash equivalents, short-term investments,
and available-for-sale securities at December 31, 1997, $4,927,040 was
restricted to collateralize borrowings the Company made under its line of credit
and equipment financing agreements. At December 31, 1997 and 1996, all
borrowings made under the line of credit and equipment financing agreements were
fully collateralized.

         At December 31, 1997, the Company had a revolving line of credit
totaling $6,750,000 ("Loan Agreement") with its principal lending institution
and a equipment financing facility totaling approximately $545,000 with a second
commercial bank ("Equipment Facility"). The Loan Agreement provides for a credit
facility which can be used to (1) fund working capital needs and (2) finance
capital equipment purchases; provided, however, that advances for capital
equipment financing cannot exceed $600,000 of the $6,750,000. Borrowings to meet
working capital needs bear interest at LIBOR plus 250 basis points (8.22% at
December 31, 1997), while borrowings to finance capital equipment purchases bear
interest at prime plus 2.5%. Pursuant to the terms of the Loan Agreement, all
borrowings must be fully collateralized by available-for-sale securities, cash,
cash equivalents, equipment financed, and general intangibles of the Company.
Under the terms of the Equipment Facility, all borrowings must be fully
collateralized by a short-term investment in the form of a certificate of
deposit. The Loan Agreement expires on June 30,1998. There is no assurance that
the Company will be successful in negotiating a continuation of the availability
of the Loan Agreement and what terms will be made available to the Company.

         The Company's debt to equity ratio was 1.73:1 and 3.47:1 at December
31, 1997 and 1996 respectively. At December 31, 1997, the Company had borrowed
$4,630,500 against its availability under the Loan Agreement and $241,068
against its availability under the Equipment Financing Facility.

         Net capital expenditures were $115,195 and $541,642 for the year ended
December 31, 1997 and 1996, respectively. In 1997, capital expenditures amounted
to approximately $82,000 for machinery and equipment; and $15,000 for automotive
and transportation. The Company does not anticipate any significant capital
expenditures in 1998.

         In 1995, the Company issued warrants (including warrants discussed in
Item 1. Business and Other Business Matters) to purchase 400,000 shares of
Common Stock, of which warrants to purchase 163,000 shares have been exercised
as of March 15, 1998. In 1997, the Company issued warrants to purchase 375,000
shares of Common Stock. As of March 15, 1998, the Company has received an
aggregate of $798,700 upon the exercise of said warrants. If the remainder of
the warrants were exercised, the Company would receive approximately an
additional $3,865,550, net of registration and other costs to be paid by the
Company as required under the terms of such warrants.

                                       17

<PAGE>

         The Company believes that it will have sufficient funds to support its
planned operations and capital expenditures for the next twelve months, but
thereafter, the Company believes that it will need to raise additional funds
through public or private financings to support its planned operations and
capital expenditures. The Company believes that it will require additional
capital before it reaches profitability and positive cash flow, if at all. No
assurance can be given that additional financing will be available or that, if
available, it will be available on terms favorable to the Company or its
stockholders. If adequate funds are not available to satisfy short-term or
long-term capital requirements, the Company may be required to reduce
substantially, or eliminate, certain areas of its product development
activities, limit its operations significantly, or otherwise modify its business
strategy. The Company's capital requirements will depend on many factors,
including but not limited, to the progress of its research and development
programs, the development of regulatory submissions and approvals, pilot
manufacturing capability, and the costs associated with protecting its patents
and other proprietary rights.

ITEM 7. FINANCIAL STATEMENTS

         Incorporated by reference from the consolidated financial statements
and notes thereto of the Company which are attached hereto beginning on page
F-1.

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

         None.

                                    PART III


ITEM 9 through 12. Incorporated by Reference

         The information called for by Item 9 "Directors, Executive Officers,
Promoters and Control Persons; Compliance with Section 16(a) of the Exchange
Act"; Item 10 "Executive Compensation"; Item 11 "Security Ownership of Certain
Beneficial Owners and Management"; and Item 12 "Certain Relationships and
Related Transactions" is incorporated herein by reference to the Company's
definitive proxy statement for its Annual Meeting of Stockholders, which
definitive proxy statement is expected to be filed with the Commission not later
than 120 days after the end of the fiscal year to which this report relates.

                                       18

<PAGE>

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

(a)      Documents filed as part of this Report:

         1. List of Consolidated Financial Statements. The following financial
statements and notes thereto of the Company which are attached hereto beginning
on page F-1, have been incorporated by reference into Item 8 of this Report on
Form 10-KSB:
<TABLE>
<CAPTION>

                                                                                                          Page
                                                                                                          ----
<S>                                                                                                       <C>
     Report of Independent Accountants                                                                    F-2

     Consolidated Balance Sheets as of December 31, 1997 and 1996                                         F-3

     Consolidated Statements of Operation for years ended December 31, 1997 and 1996
     and Cumulative During Development Stage                                                              F-4

     Consolidated Statements of Stockholders' Equity for the years ended December 31, 1997
     and 1996 and date of inception to December 31, 1995                                                  F-5

     Consolidated Statements of Cash Flows for the years ended December 31, 1997 and 1996
     and Cumulative During Development Stage                                                              F-6

     Notes to Consolidated Financial Statements                                                           F-7
</TABLE>

         2. List of Exhibits. The following exhibits are listed in the Exhibits
appearing below and are followed herewith or are incorporated by reference to
exhibits previously filed with the Commission.
<TABLE>
<CAPTION>

         Exhibit
         Number                             Description
         -------                            -----------
<S>      <C>                                         <C>
         2.1 (1)  Agreement of Merger dated as of April 5, 1995 by and among the Company, MDC
                  Investment Holdings, Inc. ("Holdings") and Med-Design, Inc. ("MDI").

         2.2 (1)  Joinder dated April 5, 1995 by John A. Botich , Michael J. Botich, Thor R. Halseth and
                  Rita F. Botich

         2.3 (1)  Secured Promissory Note dated April 5, 1995 from the Company to Anker & Hymes, a
                  Law Corporation ("Anker & Hymes"), Client Trust Account for the benefit of all of he
                  former shareholders of MDI.

         2.4 (1)  Security and Pledge Agreement dated April 5, 1995 between the Corporation and Anker
                  & Hymes for the benefit of all of the former shareholders of MDI.

         3.1 (1)  Certificate of Incorporation of the Company.

         3.2 (1)  Amendment to Certificate of Incorporation of the Company.

         3.3 (1)  Bylaws of the Company.

         4.1 (1)  Specimen of Common Stock Certificate of the Company.

</TABLE>

                                       19

<PAGE>
<TABLE>
<CAPTION>

         Exhibit
         Number                             Description
         -------                            -----------

<S>      <C>                                            <C>
         10.1 (1)   Employment Agreement dated as of April 5, 1995 between the Company and James M.
                    Donegan.

         10.2 (1)   Employment Agreement dated as of April 5, 1995 between the Company and John A.
                    Botich.

         10.3 (1)   Employment Agreement dated as of April 5, 1995 between the Company and Michael J.
                    Botich.

         10.4 (1)   Employment Agreement dated as of April 5, 1995 between the Company and Thor R.
                    Halseth.

