<PAGE>   1
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB

              ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934
                   For The Fiscal Year Ended December 31, 1999

                         Commission File Number: 1-12529

                                  NETMED, INC.
                 (Name of small business issuer in its charter)

             OHIO                                                31-1282391
(State or other jurisdiction of                               (I.R.S. Employer
 incorporation or organization)                              Identification No.)

                          1275 KINNEAR ROAD, SUITE 132
                             COLUMBUS, OH 43212-1155
                    (Address of principal executive offices,
                               including zip code)

                                 (614) 675-3722
                           (Issuer's telephone number,
                              including area code)

        Securities registered pursuant to Section 12(b) of the Act: None

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

                           COMMON SHARES, NO PAR VALUE
                                (Title of Class)

         The registrant has filed all reports required to be filed by Section 13
or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such
reports), and has been subject to the filing requirements for at least the past
90 days.

         Check if there is no disclosure of delinquent filers pursuant to Item
405 of Regulation S-B contained in this form, and will not 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 registrant had no revenues for the fiscal year ended December 31,
1999.

         The aggregate market value of the registrant's common equity held by
non-affiliates of the registrant was approximately $1,405,725 on March 22, 2000.

         There were 12,868,951 of the Registrant's Common Shares outstanding on
March 22, 2000.

         Transitional Small Business Disclosure Format (check one):
Yes [ ]   No [x]

                       DOCUMENTS INCORPORATED BY REFERENCE

         None.
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                                     PART I

ITEM 1.  DESCRIPTION OF BUSINESS.

GENERAL

         The Company is an Ohio corporation engaged in the business of
acquiring, developing and marketing medical and health-related technologies. The
sole business activity of the Company, through its majority owned subsidiary
OxyNet, Inc., is the development and commercialization of products incorporating
a new ceramic-based technology for separation of oxygen from ambient air and
other gases. The first such product targeted for commercialization is an oxygen
concentrator for use in the home health industry.

         Prior to March 26, 1999, the Company was also in the business of
marketing of the PAPNET(R) Testing System, an automated cervical cancer
screening product of Neuromedical Systems, Inc. ("NSI"). The Company marketed
the PAPNET(R) Testing System in a five state area under license from NSI. On
March 26, 1999, NSI announced that it had commenced reorganization proceedings
under Chapter 11 of the U.S. Bankruptcy Code. In connection with its Chapter 11
filing, the Company terminated the majority of its U.S. workforce and agreed to
sell its intellectual property and related assets to AutoCyte, Inc. (now Tripath
Imaging, Inc.), for $4,000,000 in cash and 1.4 million shares of AutoCyte common
stock. As of May 6, 1999, NSI, as debtor in possession, rejected the Company's
license and the Bankruptcy Court confirmed the rejection over the Company's
objection. As a result, the Company became an unsecured creditor of NSI with a
breach of contract claim for the termination of the license.

         On December 3, 1999, the Company announced that the bankruptcy court
had approved a settlement among the Company, NSI, and the official committee of
unsecured creditors. The agreement provided for the settlement and release of
the Company's claims in exchange for 175,000 shares of common stock of Tripath
Imaging, Inc. (NasdaqNM: TPTH), and the allowance in the bankruptcy proceeding
of an unsecured claim by the Company in the amount of $1.5 million. The 175,000
Tripath shares were issued to the Company in late December, 1999, and the
balance of its settled claim will be included with other allowed claims of
unsecured creditors to be paid out of liquidation proceeds in the bankruptcy
proceeding. The Company is unable to predict the amount and timing of any
payments it may ultimately receive in respect of the $1.5 million unsecured
claim.

         The Company was originally organized in 1989 for the purpose of
acquiring the exclusive territorial rights to market NSI's proprietary products
in Ohio. In 1990, it acquired from NSI marketing rights for Kentucky and the
Chicago, Illinois metropolitan area. On December 16, 1996, the Company completed
a merger with licensees that had held the rights to market the PAPNET Testing
System in the states of Missouri, Georgia and North Carolina. The Company was
the surviving corporation in the merger. Upon completion of the merger, the
Company changed its name from Papnet of Ohio, Inc. to NetMed, Inc.

         Currently, the Company's sole business is limited to research and
development activities related to the oxygen separation and concentration
technology of its subsidiary, OxyNet, Inc.

DEVELOPMENT OF OXYGEN TECHNOLOGY

         In early 1997 the Company entered into an agreement with CeramPhysics,
Inc. of Westerville, Ohio ("Ceram"), pursuant to which the Company obtained the
right to acquire 95% ownership of Ceram Oxygen Technologies, Inc. ("COTI"), a
Ceram subsidiary that held an exclusive world-wide license to Ceram's patented
ceramic oxygen generation technology for all applications of the technology
except oxygen sensors and fuel cells. On April 3, 1998, the Company acquired
from COTI 95 common shares, representing 95 percent of COTI's outstanding common
shares immediately following the closing, in exchange for a cash payment of
$50,000 and delivery of a note in the principal amount of $150,000. The note
provided for three equal principal payments of $50,000 on each of June 1, July
1, and August 1, 1998, together with interest at the rate of 8.5 percent per
annum. The cash payment and note were assigned by COTI to Ceram in payment of a
$200,000 license fee for the technology. Following this transaction, COTI's name
was changed to "OxyNet, Inc."

         The Company is currently engaged in litigation with Ceram and its
principals over a purported termination of the license for this technology, as
well as disputes concerning the scope of the license and the payment of
royalties. See "Legal Proceedings."

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         It is the Company's intention to incorporate the technology into
products that separate and concentrate oxygen from ambient air and other gases,
with the first product being an oxygen concentrator for use in the home health
industry. Since acquisition of the rights to the technology, the Company has
proceeded with the scale-up of early demonstration modules incorporating the
technology, and has developed other components necessary to construct a
prototype oxygen concentrator system. Since 1997, the Company has experienced a
number of technical challenges that have delayed the completion of a prototype
device. However, the Company believes that it has overcome most of these
difficulties, and expects to complete and demonstrate the prototype by the end
of the second quarter of 2000.