         10.5 (2)   Non-Qualified Stock Option Plan.

         10.6 (2)   Warrant dated August 15, 1995 from the Company and J.E. Sheehan & Company.

         10.7 (2)   Warrant dated August 15, 1995 from the Company to Dominque A. Bodevin.

         10.8 (2)   Warrant dated August 15, 1995 from the Company to Roger Favale.

         10.9 (1)   Underwriters Warrant Agreement dated June 6, 1995 between the Company and Gilford
                    Securities Incorporated.

         10.10 (3)  Placement Agent Agreement dated as of January 8, 1997 by and between the Company
                    and Fine Equities, Inc. ("Fine").

         10.11 (3)  Form of Subscription Agreement between the Company dated as of January 23, 1997,
                    and each of the purchasers of the 1,000,000 shares of Common Stock.

         10.12 (3)  Placement Agent's Warrant Agreement dated as of January 23, 1997 by and between the
                    Company and Fine.

         10.13 (6)  Warrant dated January 23, 1997 from the Company for N. Scott Fine.

         10.14 (6)  Warrant dated January 23, 1997 from the Company for M. Troy Duncan.

         10.15 (6)  Warrant dated January 23, 1997 from the Company to Sharon Bronte.

         10.16 (6)  Warrant dated January 23, 1997 from the Company to William A. Jolly.

         10.17 (2)  Business Loan Agreement dated July 26, 1995 between MDC Investment Holdings, Inc. ("MDC
                    Holdings") and Meridian Bank.

         10.18 (2)  Demand Promissory Note dated July 26, 1995 from MDC Holdings in favor of Meridian Bank.
</TABLE>

                                                 20

<PAGE>

<TABLE>
<CAPTION>

         Exhibit
         Number                             Description
         -------                            -----------

<S>      <C>                                  <C>
         10.19 (2)  Security Agreement dated July 26, 1995 between MDC Holdings and Meridian Bank.

         10.20 (2)  Surety Agreement dated July 26, 1995 between the Company and Meridian Bank.

         10.21 (2)  Security Agreement dated July 26, 1995 between the Company and Meridian Bank.

         10.22 (2)  Pledge Agreement dated July 26, 1995 between MDC Holdings and Meridian Bank.

         10.23 (2)  Judgment Note dated July 26, 1995 from the Company in favor of MDC Holdings.

         10.24 (2)  Business Loan Agreement dated December 29, 1995 between MDC Research Ltd.
                    and Meridian Bank.

         10.25 (2)  Business Loan Agreement dated December 29, 1995 between MDC Holdings and
                    Meridian Bank.

         10.26 (2)  Demand Promissory Note dated December 29, 1995 from MDC Research Ltd. in
                    favor of Meridian Bank.

         10.27 (2)  Demand Promissory Note dated December 29, 1995 from MDC Holdings in favor of
                    Meridian Bank.

         10.28 (2)  Security Agreement dated December 29, 1995 between MDC Research Ltd. and Meridian Bank.

         10.29 (2)  Pledge Agreement dated December 29, 1995 between MDC Holdings and Meridian Bank.

         10.30 (2)  Assignment of Agency of Fiduciary Account dated December 29, 1995 from MDC
                    Holdings to Meridian Bank.

         10.31 (2)  Surety Agreement dated December 29, 1995 between the Company and Meridian
                    Bank.

         10.32 (2)  Surety Agreement dated December 29, 1995 between MDC Holdings and Meridian
                    Bank.

         10.33 (2)  Amendment to Loan Agreement dated February 16, 1996 among Meridian Bank, MDC
                    Holdings and MDC Research Ltd.

         10.34 (4)  Second Amendment to Loan Agreement dated April 4, 1996 among Meridian Bank,
                    MDC Holdings, The Med-Design Corporation, and MDC Research Ltd.

         10.35 (4)  Judgement Note dated April 12, 1996 from the Company in favor of MDC
                    Holdings.

         10.36 (4)  Amendment to Security Agreement dated April 4, 1996 between the Company and
                    Meridian Bank.
</TABLE>

                                                        21

<PAGE>

<TABLE>
<CAPTION>

         Exhibit
         Number                             Description
         -------                            -----------


<S>      <C>                                        <C>
         10.37 (4)  Demand Promissory Note dated April 4, 1996 from MDC Holdings in favor of
                    Meridian Bank.

         10.38 (5)  Third Amendment to Loan Agreement dated July 11, 1996 among Meridian Bank,
                    MDC Holdings, The Med-Design Corporation, and MDC Research Ltd.

         10.39 (5)  Judgement Note date July 11, 1996 from MDC Holdings in favor of Meridian
                    Bank.

         10.40 (5)  Demand Promissory Note dated July 11, 1996 from MDC Holdings in favor of
                    Meridian Bank.

         10.41 (6)  Fourth Amendment to Loan Agreement dated November 14, 1996 among CoreStates
                    Bank, N.A. ("CoreStates") successor by merger to Meridian Bank, MDC Holdings,
                    The Med-Design Corporation, and MDC Research Ltd.

         10.42 (6)  Judgement Note dated November 14, 1996 from the Company in favor of MDC
                    Holdings.

         10.43 (6)  Demand Promissory Note dated November 14, 1996 from MDC Holdings in favor of
                    CoreStates.

         10.44 (2)  Form of Business Loan Agreement dated July 12, 1995 between the Company and
                    Eagle National Bank ("Eagle Bank").

         10.45 (2)  Form of Promissory Note dated July 12, 1995 from the Company in favor of
                    Eagle Bank.

         10.46 (2)  Form of Security Agreement dated July 12, 1995 between the Company and Eagle
                    Bank.

         10.47 (2)  Form of Assignment of Deposit Account dated July 12, 1995 from the Company
                    to Eagle Bank.

         10.48 (2)  Lease Agreement dated June 15, 1995 between Moen Development and MDC
                    Research Ltd. and guaranteed by the Company.

         10.49 (2)  Lease Agreement dated October 1, 1993 between Arden North American Partners,
                    L.P. and the Company, as well as amended by the First Amendment dated November
                    2, 1995.

</TABLE>

                                                 22

<PAGE>

<TABLE>
<CAPTION>

         Exhibit
         Number                             Description
         -------                            -----------

<S>      <C>                                            <C>
         10.50 (2)  Employment Agreement dated as of August 1, 1995 between the Company and
                    Donald Shea.

         10.51 (2)  Employment Agreement between the Company and Patrick E. Rodgers.

         10.52 (2)  Employment Agreement between the Company and John Osborne.

         10.53 (2)  Employment Agreement between the Company and Gilbert White.

         10.54 (6)  Warrant dated March 19, 1997 from the Company to John F. Kelley.

         10.55      Warrant dated October 10, 1997 from the Company to John F. Kelley.

         10.56      Warrant dated January 14, 1998 from the Company to John F. Kelley.

         10.57      Warrant dated January 14, 1998 from the Company to Gilbert White.

         10.58      Repriced option agreement from the Company to John Kelley.

         10.59      Repriced option agreement from the Company to John Marr.

         10.60      Consulting agreement from the Company to John Botich.

         10.61      Revised warrant agreement from the Company to John Kelley.

         10.62      Revised warrant agreement from the Company the John Kelley.

         21 (1)     List of Subsidiaries of the Company.

         27 (7)     Financial Data Schedule.
</TABLE>

(b) No Reports on Form 8-K were filed in the quarter ended December 31, 1997.

-----------------------


(1) Incorporated by reference to Form SB-2 filed April 7, 1995 and Amendment
    Nos. 1, 2 and 3 thereto (File No. 33-901014).

(2) Incorporated by reference to Form 10-KSB filed on March 29, 1996.

(3) Incorporated by reference to Form 8-K filed on February 7, 1997.

(4) Incorporated by reference to Form 10-QSB filed on May 13, 1996.

                                       23

<PAGE>

(5) Incorporated by reference to Form 10-QSB filed on August 7, 1996.

(6) Incorporated by reference to Form 10-KSB filed March 29, 1997.

(7) Electronic filing only.


                                   SIGNATURES

   In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

                                      THE MED-DESIGN CORPORATION

Date: March 27, 1998                  By: /s/ James M. Donegan
                                          --------------------
                                          James M. Donegan
                                          President and Chief Executive Officer


   In accordance with the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.

<TABLE>
<CAPTION>

Signature                                   Title                                                         Date
---------                                   -----                                                         ----
<S>                                         <C>                                                           <C>
/s/ James M. Donegan                        Chairman of the Board, President and Chief                    March 27, 1998
--------------------                        Executive Officer (Principal Executive Officer)
James M. Donegan


/s/ Lawrence D. Ellis                       Vice President, Finance and Acting Chief                      March 27, 1998
---------------------                       Financial Officer (Principal Financial Officer
Lawrence D. Ellis                           and Principal Accounting Officer)


/s/ Joseph N. Bongiovanni, III              Director                                                      March 27, 1998
------------------------------
Joseph N. Bongiovanni, III


/s/ John A. Botich                          Director                                                      March 27, 1998
------------------------------
John A. Botich


/s/ John F. Kelley                          Director                                                      March 27, 1998
------------------------------
John F. Kelley


/s/ John S. Marr, M.D.                      Director                                                      March 27, 1998
------------------------------
John S. Marr, M.D.


/s/ Gilbert M. White                        Director                                                      March 27, 1998
------------------------------
Gilbert M. White


/s/ William A. Jolly                        Director                                                      March 27, 1998
------------------------------
William A. Jolly
</TABLE>

                                       24

<PAGE>

                   Index to Consolidated Financial Statements

<TABLE>
<CAPTION>

                                                                                                               Page
                                                                                                               ----
<S>                                                                                                              <C>
Report of Independent Accountants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..    F-2

Consolidated Balance Sheets as of December 31, 1997
     and 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . ..    F-3

Consolidated Statements of Operations for the years ended
     December 31, 1997 and 1996 and Cumulative during the development stage . . . . . . . .  . . . . . . ..    F-4

Consolidated Statements of Stockholders' Equity for the years ended
     December 31, 1997 and 1996 and date of inception to December 31, 1995. . . . . . . . . . . . . . . . .    F-5

Consolidated Statements of Cash Flows for the years ended
     December 31, 1997 and 1996 and Cumulative during the development stage . . . . . . . . . . . . . . . .    F-6

Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..    F-7 to F-17

</TABLE>

                                       F-1

<PAGE>

                        REPORT OF INDEPENDENT ACCOUNTANTS


The Board of Directors and Stockholders
The Med-Design Corporation:

         We have audited the accompanying consolidated balance sheets of The
Med-Design Corporation and subsidiaries (a development stage company) as of
December 31, 1997 and 1996, and the related consolidated statements of
operations, stockholders' equity and cash flows for the year ended December 31,
1997 and 1996 and for the period from December 13, 1993 (inception) to December
31, 1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

         We conducted our audits 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 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 financial position of
The Med-Design Corporation and subsidiaries (a development stage company) as of
December 31, 1997 and 1996, and the consolidated results of their operations and
their cash flow for the year ended December 31, 1997 and 1996 and for the period
from December 13,1993 (inception) to December 31, 1997 in conformity with
generally accepted accounting principles.



/s/ Coopers & Lybrand L.L.P.

2400 Eleven Penn Center
Philadelphia, Pennsylvania
March 16, 1998

                                       F-2



<PAGE>

                   THE MED-DESIGN CORPORATION AND SUBSIDIARIES
                          (a development stage company)

                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>

                                                                                 December 31,          December 31,
                                                                                     1997                  1996
                                                                                 ------------          ------------
<S>                                                                                <C>                 <C>
ASSETS
Current Assets:
     Cash and cash equivalents                                                     $114,079            $1,648,639
     Short-term investments                                                         546,591               535,248
     Available-for-sale securities                                                5,617,284             5,638,498
     Prepaid expenses and other current assets                                      152,547                97,461
                                                                                 ----------            ----------

          Total current assets                                                    6,430,501             7,919,846

     Property, plant, and equipment, net of accumulated
          depreciation and amortization of $406,781 in 1997
               and $183,510 in 1996                                               1,181,481             1,240,557
     Patents, net of accumulated amortization of $44,164 in 1997
          and $34,324 in 1996                                                       681,048               174,623
     Other assets                                                                        --                14,136
                                                                                 ----------            ----------
                                                                                 $8,293,030            $9,349,162
                                                                                 ==========            ==========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
     Short-term borrowings                                                       $4,630,500            $6,446,500
     Accounts payable                                                               205,625               172,911
     Accrued expenses                                                               213,042               128,146
     Current maturities of long-term debt and capital lease obligations             199,821               237,652
                                                                                 ----------            ----------

          Total current liabilities                                               5,248,988             6,985,209
                                                                                 ----------            ----------

     Long-term debt and capital lease obligations, less current maturities          154,674               300,366
                                                                                 ----------            ----------

          Total liabilities                                                       5,403,662             7,285,575
                                                                                 ----------            ----------

Commitments and Contingencies

Stockholders' equity
     Preferred stock, $.01 par value, 5,000,000 shares authorized;
          No shares outstanding                                                          --                    --
     Common stock, $.01 par value, 20,000,000 shares authorized;
          7,951,570 and 6,899,570 shares issued and outstanding
               at December 31, 1997 and 1996, respectively                           79,516                68,996
     Additional paid-in capital                                                  21,764,194            15,718,504
     Deficit accumulated during the development stage                           (18,967,241)          (13,747,408)
     Unrealized gain on available-for-sale securities                                12,899                23,495
                                                                                 ----------            ----------

Total stockholders' equity                                                        2,889,368             2,063,587
                                                                                 ----------            ----------

                                                                                 $8,293,030            $9,349,162
                                                                                 ==========            ==========

</TABLE>

   The accompanying notes are an integral part of these financial statements.