         Assuming successful completion of the prototype, it is the Company's
intention to pursue the development of a commercial version of the device.
Although it is possible that the Company will proceed to do so unilaterally, the
Company lacks the financial and other resources necessary to do so, and it is
more likely that the Company will pursue commercialization through a licensing,
joint venture or similar relationship with a larger company.

         On March 7, 2000, the U.S. Patent Office issued patent No. 6,033,457 on
the Company's medical oxygen concentrator system. The patent has been assigned
to the Company's subsidiary, OxyNet, Inc.

         The Company is also pursuing other applications of the technology
beyond the generation of medical oxygen. On April 30, 1999, the Company and
OxyNet, Inc. entered into a joint development agreement and a licensing
agreement with MG Generon, Inc., a subsidiary of Messer Group, to pursue
development of a device that will use the technology to produce highly
concentrated nitrogen from gas mixtures through the removal of oxygen from such
mixtures. The Company granted a first security interest in the license agreement
between the Company, OxyNet and Ceram, and if joint development efforts are
successful, MG Generon would have exclusive rights to the nitrogen purification
technology and the Company would be paid a royalty. MG Generon made a payment of
$250,000 to the Company upon execution of the joint development agreement, and
agreed to fund additional development costs based upon a project schedule to be
approved by MG Generon. Under certain conditions relating to the litigation with
Ceram, payments made by MG Generon could be refundable.

PERSONNEL

         As of March 17, 2000, the Company employed two full time employees.
None of the Company's employees are subject to a collective bargaining
agreement, and the Company considers its relationship with its employees to be
good.

BUSINESS RISKS

           The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for certain forward-looking statements. The following factors, among
others, could cause actual results to differ materially from those contained in
forward-looking statements made in this report, including without limitation,
the sections entitled "Business," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Legal Proceedings." When
used in this report and the documents incorporated by reference herein, the
words "estimate," "project," "anticipate," "expect," "believe" and words of
similar import are intended to identify forward-looking statements.

WE MAY NEVER HAVE POSITIVE EARNINGS

         Our current business is limited to research and development activities
relating to our OxyNet(R) technology, from which we have yet to derive any
revenues. Therefore we are subject to risks incident to any early stage
business, including the absence of earnings. As of December 31, 1999, we had a
retained deficit of $7,830,287. Until a successful commercial launch of a
product incorporating our OxyNet(R) technology (which is by no means assured) we
will realize little, if any, revenue, and will be dependent upon the proceeds of
the NSI bankruptcy settlement to fund operations.

LACK OF SALES AND REVENUES AND HISTORY OF LOSSES; ANTICIPATED FUTURE LOSSES

         Historically, the Company's only revenues were derived from sales of
NSI's Papnet product. Since termination of the NSI license, the Company has been
engaged primarily in the research, development and testing of our OxyNet(R)
technology. The Company has not had any commercial sales or generated any
significant revenues from the OxyNet(R) technology to date and has experienced
operating losses since its inception, with those for fiscal

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year 1999 totaling $1,039,279. The Company expects to incur substantial
operating losses and the rate at which such losses are incurred is expected to
increase relative to prior years as the Company prepares for the
commercialization of a product incorporating the technology. Until a successful
commercial launch of a product incorporating our OxyNet(R) technology, which is
by no means assured, we will realize little, if any, revenue, and will be
dependent upon the proceeds of the NSI bankruptcy settlement to fund operations.
There can be no assurance that the Company will ever generate revenues or
achieve profitability.

PRODUCT DEVELOPMENT RISKS; UNCERTAINTY OF REGULATORY APPROVAL

         Our OxyNet(R) oxygen concentrator device is under development and,
accordingly, its safety and efficacy has not yet been established. The
production and marketing of the OxyNet(R) oxygen concentrator, and the Company's
ongoing research and development activities are subject to regulations by
numerous government authorities in the United States and other countries. The
manufacture and sale of the oxygen concentrator and future products are subject
to FDA review and approval, which can be an expensive, lengthy and uncertain
process.

         Failure to complete clinical trials or obtain the necessary FDA
allowances or approvals, or to obtain such allowances or approvals on a timely
basis, would have a material adverse effect on the Company's business, financial
condition and results of operations. In addition, the FDA and various state
agencies inspect medical device manufacturers from time to time to determine
whether they are in compliance with applicable regulations, including ones
concerning manufacturing, testing, quality control and product labeling
practices. Noncompliance with applicable regulatory requirements can result in,
among other things, fines, injunctions, civil penalties, recall or seizure of
products, total or partial suspension of production, failure of the government
to grant pre-market clearance or approval for devices, withdrawal of marketing
clearances or approvals, and criminal prosecution. The FDA also has the
authority to request recall, repair, replacement or refund of the cost of any
device manufactured or distributed by the Company.

UNCERTAINTY OF MARKET ACCEPTANCE

         The OxyNet(R) oxygen concentrator system represents a new approach to
medical oxygen, and there can be no assurance that the we will gain any
significant degree of market acceptance even if we obtain the necessary
regulatory clearances or approvals. We believe that in order to obtain market
acceptance for oxygen concentrators designed for use in the home health
industry, recommendations by physicians may be significant, and there can be no
assurance that any such recommendations will be obtained. In addition, the
medical gas industry is highly competitive. In order to compete successfully
against other products, the Company must maintain competitive pricing.
Insufficient market acceptance of the oxygen concentration system would have a
material adverse effect on the Company's business, financial condition and
results of operations.

DEPENDENCE ON SINGLE PRODUCT

         Although the we intend to pursue other applications of the OxyNet(R)
technology, we expect that if we ever realize any significant revenues from
commercialization of the technology, the first revenues will be derived from the
home health care model of the oxygen concentrator system. Failure to
successfully develop and commercialize the home health care system would have a
material adverse effect on the Company's business, financial condition and
results of operations.