                                       F-3

<PAGE>

                   THE MED-DESIGN CORPORATION AND SUBSIDIARIES
                          (a development stage company)

                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>

                                                  Cumulative
                                                From Inception                Year Ended December 31,
                                              December 13, 1993          --------------------------------
                                             to December 31, 1997           1997                  1996
                                             --------------------        ----------            ----------
<S>                                               <C>                      <C>                   <C>
Operating expense:
     Marketing                                    $   570,569              $192,201              $219,191
     General and administrative                     8,065,820             3,410,569             2,592,727
     Research and development                       3,768,910             1,605,668             1,554,096
     Purchased research and development             5,932,770                    --                    --
                                                  -----------            ----------            ----------
     Total operation expenses                      18,338,069             5,208,438             4,366,014
                                                  -----------            ----------            ----------
     Loss from operations                         (18,338,069)           (5,208,438)           (4,366,014)
     Interest expense                              (1,630,105)             (421,967)             (400,649)
     Investment income                              1,000,933               410,572               443,794
                                                  -----------            ----------            ----------
     Net loss                                    ($18,967,241)          ($5,219,833)          ($4,322,869)
                                                  ===========            ==========            ==========
Basic and diluted earnings per share                                         ($0.66)               ($0.63)
                                                                         ==========            ==========
Weighted average common
     shares outstanding                                                   7,850,756             6,830,802
                                                                         ==========            ==========
</TABLE>

   The accompanying notes are an integral part of these financial statements.

                                       F-4

<PAGE>

                   THE MED-DESIGN CORPORATION AND SUBSIDIARIES
                          (a development stage company)

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>



                                                                                      Additional
                                                       Common Stock   Common Stock    Paid-In
                                                       Shares         Amount          Capital
                                                     ----------------------------------------------
<S>                                                    <C>           <C>             <C>
Balance, December 13, 1993
  (inception)                                                 --              --              --
  Issuance of shares in exchange
       for contributed assets                          1,541,824     $    15,418     $    84,582
  Issuance of shares of common
       stock for cash                                     54,520             545          66,705
  Issuance of shares of
       common stock with debt                            182,056           1,821         528,164
  Issuance of shares of
       common stock for services rendered                240,000           2,400         416,400
  Issuance of shares of common stock with debt            42,856             429         149,571
  Expiration of option to convert shares of
      common stock into $30,000 of senior debt            20,000             200          29,800
  Issuance of shares of common stock in
       exchange for outstanding shares of MDI          1,247,314          12,473       4,353,126
  Issuance of shares of common stock in
       initial public offering                         3,450,000          34,500       9,491,466
  Issuance of warrants in connection with
       consulting agreement                                                               21,000
  Change in unrealized gains on
       available-for-sale securities
  Net Loss
                                                     ----------------------------------------------
Balance, December 31, 1995                             6,778,570          67,786      15,140,814
  Issuance of shares of common stock related to
       the exercise of stock options                      10,000             100          34,900
  Issuance of shares of common stock in
       connection with exercise of warrants              111,000           1,110         542,790
  Change in unrealized gains on
       available-for-sale securities
  Net Loss
                                                     ----------------------------------------------
Balance, December 31, 1996                             6,899,570          68,996      15,718,504
  Issuance of shares of common stock in
       connection with the private placement (net)     1,000,000          10,000       4,607,497
  Issuance of warrants for services                                                      821,000
  Repricing of stock option                                                               62,080
  Issuance of shares of common stock in
       connection with exercise of warrants               52,000             520         254,280
  Issuance of warrants in
       partial payment of patents                                                        300,833
  Change in unrealized gains on
       available-for-sale securities
  Net Loss
                                                     ----------------------------------------------
  Balance, December 31, 1997                           7,951,570     $    79,516     $21,764,194
                                                     ===========     ===========     ===========

</TABLE>

<TABLE>
<CAPTION>

                                                          Deficit          Unrealized
                                                          Accumulated      Gains On
                                                          During the       Available-
                                                          Development      For-Sale      Stockholders'
                                                          Stage            Securities    Equity
                                                      ------------------------------------------------
<S>                                                         <C>            <C>           <C>
Balance, December 13, 1993
  (inception)                                                      --           --                --
  Issuance of shares in exchange
       for contributed assets                                                               $100,000
  Issuance of shares of common
       stock for cash                                                                         67,250
  Issuance of shares of
       common stock with debt                                                                529,985
  Issuance of shares of
       common stock for services rendered                                                    418,800
  Issuance of shares of common stock with debt                                               150,000
  Expiration of option to convert shares of
      common stock into $30,000 of senior debt                                                30,000
  Issuance of shares of common stock in
       exchange for outstanding shares of MDI                                              4,365,599
  Issuance of shares of common stock in
       initial public offering                                                             9,525,966
  Issuance of warrants in connection with
       consulting agreement
  Change in unrealized gains on
       available-for-sale securities                                       $26,479            26,479
  Net Loss                                                $(9,424,529)                    (8,492,487)
                                                      -----------------------------------------------
Balance, December 31, 1995                                 (9,424,539)      26,479         5,810,540
  Issuance of shares of common stock related to
       the exercise of stock options                                                          35,000
  Issuance of shares of common stock in
       connection with exercise of warrants                                                  543,900
  Change in unrealized gains on
       available-for-sale securities                                        (2,984)           (2,984)
  Net Loss                                                 (4,322,869)                    (4,322,869)
                                                      -----------------------------------------------
Balance, December 31, 1996                                (13,747,408)      23,495         2,063,587
  Issuance of shares of common stock in
       connection with the private placement (net)                                         4,617,497
  Issuance of warrants for services                                                          821,000
  Repricing of stock option                                                                   62,080
  Issuance of shares of common stock in
       connection with exercise of warrants                                                  254,800
  Issuance of warrants in
       partial payment of patents                                                            300,833
  Change in unrealized gains on
       available-for-sale securities                                      (10,596)           (10,596)
  Net Loss                                                (5,219,833)                     (5,219,833)
                                                      ----------------------------------------------
  Balance, December 31, 1997                            $(18,967,241)     $12,899      $   2,889,368
                                                        ============      =======      =============
</TABLE>



   The accompanying notes are an integral part of these financial statements.

                                       F-5

<PAGE>

                   THE MED-DESIGN CORPORATION AND SUBSIDIARIES
                          (a development stage company)

                            STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>

                                                              Cumulative
                                                            From Inception
                                                          December 13, 1993       December 31,    December 31,
                                                         To December 31, 1997         1997            1996
                                                       ------------------------ ---------------- ---------------
<S>                                                                <C>               <C>             <C>
Cash flows from operating activities:
Net Loss                                                           $(18,967,241)     $(5,219,833)    $(4,322,869)
Adjustments to reconcile net loss to operating
     cash flows (net of acquisition):
          Depreciation and amortization                                 432,349          233,111         150,337
          Issuance of common stock for services                         418,800
          Purchased research and development                          5,932,770
          Issuance of common stock for interest                          29,985
          Issuance of warrants for services                             842,000          821,000
          Repricing of stock options                                     62,080           62,080
          Amortization of original issued discount                      650,000
          Loss on sale of available-for-sale securities                   2,962            7,046             341
          Changes in operating assets and liabilities:
               Prepaid expenses and other current assets               (150,039)         (55,086)        (32,276)
               Accounts payable                                          97,904           32,714        (117,003)
               Accrued expenses                                         (77,451)          84,896        (108,047)
                                                                   ------------      -----------     -----------
          Net cash used by operating activities                     (10,725,881)      (4,034,072)     (4,429,517)
                                                                   ------------      -----------     -----------

Cash flows from investing activities
     Purchases of property and equipment                             (1,494,732)        (115,195)       (541,642)
     Additions to patents                                              (267,975)        (215,432)        (43,475)
     Payments for purchase of option to acquire
          Med-Design Incorporated                                      (125,000)
     Investments in available-for-sale securities, net               (5,607,347)           3,572       1,470,463
     Notes receivable funded                                            (92,500)
     Purchase of short-term investment                                 (546,591)         (11,343)        (23,340)
                                                                   ------------      -----------     -----------

          Net cash (used) provided by investing activities           (8,134,145)        (338,398)        862,006
                                                                   ------------      -----------     -----------

Cash flows from financing activities:
     (Repayment of) advances from related parties                            --               --              --
     (Repayment of) proceeds from short-term borrowing                       --               --              --
     Capital lease payments                                             (27,354)         (11,508)         (9,813)
     Proceeds from long-term borrowings                                 706,095           14,410         280,187
     Repayment of long-term borrowings                                 (409,549)        (235,425)       (158,217)
     Proceeds from issuance of common stock, prior to
          initial public offering                                        97,250
     Proceeds from exercise of options                                   35,000                           35,000
     Proceeds from issuance of common stock in connection
          with exercise of warrants                                     798,700          254,800         543,900
     Proceeds from short-term borrowing                               6,630,500          184,000       4,318,000
     Repayment of short-term borrowing                               (2,000,000)      (2,000,000)
     Other                                                                                14,136         (14,136)
     Repayment of acquisition note                                   (1,000,000)
     Proceeds of initial public offering, net of offering costs       9,525,966
     Proceeds of private placement, net of offering costs             4,617,497        4,617,497
                                                                   ------------      -----------     -----------

          Net cash provided by financing activities                  18,974,105        2,837,910       4,994,921
                                                                   ------------      -----------     -----------

Increase (decrease) in cash                                             114,079       (1,534,560)      1,427,410
Cash and cash equivalents, beginning of period                                         1,648,639         221,229
                                                                   ------------      -----------     -----------
Cash and cash equivalents, end of period                             $  114,079        $ 114,079     $ 1,648,639
                                                                   ------------      -----------     -----------
Cash paid during the period:
     Interest                                                         $ 921,682       $  396,144      $  378,469
                                                                   ------------      -----------     -----------
Noncash investing and financing activities:
     Issuance of common stock for rights under option
          to acquire Med-Design, Inc.                                 $ 100,000
                                                                   ------------      -----------     -----------
     Issuance of warrants in partial payment of patents                $300,833         $300,833
                                                                   ------------      -----------     -----------
     Issuance of common stock in connection with
          short-term borrowing                                        $ 650,000
     Capital lease obligation incurred                                 $ 85,303         $ 49,000         $ 7,697
                                                                   ------------      -----------     -----------
     Change in unrealized gain                                          $12,889        $ (10,596)       $ (2,984)
                                                                   ------------      -----------     -----------
</TABLE>


    The accompanying notes are an integral part of these financial statements.

                                       F-6

<PAGE>

                   THE MED-DESIGN CORPORATION AND SUBSIDIARIES
                          (a development stage company)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1. Nature of Business

    The Med-Design Corporation (the "Company") designs, develops, manufactures
and markets safety medical devices intended to reduce the incidence of
accidental needlesticks. Accordingly, the Company and its products are subject
to various regulatory processes and approvals. The Company has three core
products under development and several new products which are in the beginning
stages of development. The Company is a development stage enterprise, as defined
by Financial Accounting Standards ("FAS") No. 7, "Accounting and Reporting by
Development Stage Enterprise."

2. Significant Accounting Policies

Principles of consolidation:

    The accompanying consolidated financial statements include the accounts of
The Med-Design Corporation ("MDC") and its wholly-owned subsidiaries, MDC
Investment Holdings, Inc. and MDC Research Ltd. All intercompany accounts and
transactions have been eliminated in consolidation.

Cash and cash equivalents:

    The Company considers all investments with original maturities of three
months or less to be cash equivalents. Financial instruments which potentially
subject the Company to concentrations of credit risk consist principally of
cash. At December 31, 1997, none of the Company's balances exceeded FDIC
insurance limits.

Short-term investments:

    Short-term investments represent investments in a certificate of deposit
with a maturity greater than three months. This investment is stated at cost
plus accrued interest which equals market value. The short-term investment is
restricted as collateral for an equipment financing facility.

Investments in marketable securities:

     The Company's investments are classified as available-for-sale securities
and accordingly any unrealized holding gains or losses, net of taxes, are
excluded from income and recognized as a separate component of stockholders'
equity until realized.

    Investments in marketable securities are made consistent with the Company's
investment guidelines as developed by management and approved by the investment
committee of the Board of Directors.

                                   (Continued)


                                       F-7

<PAGE>

                   THE MED-DESIGN CORPORATION AND SUBSIDIARIES
                          (a development stage company)

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


2. Significant Accounting Policies, continued

Property, plant and equipment:

    Property, plant and equipment are carried at cost. Assets held under capital
leases are recorded at the lower of the net present value of the minimum lease
payments or the fair value of the leased assets at the inception of the lease.
Significant additions or improvements extending the asset's useful lives are
capitalized. Normal maintenance and repair costs are expensed as incurred. When
property, plant and equipment are sold, retired or otherwise disposed of, the
applicable costs and accumulated depreciation are removed from the accounts and
the resulting gain or loss recognized.

    Depreciation is computed by the straight-line method utilizing rates based
upon the estimated service life of the various classes of assets (5 to 10
years). Leasehold improvements are depreciated over the remaining lease term or
asset life if shorter.

Recoverability of long-lived assets:

    The Company's assets are reviewed for impairment whenever events or
circumstances provide evidence that suggest that the carrying amount may not be
recoverable. The Company assesses the recoverability of its assets by
determining whether the carrying value can be recovered through projected
undiscounted future cash flows.

Patents:

    Patents, patent applications, and rights are stated at acquisition costs.
Amortization of patents is recorded by using the straight-line method over the
legal lives of the patents, generally for periods ranging up to 17 years.
Amortization expense from the years ended December 31, 1997 and 1996 was $9,840
and $9,600, respectively.

    In connection with the acquisition of two patents in August 1997 the Company
paid $75,000  and issued warrants to the seller of these patents to purchase
75,000 shares of Common Stock with a fair value $300,833 and a exercise
price of $5.75 per share. These amounts were capitalized.

Income taxes:

    The Company accounts for income taxes under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled.

Research and development:

    Expenditures relating to the development of new products and processes,
including significant improvements and refinements to existing products, are
expensed as incurred. Research and development expenses amounted to $1,605,668
in 1997 and $1,554,096 in 1996.

                                   (Continued)

                                       F-8

<PAGE>

                   THE MED-DESIGN CORPORATION AND SUBSIDIARIES
                          (a development stage company)

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

2. Significant Account Policies, continued

Basic and diluted loss per share:

    The Company adopted FAS No. 128 "Earnings Per Share" effective December 31,
1997. The provisions of FAS No. 128 establish standards for computing and
presenting earnings per share (EPS). This standard replaces the presentation of
primary EPS with a presentation of basic EPS. Additionally it requires dual
presentation of basic and diluted EPS for all entities with complex capital
structures and requires a reconciliation of the numerator and denominator of the
basic EPS computation to the numerator and denominator of the diluted EPS
computation. Per share amounts for all periods presented have been restated to
confirm with the provisions of FAS No. 128.