COMPETITION AND TECHNOLOGICAL ADVANCES

         Our ability to compete in the medical oxygen field will depend
primarily upon physician and consumer acceptance of the home health care model
of the oxygen concentrator, consistency of product quality and delivery, price,
technical capability and the training of health care professionals and
consumers. Other factors within and outside of our control will also affect our
ability to compete, including our product development and innovation
capabilities, our ability to obtain required regulatory clearances, our ability
to protect the proprietary technology included in its products, our
manufacturing and marketing capabilities, our third-party reimbursement status
and our ability to attract and retain skilled employees. Our competitors will
likely have significantly greater financial, technical, research, marketing,
sales, distribution and other resources than the Company. There can be no
assurance that the Company's competitors will not succeed in developing or
marketing technologies and products that are more effective or commercially
attractive than any products that may be offered by the Company, nor can there
be any assurance that such competitors will not succeed in obtaining regulatory
clearance, introducing or commercializing any such products before the Company.
Such developments could have a material adverse effect

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on the Company's business, financial condition and results of operations.

PATENTS AND PRODUCTION OF PROPRIETARY TECHNOLOGY

         The Company's ability to compete effectively will depend, in part, on
its ability to develop and maintain proprietary aspects of its OxyNet oxygen
concentrator technology. Although the Company's OxyNet subsidiary has been
issued a United States patent for its home concentrator system, and has
exclusively licensed other patents for the core technology, there can be no
assurance that these patents will not be challenged, invalidated or circumvented
in the future. Legal standards related to the enforceability, scope and validity
of patents are in transition and are subject to uncertainty due to broad
judicial discretion and evolving case law. Moreover, there can be no assurance
that competitors, many of which have substantial resources and have made
substantial investments in competing technologies, will not seek to apply for
and obtain patents that will prevent, limit or interfere with the Company's
ability to make, use and sell its products either inside or outside the United
States. The defense and prosecution of patent litigation or other legal or
administrative proceedings related to patents is both costly and time-consuming,
even if the outcome is favorable to the Company. An adverse outcome could
subject the Company to significant liabilities to third parties, require
disputed rights to be licensed from others or require the Company to cease
making, using or selling any products. There also can be no assurance that any
licenses required under any patents or proprietary rights would be made
available on terms acceptance to the Company, if at all.

         The Company is currently engaged in litigation with the licensor of the
core oxygen generation technology over a purported termination of the license
for this technology, as well as disputes concerning the scope of the license and
the payment of royalties. See "Legal Proceedings."

         There has been extensive litigation in the medical device industry
regarding patents and other intellectual property rights. Although patent and
intellectual property disputes in the medical device area have often been
settled through licensing or similar arrangements, costs associated with such
arrangements may be substantial. Adverse determinations as to the OxyNet patents
could:

         o        limit or destroy the value of our license rights to these
                  technologies
         o        subject us to significant liabilities from third parties
         o        require us to seek licenses from third parties
         o        prevent us from manufacturing or selling these products

Any of these determinations could have a material adverse effect on our
business, financial condition and results of operations.

         The Company also relies on unpatented proprietary technology, and there
can be no assurance that others may not independently develop the same or
similar technology or otherwise obtain access to the Company's unpatented
proprietary technology. In addition, the Company cannot be certain that others
will not independently develop substantially equivalent or superseding
proprietary technology, or that an equivalent product will not be marketed in
competition with the Company's products, thereby substantially reducing the
value of the Company's proprietary rights. There can be no assurance that any
confidentiality agreements between the Company and its employees, consultants or
contractors will provide meaningful protection for the Company's trade secrets,
know-how or other proprietary information in the event of any unauthorized use
or disclosure of such trade secrets, know-how or other proprietary information.

PRODUCT LIABILITY RISK; LIMITED INSURANCE COVERAGE

         If the Company is successful in the commercialization of the OxyNet(R)
technology and embarks on the manufacture or distribution of products
incorporating the technology, it will face exposure to product liability claims.
Although the Company may seek to obtain insurance for such exposure, product
liability insurance is expensive, and there can be no assurance that such
insurance in the future will be available on commercially reasonable terms, or
at all, or that such insurance, even if obtained, would adequately cover any
product liability claim. A product liability or other claim with respect to
uninsured liabilities or in excess of insured liabilities could have a material
adverse effect on the business, financial condition and prospects of the
Company.

LIMITED PUBLIC MARKET-DELISTED FROM THE AMERICAN STOCK EXCHANGE

         In August 1998, the staff of the American Stock Exchange recommended
that our common shares be

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delisted from trading on the Exchange because of our failure to meet minimum
financial requirements for continued listing. We appealed this determination to
the Board of Governors of the Exchange, which permitted our continued listing on
the Exchange until March 31, 1999, when it decided to follow the Exchange
staff's recommendation and delist our common shares. Our common shares are
currently traded in the over the counter market and are quoted on the OTC
Bulletin Board. There can be no assurance that our common shares will continue
to be admitted for quotation on the OTC Bulletin Board or that a market for our
common shares will exist in the future. There is no assurance that, if a market
exists in the future, that it will be an active, liquid or continuous trading
market. The stock market has experienced extreme price and volume fluctuations
and volatility that has particularly affected the market prices of many
technology, emerging growth, and developmental companies. Such fluctuations and
volatility have often been related or disproportionate to the operating
performance of such companies. Factors such as announcements of the introduction
or enhanced services or related products by the Company or its competitors may
have a significant impact on the market price of the Company's common shares.

RISKS RELATING TO LOW PRICED STOCKS

         The Company's common shares are currently trading at a price
substantially below $5.00 per share, subjecting trading in the stock to certain
rules promulgated under the Act requiring additional disclosures by
broker-dealers. These rules generally apply to any non-Nasdaq equity security
that has a market price share of less than $5.00 per share, subject to certain
exceptions (a "penny stock"). Such rules require the delivery, prior to any
penny stock transaction, of a disclosure schedule explaining the penny stock
market and the risks associated therewith and impose various sales practice
requirements on broker-dealers who sell penny stocks to persons other than
established customers and accredited investors (generally defined as an investor
with a net worth in excess of $1,000,000 or annual income exceeding $200,000
individually or $300,000 together with a spouse). For these types of
transactions, the broker-dealer must make a special suitability determination
for the purchaser and have received the purchaser's written consent to the
transaction prior to the sale. The broker-dealer also must disclose the
commissions payable to the broker-dealer, current bid and offer quotations for
the penny stock and, if the broker-dealer is the sole market-maker, the
broker-dealer must disclose this fact and the broker-dealer's presumed control
over the market. Such information must be provided to the customer orally or in
writing before or with the written confirmation of trade sent to the customer.
Monthly statements must be sent disclosing recent price information for the
penny stock held in the account and information on the limited market in penny
stocks. The additional burdens imposed upon broker-dealers by such requirements
could discourage broker-dealers from effecting transactions in our common shares
which could severely limit the market liquidity of our common shares and the
ability of holders of our common shares to sell them.