Estimates utilized in the preparation of financial statements;

    The preparation of financial statements in conformity with general accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent liabilities at the date of the financial statements and the reported
amounts of expenses during the reporting period. Actual results could differ
from those estimates.

Recently issued pronouncements:

    In June 1997, the FASB issued FAS 130, "Reporting Comprehensive Income,"
which requires changes in comprehensive income be shown in the financial
statement that is displayed with the same prominence as other financial
statements. Additionally, the FASB issued FAS 131 "Disclosures about Segments of
an Enterprise and Related Information," which requires disclosures in financial
statements based on managements' approach to segment reporting and industry
requirements to report selected segment information disclosures about products
and services and major customers, on a quarterly basis. The Company will be
required to adopt FAS 130 and 131 during fiscal 1998. The impact of these new
standards on the Company's future financial statements and disclosures has not
been determined.

3. Available-for-Sale Securities

    The Company has recorded investments in available-for-sale securities at
fair value and gross unrealized gains and losses as a separate component of
stockholders' equity. Realized gains and losses on the sale of investment
securities are recognized using the specific identification method.

    Gross unrealized gains and losses for the years ended December 31, 1997 and
1996 are as follows:
<TABLE>
<CAPTION>

                                                                     Gross
                                                                   Unrealized
                                                                     Gains
                                               Cost                 (Losses)                Fair Value
                                               ----                ----------               ----------
<S>                                        <C>                       <C>                    <C>
At December 31, 1997:
U.S. Government Obligations                $3,657,275                $12,476                $3,669,750
Corporate Debt Securities                   1,947,111                    423                 1,947,534
                                           ----------                -------                ----------
Total                                      $5,604,386                $12,899                $5,617,284
                                           ==========                =======                ==========

At December 31, 1996:
U.S. Government Obligations                $3,010,309                $31,228                $3,041,537
Corporate Debt Securities                   2,604,694                 (7,733)                2,596,961
                                           ----------                -------                ----------
Total                                      $5,615,003                $23,495                $5,638,498
                                           ==========                =======                ==========
</TABLE>

                                   (Continued)
                                       F-9

<PAGE>

                   THE MED-DESIGN CORPORATION AND SUBSIDIARIES
                          (a development stage company)

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


3. Available-for-Sale Securities, continued

    Investment income for the years ended December 31, 1997 and 1996 consisted
of the following:




                                               1997            1996
                                               ----            ----
Realized gain on sale of
available-for-sale securities                  $817         $15,035

Realized loss on sale of
available-for-sale securities                (7,863)        (15,376)

Interest income                             409,361         416,413

Dividend income                               8,257           6,148
                                            -------         -------

Total                                      $410,572        $422,220
                                           ========        ========

4. Property, Plant And Equipment

    Balances of major classes of assets and accumulated depreciation and
amortization at December 31, 1997 and 1996 are as follows:


                                                     1997                1996
                                                     ----                ----

Leasehold improvements                             $160,127            $160,127

Automotive and Transportation                        15,104
Machinery and equipment                             466,044             433,863

Office furniture & fixtures                         422,087             413,178

Computer equipment & software                       337,768             320,788

Equipment under capital lease                        85,303              36,303

Construction in progress                            101,829              59,808
                                                 ----------          ----------
                                                 $1,588,262          $1,424,067

Less:

Accumulated depreciation                            391,105             174,319
Accumulated amortization of
Equipment held under capital
Lease                                                15,676               9,191
                                                 ----------          ----------


                                                 $1,181,481          $1,240,557
                                                 ==========          ==========


    Depreciation and amortization expense was $223,271 and $140,737 for the
years ended December 31, 1997 and 1996, respectively.



                                   (Continued)

                                      F-10

<PAGE>




                   THE MED-DESIGN CORPORATION AND SUBSIDIARIES
                          (a development stage company)

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


5. Short-Term Borrowings

    In July 1995, the Company entered into a $3,000,000 revolving line of credit
("Loan Agreement") with its principal lending institution (the "Bank"). In 1996,
The Loan Agreement was amended to $6,750,000, and the Company's equipment
financing facility ("Equipment Loans") with the Bank was consolidated into the
Loan Agreement. The amended Loan Agreement provides that advances under
Equipment Loans will not exceed $600,000 of the $6,750,000. Borrowings to meet
working capital needs bear interest at LIBOR plus 250 basis points (8.22% at
December 31, 1997). Under the terms of the Loan Agreement, all borrowings must
be fully collateralized by available-for-sale securities, cash equivalents,
equipment financed, and general intangibles of the Company. The line of credit
is due on June 30, 1998. At December 31, 1997 and 1996, including Equipment
Loans, the Company had $4,685,972 and $6,563,056 outstanding under the Loan
Agreement, respectively.

    Equipment Loans are classified as long-term debt (See Note 6).

6. Long-Term Debt

    Long-term debt at December 31, 1997 and 1996 consisted of the following:

                                                          December 31,
                                                      -------------------
                                                      1997           1996
                                                      ----           ----
Bank term note, under equipment
financing facility, interest at prime plus
 .25%; fully collateralized, payable in
monthly installments through December
1998 (See Note 5).                                  $ 55,472        $116,556

Bank term note, under financing facility
interest at the Bank's prime rate, payable
in equal monthly installments through
1999; fully collateralized by applicable
equipment and the short-term
investment. At December 31, 1997,
approximately $305,523 was available for
additional equipment financing.                      241,068         401,005

Capital lease obligations, at interest rates
ranging from 4.4% to 9.3%, with monthly
payments ranging from $182 to $987;
lease obligations are due through 2002.               57,955          20,457
                                                    --------        --------

                                                     354,495         538,018
Less: current maturities                             199,821         237,652
                                                    --------        --------
                                                    $154,674        $300,366
                                                    ========        ========

                                   (Continued)

                                      F-11

<PAGE>

                   THE MED-DESIGN CORPORATION AND SUBSIDIARIES
                          (a development stage company)

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


6. Long-Term Debt, continued

    The aggregated amount of debt and capital lease obligations maturing in each
of the next five years, is as follows:

                  1998                                 $199,821
                  1999                                  121,000
                  2000                                   11,707
                  2001                                   10,546
                  2002                                   11,421
                                                       --------
                                                       $354,495
                                                       ========

7. Commitments and Contingencies

    The Company leases a building, office space, and other office equipment
under noncancellable operating leases expiring at various times through December
31, 2000. The building lease provides an option to renew the lease for two
additional thirty-six month periods (See Note 16).

    The following is a schedule of future minimum payments, by year and in the
aggregate, of noncancellable operating leases with initial or remaining terms of
greater than one year at December 31, 1997:

                  1998                                $191,996
                  1999                                 196,411
                  2000                                 134,776
                                                       -------
                  Total minimum
                     lease payments                   $523,183
                                                      ========

    Total rent expense under all operating leases for year ended December 31,
1997 and 1996 was $187,709 and $189,774 respectively.

    The Company has employment agreements renewable annually with the Chief
Executive Officer, and certain other executives providing for salary to be paid
over the term of their agreements which expire in the year 2000 and 1998,
respectively. At December 31, 1997, the payments remaining under employment
contracts total approximately $669,000.

    In March, 1998, the Company's Chairman, President and Chief Executive
Officer, who is also a shareholder, committed to provide up to $1,400,000 to
fund the Company's operation should the necessity arise.

                                   (Continued)

                                      F-12

<PAGE>

                   THE MED-DESIGN CORPORATION AND SUBSIDIARIES
                          (a development stage company)

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

8. Basic and Diluted Loss Per Share

    The following table sets forth the computation of basic and diluted net
loss per share:
<TABLE>
<CAPTION>


                                                    Loss                        Common Shares
                                                 Numerator                       Denominator                           EPS
                                                 ---------                      -------------                          ---
<S>                                            <C>                                <C>                               <C>
1997
----
Basic and diluted EPS
-------------------------------
Net loss to common shareholders                $ (5,219,833)                      7,850,756                         $ (0.66)
                                               ------------                       ---------                         --------
1996
----
Basic and diluted EPS
-------------------------------
Net loss to common shareholders                $ (4,322,869)                      6,830,802                         $ (0.63)
                                               ------------                       ---------                         --------
</TABLE>

Options and warrants to purchase 1,504,000 shares of common stock as of December
31, 1997 and 578,000 as of December 31, 1996 were not included in computing
diluted earnings per share as the effect was antidiluted.

9. Stockholders' Equity

    Common Stock

         On January 31, 1996, the Board of Directors authorized a two-for-one
stock split in the form of a stock dividend payable to shareholders of record as
of February 12, 1996. All references in the consolidated financial statements to
average number of shares outstanding and related prices, per share amounts, and
stock plan data have been restated to reflect this split.

    The Company was originally capitalized by the contribution of a $100,000
option to acquire MDI in exchange for 1,541,824 shares of the Company.

    During the years ended December 31, 1995 and 1994 the Company issued three
notes totaling $650,000 with 182,056 shares of Common Stock in the aggregate.
The value of the stock represents $650,000 of original issue discount on the
debt which was charged to income through the first quarter of fiscal year 1995.
The debt along with accrued interest of 10% was paid upon the consummation of
the Company's initial public offering. Two of these notes aggregating $400,000
and 114,286 shares were issued to shareholders of the Company.

    In addition to shares purchased for cash or in connection with debt
issuances during the year ended December 31, 1994, the Company issued 240,000
shares of its Common Stock to various individuals in exchange for services
rendered. The fair market value of those shares has been recorded as
compensation expense of $418,800.

    In accordance with an agreement between the Company and a shareholder, based
on the outcome of the Company's initial public offering, the shareholder had the
option to convert 20,000 shares of stock into $30,000 of senior corporate debt
bearing interest at 10%. Based on the outcome of the initial public offering
this option expired unexercised.

                                   (Continued)

                                      F-13

<PAGE>

                   THE MED-DESIGN CORPORATION AND SUBSIDIARIES
                          (a development stage company)

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


9. Stockholders' Equity, continued

    Stock Option Plan

    In 1995, the Company created a Non-Qualified Stock Option Plan ("Stock
Option Plan") which provides for the granting of 500,000 options to directors,
officers, and other employees of the Company. Under the Stock Option Plan, the
exercise price of each option may not be less than the fair market value (as of
the date of grant) of Common Stock subject thereto and the term of each option
may be no more than 10 years from the date of grant. Additionally, the Stock
Option Plan provides for the issuance of options for the purchase of 16,000
shares of Common Stock annually to each non-employee director.

    Activity under the Stock Option Plan during the years ended December 31,
1997 and 1996 is as follows:

<TABLE>
<CAPTION>


                                                       1997                                          1996
                                          ------------------------------              ----------------------------------
                                                               Weighted-                                       Weighted-
                                                               Average                                         Average
                                                               Exercise                                        Exercise
       Fixed Options                      Shares                 Price                Shares                     Price
------------------------------------------------------------------------------------------------------------------------
<S>                                          <C>                   <C>                   <C>                       <C>
Outstanding at beginning
     of year                                 289,000               $8.48                 123,000                   $4.80
Granted                                      186,500               $7.78                 176,000                  $10.77
Exercised                                         --                  --                 (10,000)                  $3.50
Canceled                                     (33,500)             $11.79                      --                      --
                                      ----------------------------------------------------------------------------------
Outstanding at end of year                   442,000               $5.53                 289,000                   $8.48
                                      ==================================================================================
Options exercisable at
     year-end                                135,400                                      81,000
                                      ==============                             ===============
Option price range at end
     of year                          $3.50 to $8.00                             $3.50 to $20.50
                                      ==============                             ===============
Weighted-average fair
     value of options granted
        during year                            $5.52                                       $5.94
                                      ==============                             ===============

</TABLE>


    The following table summarizes information about fixed stock options
outstanding at December 31, 1997:


<TABLE>
<CAPTION>

                                              Options Outstanding                                 Options Exercisable
                               ---------------------------------------------------          -------------------------------
                                                    Weighted-
                                                     Average             Weighted-                                Weighted-
                                  Number            Remaining             Average             Number               Average
Range of                       Outstanding         Contractual           Exercise           Exercisable           Exercise
Exercise Prices                at 12/31/97            Life                 Price            at 12/31/97             Price
---------------------------------------------------------------------------------------------------------------------------
<S>                               <C>                    <C>                <C>                <C>                  <C>
$3.50                             52,000                 3.7                $3.50              52,000               $ 3.50
$4.50 to $8.00                   390,000                 3.9                $7.22              83,400               $ 6.08
$3.50 to $8.00                   442,000                 3.8                $6.78             135,400               $ 5.09
                                 =======                 ===                =====             =======               ======
</TABLE>

                                   (Continued)

                                      F-14

<PAGE>



                   THE MED-DESIGN CORPORATION AND SUBSIDIARIES
                          (a development stage company)

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

9. Stockholders' Equity, continued

     Stock Option Plan, continued

    On October 10, 1997, the Company repriced previously issued stock options on
32,000 shares of Common Stock for two directors. The options were issued on June
3, 1996 at an exercise price of $20.50 a share and were repriced to $4.50 a
share.  In connection with the repricing of these stock options the Company
recorded compensation expense of $62,080.

    The company has adopted the disclosure only provisions of FAS No. 123,
"Accounting for Stock-based Compensation." Accordingly, no compensation cost has
been recognized for the Company's Stock Option Plan. Had compensation cost for
the Company's Stock Option Plan been determined based on the fair value at the
grant date for awards in 1997 and 1996 consistent with the provisions of FAS No.
123, the Company's net loss and net loss per share would have been increased to
the pro forma amounts indicated below:

                                                    1997                1996
                                                    ----                ----
       Net loss - as reported                   ($5,219,833)        ($4,322,869)
       Net loss - pro forma                     ($6,261,171)        ($4,919,601)
       Net loss per share - as reported              ($0.66)             ($0.63)
       Net loss per share - pro forma                ($0.80)             ($0.72)

    The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumption used for grants in 1997 and 1996: dividend yield of 0.00%; expected
volatility of .92%; risk free interest rate of 6.29%; and expected lives based
on actual terms of options granted.