NO DIVIDENDS

         We have not paid and do not anticipate paying any cash dividends in the
foreseeable future. If we do not pay dividends, the only way you can benefit
from owning our stock is through appreciation of the stock's value. We intend to
retain future earnings for the development and expansion of our business. We
have accumulated substantial losses since our inception. There can be no
assurance that our operations will result in sufficient revenues to enable us to
operate at profitable levels or to generate positive cash flow.

ISSUANCE OF ADDITIONAL EQUITY SECURITIES COULD DILUTE YOUR INTEREST

         Terms of our preferred shares issued by our OxyNet subsidiary include
the right to exchange these for our common stock. This may have a dilutive
effect on our common shareholders. See "Market For Common Equity And Related
Stockholder Matters."

         If we issue equity securities to raise funds, each current
shareholder's interest may be reduced. Further, such equity securities may have
rights, preferences or privileges senior to the common shares.

THE CONCENTRATION OF OWNERSHIP OF THE COMMON SHARES MAY LIMIT YOUR ABILITY TO
INFLUENCE MATTERS

         Our directors, executive officers and principal shareholders (5% or
greater) collectively beneficially own or have the right to acquire under
currently exercisable options approximately 20% of the outstanding common
shares. As a result, these shareholders will be able to exercise significant
influence over matters requiring shareholder approval, including the election of
directors and approval of significant corporate transactions. Such concentration
of ownership may have the effect of delaying or preventing a change in control.

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         We had 12,868,951 common shares outstanding as of December 31, 1999.
Approximately 1,623,148 shares are held by affiliates of NetMed.

VOLATILITY OF MEDICAL TECHNOLOGY COMPANIES' SECURITIES MAY ADVERSELY EFFECT THE
MARKET PRICE OF YOUR STOCK

         Market prices of securities of medical technology companies, including
our common shares, have experienced significant volatility from time to time.
There may be volatility in the market price of our common shares due to factors
that may not relate to our performance. Various factors and events, such as
announcements by us or our competitors concerning new product developments,
governmental approvals, regulations or actions, developments or disputes
relating to patent or proprietary rights and public concern over product
liability may have a significant impact on the market price of our common
shares.

WE NEED TO RAISE ADDITIONAL CAPITAL IN 2000 IN ORDER TO BE SUCCESSFUL

         We will likely incur substantial expenditures during 2000 to further
development and commercialization of the OxyNet oxygen concentrator. We do not
currently have adequate funds to accomplish this objective, and anticipate that
we may need to raise additional capital in 2000. We are unsure whether capital
will be available at that time.


ITEM 2.  DESCRIPTION OF PROPERTY.

         The Company's executive offices are located in Columbus, Ohio, and
consist of 1,275 square feet of office and laboratory space subleased from
Business Technology Center, Inc., at an annual rental of $15,120. The prime
lessor for the premises is The Ohio State University. The term of the lease is
for one year, ending October 31, 2000.


ITEM 3.  LEGAL PROCEEDINGS.

         On March 1, 1999, the Company and OxyNet commenced a lawsuit in the
Common Pleas Court of Franklin County, Ohio against Ceram and its principals
over Ceram's purported termination of the license for the ceramic oxygen
generation technology, as well as over other issues, including whether oxygen
"scrubbing" applications are included in the scope of the license and whether
minimum royalties are payable prior to the manufacture or sale of products
incorporating the technology, and asserting claims for damages for fraud and
negligent misrepresentation. On March 3, 1999, the Company and OxyNet obtained a
temporary restraining order prohibiting Ceram from taking any action to
terminate the license or that otherwise is inconsistent with the rights of the
Company under the license. On March 24, 1999, the court issued a decision
finding that the license had not been terminated and granting a preliminary and
permanent injunction against Ceram from taking any action inconsistent with the
Company's rights under the license. While the Company is confident that it will
prevail in any appeal from that decision, and that its other claims will be
found meritorious, it is unable to predict the ultimate outcome of the
litigation. The Company expects that the case will be tried in June, 2000.

         On March 26, 1999, NSI announced that it had commenced reorganization
proceedings under Chapter 11 of the U.S. Bankruptcy Code in the United States
Bankruptcy Court for the District of Delaware. On December 1, 1999, the United
States Bankruptcy Court for the District of Delaware approved a settlement
agreement among NetMed, NSI, and the official committee of unsecured creditors
in the NSI's pending Chapter 11 bankruptcy reorganization. The settlement
agreement provided for the settlement and release of NetMed's claims in exchange
for 175,000 shares of common stock of Tripath Imaging, Inc., and the allowance
in the bankruptcy proceeding of an unsecured claim by NetMed in the amount of
$1.5 million. The Company is unable to predict the amount and timing of any
payments it may ultimately receive in respect of the $1.5 million unsecured
claim allowed by the settlement.


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

         Not applicable.

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                                     PART II

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

         Until April 19, 1999, the Common Shares were listed for trading on the
American Stock Exchange under the symbol "NMD." The following table sets forth,
for the periods indicated, the high and low last sales prices per share, as
reported on the American Stock Exchange.

<TABLE>
<S>                                                    <C>          <C>
         First Quarter 1998....................        $2.4375      $0.9375
         Second Quarter 1998...................         1.25         0.625
         Third Quarter 1998....................         0.8438       0.0625
         Fourth Quarter 1998...................         0.5625       0.1875
         First Quarter 1999....................         0.218        0.093
</TABLE>

Effective April 20, 1999, the Common Shares were admitted for quotation on the
NASD OTC Bulletin Board under the symbol "NTMD." The following table sets forth,
for the periods indicated, the high and low bid per share, as reported by Nasdaq
Trading & Market Services. These quotations reflect inter-dealer prices, without
retail mark-up, mark-down or commission and may not represent actual
transactions.

<TABLE>
<S>                                                          <C>          <C>
         Second Quarter 1999......................           $0.125       $0.0313
         Third Quarter 1999.......................            0.08         0.04
         Fourth Quarter 1999......................            0.05         0.03
</TABLE>

         On March 17, 2000, the last reported sale price of the Common Shares
was $0.14 per share. On March 17, 2000, there were 411 holders of record of the
Common Shares. This figure excludes an indeterminate number of stockholders
whose shares are held in "street" or "nominee" name.

         The Company has not paid and does not anticipate paying any cash
dividends in the foreseeable future and intends to retain future earnings for
the development and expansion of its business. Any future determination to pay
dividends will be at the discretion of the Board and subject to certain
limitations under the Ohio General Corporation Law and will depend upon the
Company's results of operations, financial condition, contractual restrictions
and other factors deemed relevant by the Board.

         In September, 1998, the Company's OxyNet subsidiary completed the
private placement of 500 shares of convertible preferred shares for net proceeds
of $491,000. These proceeds have been and will continue be used for further
development of products incorporating OxyNet's ceramic oxygen generation
technology. The OxyNet preferred shares are convertible into common shares of
OxyNet on a one share for one share basis. In addition, purchasers of the OxyNet
preferred shares were given the right to exchange them for NetMed Common Shares
if a public offering of the common shares of OxyNet did not occur 18 months from
the date of issuance of the OxyNet shares. The number of NetMed Common Shares
issuable on exercise of this right would be determined by dividing the aggregate
original stated value of the OxyNet preferred shares, plus accrued dividends, by
the market price of the NetMed Common Shares at the time of exercise. This one
time right to exchange the OxyNet shares for NetMed Common Shares was available
only for a period of 30 days following the expiration of the 18 month period
referenced above. The 18 month period expired in March, 2000 without a public
offering having occurred, but holders of 350 of the OxyNet shares have agreed to
extend the period for an additional 12 months. The exercise of these exchange
rights may result in substantial dilution to holders of the NetMed's common
shares. A holder of 50 preferred shares has notified the Company of the exercise
of the exchange right, which will require the Company to issue the holder
approximately 845,000 Common Shares.


ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS.

OVERVIEW

         The Company is an Ohio corporation engaged in the business of
acquiring, developing and marketing medical and health-related technologies. The
sole business activity of the Company, through its majority owned subsidiary
OxyNet, Inc., is the development and commercialization of products incorporating
a new ceramic-based technology for separation of oxygen from ambient air and
other gases. The first such product targeted for commercialization is an oxygen
concentrator for use in the home health industry.

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         Prior to March 26, 1999, the Company was also in the business of
marketing of the PAPNET(R) Testing System, an automated cervical cancer
screening product of Neuromedical Systems, Inc. ("NSI"). The Company marketed
the PAPNET(R) Testing System in a five state area under license from NSI. On
March 26, 1999, NSI announced that it had commenced reorganization proceedings
under Chapter 11 of the U.S. Bankruptcy Code. In connection with its Chapter 11
filing, the Company terminated the majority of its U.S. workforce and agreed to
sell its intellectual property and related assets to AutoCyte, Inc. (now Tripath
Imaging, Inc.), for $4,000,000 in cash and 1.4 million shares of AutoCyte common
stock. As of May 6, 1999, NSI, as debtor in possession, rejected the Company's
license and the Bankruptcy Court confirmed the rejection over the Company's
objection. As a result, the Company became an unsecured creditor of NSI with a
breach of contract claim for the termination of the license.

         On December 3, 1999, the Company announced that the bankruptcy court
had approved a settlement among the Company, NSI, and the official committee of
unsecured creditors. The agreement provided for the settlement and release of
the Company's claims in exchange for 175,000 shares of common stock of Tripath
Imaging, Inc. (NasdaqNM: TPTH), and the allowance in the bankruptcy proceeding
of an unsecured claim by the Company in the amount of $1.5 million. The 175,000
Tripath shares were issued to the Company in late December, 1999, and the
balance of its settled claim will be included with other allowed claims of
unsecured creditors to be paid out of liquidation proceeds in the bankruptcy
proceeding. The Company is unable to predict the amount and timing of any
payments it may ultimately receive in respect of the $1.5 million unsecured
claim.

RESULTS OF OPERATIONS

TWELVE MONTHS ENDED DECEMBER 31, 1999 AND 1998

         Royalty revenue decreased from $400,000 for the twelve months ended
December 31, 1998, to zero for the twelve months ended December 31, 1999. This
resulted from NSI being in default on payment of royalties earned for the first
quarter and with NSI's filing for Chapter 11 bankruptcy reorganization on March
26,1999.

         Total operating expenses decreased from $1,969,000 for the twelve
months ended December 31, 1998, to $1,039,000 for the same period in 1999. The
decrease was the result of reduced sales representatives, lower development
expenses and certain executives of the Company working for no cash compensation.

         The Company recorded a loss on available-for-sale securities in the
amount of $386,000 for the twelve months ended December 31, 1999. The securities
are common shares of NSI and the decline in value is considered permanent. In
August 1997, the Company completed a 6%, $3,000,000 convertible debenture
financing. The Company, as a condition to the financing, has pledged shares of
common stock of NSI that under certain conditions may be used by the purchasers
to convert outstanding debentures as well as accrued interest. For the twelve
months ended December 31, 1998, the purchasers converted $475,000 of principal
plus accrued interest into a total of 352,200 shares of NSI. This resulted in a
loss on available for sale securities of $894,000 for the twelve months ended
December 31, 1998.

         Interest income decreased to $12,000 for the twelve months ended
December 31, 1999, from $41,000 for the twelve months ended December 31, 1998.
The decrease is due to lower cash balances to invest.

         Interest expense decreased to $5,000 for the twelve months ended
December 31, 1999 from $104,000 for the same period in 1998. The decrease is
primarily the result of the exchange of debentures for convertible preferred
stock described in Note B to the financial statements in January 1999.

LIQUIDITY AND CAPITAL RESOURCES

         The Company has financed its operations to date primarily by the sale
of NSI common stock owned by the Company, the sale of Common Shares, the sale of
the convertible debentures and the joint development agreement with MG Generon.
The Company's combined cash and cash equivalents totaled $416,000 at December
31, 1999, a decrease of $97,000 from December 31, 1998.