     Warrants

     In connection with the initial public offering (Note 15), the Company
issued warrants to the Underwriter to purchase 300,000 shares of Common Stock,
of which warrants to purchase 111,000 were exercised in 1996 and 52,000 were
exercised in 1997. In addition, on August 15, 1995 the Company issued warrants
to purchase from the Company 100,000 shares of Common Stock at $7.50 per share,
in consideration for the execution of an agreement for consulting services. The
warrants are exercisable upon issuance and expire on August 15, 1998. In
connection with the issuance of these warrants, the Company recorded consulting
expense in the amount of $21,000 for the year ended December 31, 1995.

    On January 23, 1997, the Company completed the sale of 1,000,000 shares of
Common Stock. In connection with the sale, the Company also sold to the
placement agent, for the sale, for nominal consideration, warrants to purchase
100,000 shares of Common Stock. These warrants are exercisable at a price of
$5.50 per share of Common Stock for a period of four years commencing January
22, 1998.

    On March 19, 1997, the Company issued warrants to purchase 100,000 shares of
Common Stock at an exercise price of $7.50 per share to a director of the
Company, who was engaged to perform certain consulting services on behalf of the
Company. The warrants are exercisable upon issuance and expire on March 19,
2000. In connection with the issuance of these warrants, the Company recorded
consulting expense in the amount of $436,000 for the year ended December 31,
1997.

    On August 6, 1997, in connection with the acquisition of two patents, the
Company issued warrants to purchase 75,000 shares of Common Stock at an exercise
price of $5.75 per share. These warrants are exercisable on or before August 6,
2002.

    On October 10, 1997, the Company issued warrants to purchase 100,000 shares
of Common Stock at an exercise price of $5.44 to a director of the Company who
was engaged to perform certain consulting services on behalf of the Company.
These warrants are exercisable upon issuance and expire on October 10, 2000. In
connection with the issuance of these warrants, the Company recorded consulting
expense in the amount of $385,000 for the year ended December 31, 1997.

                                   (Continued)

                                      F-15


<PAGE>

                   THE MED-DESIGN CORPORATION AND SUBSIDIARIES
                          (a development stage company)

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

10. Income Taxes

    On December 31, 1997 and 1996, the Company had a net operating loss carry
forward for federal income tax purposes of approximately $8,940,000 and
$6,092,000, respectively, and for state tax purposes of approximately $6,695,000
and $5,966,000, respectively. These net operating losses are available to offset
future taxable income, if any, through 2011 and 2001 for federal and state tax
purposes, respectively. A valuation allowance has been provided for the deferred
tax asset resulting from the net operating loss carry forward. Other temporary
differences are insignificant. The utilization of net operating loss
carryforward may be limited by Section 382 of the Internal Revenue Code.

11. Related Party Transactions

    During 1997 and 1996, the Company paid $31,830 and $33,182 respectively, for
legal services to a firm, of which a partner is a director, officer and
shareholder of the Company.

12. Fair Value of Financial Statements

    The fair value of financial instruments approximates carrying value. The
following methods and assumptions were considered by the Company in determining
its fair value disclosures for financial instruments:

    Cash and cash equivalents: The carrying amount reported in the balance sheet
    approximates fair value.

    Marketable securities: Available-for-sale securities consist of corporate
    bonds and U.S. Government Obligations. Fair value is based on quoted market
    prices.

    Debt: The Company's debt is primarily variable in nature and based on LIBOR
    or the prime rate. As a whole the carrying amount of debt instruments
    approximates fair value.

13. Management's Plan

    The Company has incurred losses of $5,220,000 and $4,323,000 for the years
ended December 31, 1997 and 1996, respectively, and has a deficit of $18,967,000
as of December 31, 1997. Management developed a plan of action during 1997 which
included cost containment measures with a focus on strategic alliances and
licensing arrangements that will enable the Company to increase its market
penetration and provide positive cash flow. Cost containment measures include,
among other strategies, relocating the Company's headquarters to its research
and development facility in Ventura, California. Management intends to refine
and enhance this plan during 1998.

                                   (Continued)

                                      F-16

<PAGE>

                   THE MED-DESIGN CORPORATION AND SUBSIDIARIES
                          (a development stage company)

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


14. Acquisition of MDI

    On April 5, 1995 the Company acquired the outstanding stock of MDI in
exchange for 1,247,314 (valued at $4,365,599) shares of the Company, of which
3,572 shares were delivered to certain creditors of MDI to satisfy $12,500 of
outstanding obligations of MDI, 24,000 shares to a former noteholder of MDI to
satisfy an obligation of MDI, and a $1,000,000 non-interest bearing promissory
note. The Note was satisfied on June 12, 1995 utilizing the net proceeds of the
Company's initial public offering.

    This acquisition was accounted for in accordance with the purchase method,
under which the purchase price was allocated to the assets of MDI based on the
fair market value of such assets. The excess of the purchase price over the fair
market value of the net assets acquired was treated as purchased research and
development as follows:

         Value of 1,247,314 shares of stock
             granted at a price of $3.50 a share      $4,365,599
         Issuance of note to former
             shareholders of MDI                       1,000,000
         Payments in connection with
             option to acquire MDI                       225,000
         Negative net book valued acquired               342,171
                                                      ----------
                                                      $5,932,770
                                                      ==========

15. Initial Public Offering

    In June 1995, the Company consummated an initial public offering (the
"Offering") of 3,000,000 shares of Common Stock at a price of $3.50 per share
(1,500,000 shares at $7.00 per share prior to stock). An additional 450,000
shares were issued at $3.50 per share to the Underwriter of the initial public
offering. The Company received $9,525,966 in proceeds, net of costs incurred in
connection with the Offering.

    Additionally, in connection with the Offering, the Company agreed to sell
the Underwriter, for nominal consideration, warrants to purchase 300,000 shares
of Common Stock ("the Underwriter's Warrants"). The Underwriter's Warrants are
exercisable at a price of $4.90 per share of Common Stock for a period of four
years commencing one year from the effective date of the Offering.

16. Subsequent Events

    On February 23, 1998, the company signed an agreement with Graphic Controls
Corporation for the development and licensing of its proprietary Safety
Intravenous Catheter Insertion Device. The signing of this agreement, and the
completion of a series of mutually agreed upon milestones would result in
payment to Med-Design totaling as much as $3.72 million with continuous
royalties for the life of the patents. Med-Design would receive $1.82 million of
the $3.72 million during the completion of milestones associated with the
development phase and $1.9 million in milestone payments associated with the
granting of the exclusive North American License.

    On January 14, 1998 the Company issued warrants to purchase 150,000 shares
of its Common Stock at a price of $2.88 to two directors. These warrants are
exercisable on or before January 14, 2001.

    In March 1998, the Company completed relocating corporate headquarters to
its Ventura, California facility from its offices in Philadelphia, PA. The
Company subleased the majority of the office space previously used by the
Company in Philadelphia as its corporate headquarters, but will continue to
maintain an office at that location.

                                      F-17