         Cash used in the Company's operations was $940,000 for the twelve
months ended December 31, 1999, versus $1,403,000 used in the same period of
1998. The Company is a development company and anticipates that its cash
requirements will be substantial for the immediate future and believes that it
will be necessary to raise additional capital in order to complete the
development of the OxyNet device and continue funding the negative

                                       9
<PAGE>   10
cash flow from operations.

The Company's future liquidity and capital requirements will depend upon
numerous factors, including the resources required to further develop the OxyNet
oxygen device, the resources required and ultimate outcome of the Company's
claims in the NSI bankruptcy hearings and the outcome of the litigation with
Ceram. Additional funding may not be available when needed or on terms
acceptable to the Company, which would have a material adverse effect on the
Company's business financial conditional and results of operations.

SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

         Statements in this document which relate to other than strictly
historical facts, including statements about the Company's plans and strategies,
as well as management's expectations about new and existing products,
technologies and opportunities, demand for and acceptance of new and existing
products (including the OxyNet oxygen concentration device), are forward looking
statements. The words "believe," "expect," "anticipate," "estimate," "project,"
and similar expressions identify forward-looking statements that speak only as
of the date hereof. Investors are cautioned that such statements involve risks
and uncertainties that could cause actual results to differ materially from
historical or anticipated results due to many factors including, but are not
limited to, the Company's lack of revenues, continuing losses from operations
and negative cash flow, the dependence on proprietary technology, government
regulation, absence of marketing and sales history, the challenges of research
and development of products incorporating the OxyNet technology, and other risks
detailed in this report and other Securities and Exchange Commission filings.
The Company undertakes no obligation to publicly update or revise any
forward-looking statements.


ITEM 7.  FINANCIAL STATEMENTS.

         The response to this Item is submitted in a separate section of this
Report.

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

         None.


                                    PART III

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

BOARD OF DIRECTORS

         S. Trevor Ferger, age 45, is the President and Chief Executive Officer
of the Company, and has served as a director since December, 1996. He is also
President of Ferger & Associates, a sales consulting firm. He started his career
with Procter & Gamble and had sales management responsibilities in Atlanta,
Georgia; Jacksonville, Florida; and Raleigh, North Carolina. After obtaining an
MBA Degree from Xavier University in Cincinnati, he started a sales and
marketing firm specializing in the sales and marketing of consumer goods to
grocery stores, which merged into Acosta Sales of Jacksonville, Florida in
October of 1996.

         Cecil J. Petitti, age 46, has been co-owner of Chaney & Petitti
Insurance Agency located in Dublin, Ohio since 1984. Chaney & Petitti specialize
in multiple insurance products, including medical insurance. Prior to merging
with the Chaney Group, Mr. Petitti was associated with the Burke, Kendall &
Petitti Insurance Agency. Mr. Petitti is also President of NetWalk, Inc., a
Columbus-based Internet service provider, and CallTech Communications, Inc., a
company providing telemarketing services and customer care outsourcing. Mr.
Petitti earned a Bachelor of Arts degree in Education from The Ohio State
University. Mr. Petitti has been a director of the Company since June, 1994.

         Michael S. Blue, M.D., age 45, has been a practicing physician since
1980. Dr. Blue graduated from Miami University of Ohio in 1976 with a Bachelor
of Science in Zoology and graduated from The Ohio State University with a Doctor
of Medicine in 1979. Dr. Blue has been President of Phoenix Group International,
Ltd. and North

                                       10
<PAGE>   11
American International Trade Group, Inc. since 1994 and 1992, respectively. He
has also been Secretary/Treasurer and member of the Board of Directors of
Columbus Oilfield Exploration, Inc. since 1987. Dr. Blue has been a director of
the Company since December 1996.

         Robert J. Massey, age 54, has served on the Board of Directors of the
Company since January, 1997. He is currently Chairman of the Board of CallTech
Communications, LLC, a company providing telemarketing services and outsourced
customer contact management. He formerly was President, Chief Executive Officer
and a director of CompuServe Corporation, culminating an over twenty year career
with the firm as an executive with responsibilities in sales, marketing and
general management. Prior to CompuServe he was a sales executive with the IBM
Corporation. Mr. Massey is a director of Antiqnet, a Columbus-based Internet
company; PWI, a Columbus-based software company; and ITS, an e-Commerce company
also in Columbus. He is a graduate of Holy Cross College, Worcester,
Massachusetts and earned an MBA in Finance from Syracuse University.

         Susan M. O'Toole, age 50, has served on the Board of Directors since
May, 1998. Ms. O'Toole is Executive Vice President and advisory board member of
Retail Apparel Group, Inc., a privately-held retail apparel company based in
Cleveland, Ohio. From 1987 to 1996, Ms O'Toole was a senior operating executive
with The Limited, Inc. in Columbus, Ohio, serving as President of its Limited
Too division from 1993-1996. Prior to joining The Limited, Ms. O'Toole was
Executive Vice President of Seifert's, a specialty retailer, from 1971 to 1987.

         James F. Zid , age 66, is the Chairman of the Company's Board of
Directors, and has served on the Board since February, 1997. Mr. Zid retired as
the managing partner of the Columbus office of Ernst & Young LLP in 1993. Mr.
Zid currently serves on the Board of Directors of Neoprobe Corporation and
Central Benefits Insurance Company.

MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS

         The Board of Directors of the Company had a total of five meetings
during the year ended December 31, 1999. During 1999 each of the directors
attended 75% or more of the total number of (i) meetings of the Board, and (ii)
meetings of committees of the Board on which such director served. Directors who
are not employees of the Company received no cash compensation or expense
reimbursement for their services. In 1999 and prior years, non-employee
directors received stock options as compensation for their services.

         The Board of Directors has an Audit Committee consisting of Dr. Blue
and Mr. Ferger, and a Compensation Committee consisting of Messrs. Blue,
Petitti, and Massey. The Audit Committee is charged with reviewing the Company's
annual audit and meeting with the Company's independent accountants to review
the Company's internal controls and financial management practices. The
Compensation Committee has the authority and responsibility to determine and
administer the Company's officer compensation policies and to establish the
salaries for executive officers, the formula for bonus awards to executive
officers, and the grant of stock options to executive officers and other key
employees under the Company's 1995 Amended and Restated Stock Option Plan (the
"Option Plan").

EXECUTIVE OFFICERS

         In addition to S. Trevor Ferger, the following person is an executive
officer of the Company:

         Kenneth B. Leachman, age 46, was elected as Vice President of Finance
in October 1996. Mr. Leachman has held various financial management positions
with several technology based companies, including Corporate Controller for Goal
Systems International from 1989 to 1991 and as Chief Financial Officer of
Sarcom, Inc. from 1992 to 1994. Mr. Leachman has a Bachelor of Science degree in
accounting from The Ohio State University in 1975 and earned his CPA certificate
from the State of Ohio in 1977.

         Officers are elected annually by the Board of Directors and serve at
its discretion. There are no family relationships among directors and executive
officers of the Company.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

         Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers, directors, and persons who are beneficial owners of more
than ten percent of the Company's Common Stock to file reports of ownership and
changes in ownership with the Securities and Exchange Commission. Reporting
persons are required

                                       11
<PAGE>   12
by Securities and Exchange Commission regulations to furnish the Company with
copies of all Section 16(a) forms filed by them. Based on its review of the
copies of Section 16(a) forms received by it and written representations from
reporting persons, the Company believes that all filing requirements applicable
to its reporting persons were complied with during 1999, except that the
statement of changes of beneficial ownership of Robert J. Massey, required to be
filed by January 10, 2000, was not filed until February 14, 2000.


ITEM 10. EXECUTIVE COMPENSATION.

COMPENSATION OF NAMED EXECUTIVE OFFICERS

         The following table sets forth certain information regarding
compensation paid during each of the Company's last three fiscal years to the
Company's Chief Executive Officer, and the only other executive officers whose
combined salary and bonus exceeded $100,000 for the fiscal year ended December
31, 1999 (collectively, the "Named Executive Officers").

<TABLE>
                                            SUMMARY COMPENSATION TABLE

<CAPTION>
                                                                                       LONG-TERM
                                                         ANNUAL COMPENSATION         COMPENSATION
                                                      ------------------------       ------------
                                                                                        AWARDS         ALL OTHER
                                                       SALARY           BONUS        ------------     COMPENSATION
     NAME AND PRINCIPAL POSITION           YEAR         ($)              ($)          SECURITIES         ($)(1)
                                                                                      UNDERLYING
                                                                                       OPTIONS
                                                                                         (#)
-------------------------------------      ----       --------         -------       ------------     ------------
<S>                                        <C>        <C>              <C>           <C>              <C>
S. Trevor Ferger, President and
Chief Executive Officer                    1999       $ 59,375            0           150,000(3)          --

David J. Richards, President and           1999       $   0               0           390,775(4)        $ 4,000
Chief Executive Officer*                   1998       $112,558            0            99,000           $15,435
                                           1997       $200,000         $50,000        150,000(2)        $16,259
</TABLE>

(1)      Includes matching contribution to the Company's 401(k) Plan, car
         allowance and excess group term insurance.

(2)      Options granted in 1997 were cancelled with the options granted in 1998
         serving as replacement options.

(3)      Options to purchase 50,000 common shares issued on each of June 1,
         September 1, and December 1, 1999.

(4)      In connection with Mr. Richards' resignation as a director and an
         officer of the Company as of May 14, 1999, all of his outstanding
         options were cancelled, and was granted a 5 year warrant to purchase
         390,775 common shares of the Company at $0.10 per share, and a one year
         warrant to purchase 100 Series A 8% Convertible Preferred Shares of
         the Company's OxyNet subsidiary for $1,000 per share.

*        Resigned as President and Chief Executive Officer effective as of May
         14, 1999.

                                       12
<PAGE>   13
                       OPTION GRANTS IN LATEST FISCAL YEAR

     The following table provides certain information regarding stock options
granted during 1999 to each of the Named Executive Officers.

<TABLE>
                                INDIVIDUAL GRANTS
----------------------------------------------------------------------------------------   -------------
<CAPTION>
             (A)                    (B)          (C)        (D)       (E)        (F)           (G)
                                              % OF TOTAL
                                               OPTIONS               MARKET
                                              GRANTED TO            PRICE ON
                                  OPTIONS     EMPLOYEES   EXERCISE   GRANT                  GRANT DATE
                                  GRANTED     IN FISCAL    PRICE      DATE    EXPIRATION     PRESENT
             NAME                   (#)          YEAR      ($/SH)    ($/SH)      DATE      VALUE ($)(1)
                                 ----------   ----------  --------  --------  ----------   ------------
<S>                              <C>          <C>         <C>       <C>       <C>          <C>
S.  Trevor Ferger                 50,000(2)        7       $0.092    $0.092     6/1/2009      $ 2,000
                                  50,000(3)        7       $ 0.06    $ 0.06     9/1/2009      $ 1,500
                                  50,000(4)        7       $0.035    $0.035    12/1/2009      $ 1,000
                                 209,357(5)       28       $ 0.10    $0.065    5/14/2004      $13,090

David J. Richards*               390,775(6)       51       $ 0.10    $0.065    5/14/2004      $24,434
</TABLE>

(1)      The amounts under the column labeled "Grant Date Present Value ($)" are
         included by the Company pursuant to certain rules promulgated by the
         Securities and Exchange Commission and are not intended to forecast
         future appreciation, if any, in the price of the Company's Common
         Shares. Such amounts are calculated by application of the Black-Scholes
         option pricing formula, which yields a valuation based upon certain
         assumptions, including that the price volatility of the stock will
         follow historic patterns and that the option holders hold the options
         granted for their full term. The actual realizable value of the options
         will vary in accordance with the market price of the Company's Common
         Shares and may differ substantially from the value produced by
         application of the formula.

(2)      Options were granted effective June 1, 1999, pursuant to resolution of
         the Board of Directors.

(3)      Options were granted effective September 1, 1999, pursuant to
         resolution of the Board of Directors.

(4)      Options were granted effective December 1, 1999, pursuant to resolution
         of the Board of Directors.

(5)      Warrant granted in lieu of compensation pursuant to resolution of the
         Board of Directors.

(6)      In connection with Mr. Richards' resignation as a director and an
         officer of the Company as of May 14, 1999, all of his outstanding
         options were cancelled, and was granted a 5 year warrant to purchase
         390,775 common shares of the Company at $0.10 per share, and a one year
         warrant to purchase 100 Series A 8% Convertible Preferred Shares of
         the Company's OxyNet subsidiary for $1,000 per share.

*        Resigned as President and Chief Executive Officer effective as of May
         14, 1999.

                                       13
<PAGE>   14
       AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUE TABLE

         The following table provides certain information regarding the number
and value of stock options held by the Named Executive Officers at December 31,
1999.

<TABLE>
<CAPTION>
                                                            NUMBER OF SECURITIES
                                                           UNDERLYING UNEXERCISED             VALUE OF UNEXERCISED
                                                         OPTIONS AT FISCAL YEAR-END         IN-THE-MONEY OPTIONS AT
                                                                     (#)                     FISCAL YEAR-END ($)(1)
                                                        ----------------------------      ---------------------------
                             SHARES
                            ACQUIRED
                               ON           VALUE
                            EXERCISE      REALIZED
          NAME                 (#)           ($)        EXERCISABLE    UNEXERCISABLE      EXERCISABLE   UNEXERCISABLE
-----------------------     --------      --------      -----------    -------------      -----------   -------------
<S>                         <C>           <C>           <C>            <C>                <C>           <C>
S. Trevor Ferger                0             0           497,677          6,000              $0             $0
David J. Richards(2)            0             0           390,775            0                $0             $0
</TABLE>

(1)      Represents the total gain which would be realized if all in-the-money
         options held at year end were exercised, determined by multiplying the
         number of shares underlying the options by the difference between the
         per share option exercise price and the per share fair market value at
         year end ($.03 on December 31, 1999). An option is in-the-money if the
         fair market value of the underlying shares exceeds the exercise price
         of the option.

(2)      Resigned as President and Chief Executive Officer effective as of May
         14, 1999.


COMPENSATION OF DIRECTORS

         Directors who are not employees of the Company receive no cash
compensation or expense reimbursement for their services, but receive stock
options as compensation for their services. For board service during 1999,
Messrs. Petitti, Massey, and Blue and Mrs. O'Toole were each granted options to
purchase 25,000 shares (exercisable at $.04 per share), and Mr. Zid was granted
options for 37,500 shares (exercisable at $.04 per share).

EMPLOYMENT CONTRACTS WITH NAMED EXECUTIVE OFFICERS

         By virtue of a Settlement Agreement and Mutual Release effective as of
May 14, 1999, entered into by and among David J. Richards, the Company and
OxyNet, Inc., Mr. Richards agreed to resign as President and as director of the
Company and OxyNet and to terminate voluntarily his employment with the Company.
Pursuant to the agreement, all of Mr. Richards' outstanding options were
cancelled, and he was granted a 5 year warrant to purchase 390,775 common shares
of the Company at $0.10 per share, and a one year warrant to purchase 100
Series A 8% Convertible Preferred Shares of the Company's OxyNet subsidiary for
$1,000 per share.


ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

SECURITY OWNERSHIP BY MANAGEMENT AND PRINCIPAL SHAREHOLDERS

         The following table sets forth information regarding beneficial
ownership of the Company's Common Shares by each director, the Company's
executive officers named in the Summary Compensation Table, each person known to
the Company to own beneficially more than 5% of the outstanding Common Shares,
and the directors and executive officers of the Company as a group as of March
17, 2000:

                                       14
<PAGE>   15
<TABLE>
<CAPTION>
                                                        SHARES BENEFICIALLY OWNED (1)
                                                        -----------------------------
            NAME OF BENEFICIAL OWNER                      NUMBER             PERCENT
-----------------------------------------------         ---------            -------
<S>                                                     <C>                  <C>
S. Trevor Ferger(2)                                       831,502              6.5
Cecil J. Petitti(3)                                       188,296              1.4
Michael S. Blue(4)                                        323,717              2.3
Robert J. Massey(5)                                        54,948                *
James F. Zid(6)                                            55,300                *
Susan M. O'Toole(7)                                        37,000                *
Kenneth B. Leachman(8)                                     59,246                *
David J. Richards(9)                                    1,247,657              9.0
All directors and executive officers as a group
   (7 persons)                                          1,340,652             11.7
</TABLE>

----------------------
*        Represents beneficial ownership of less than 1% of the Company's
         outstanding Common Shares.

(1)      Beneficial ownership is determined in accordance with the rules of the
         Securities and Exchange Commission which generally attribute beneficial
         ownership of securities to persons who possess sole or shared voting
         power and/or investment power or as to which the person has the right
         to acquire the beneficial ownership within 60 days of March 30, 2000.
         Unless otherwise indicated, voting power and investment power are
         exercised solely by the person named above or shared with members of
         his household.

(2)      Includes 547,677 shares which may be purchased under stock options and
         a warrant exercisable within 60 days of March 30, 2000.

(3)      Includes 38,320 shares which may be purchased under stock options
         exercisable within 60 days of March 30, 2000.

(4)      Includes 37,000 shares which may be purchased under stock options
         exercisable within 60 days of March 30, 2000.

(5)      Includes 37,000 shares which may be purchased under stock options
         exercisable within 60 days of March 30, 2000.

(6)      Includes 49,500 shares which may be purchased under stock options
         exercisable within 60 days of March 30, 2000.

(7)      Includes 37,000 shares which may be purchased under stock options
         exercisable within 60 days of March 30, 2000.

(8)      Includes 37,246 shares which may be purchased under stock options
         exercisable within 60 days of March 30, 2000.

(9)      Includes 390,775 shares which may be purchased under a warrant
         exercisable within 60 days of March 30, 2000.


ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

         In September 1997, the Company entered into a net lease with Muirfield
Square, Ltd. for 4,900 square feet of office space in which the Company's
principal offices were located. The lease term was for 5 years at an annual rent
of $53,900 for the first year, escalating annually at the rate of 3% over the
term, and renewable for an additional 5-year term at an annual net rental of
$60,660. Messrs. Richards, Ferger, and Massey own a majority of the membership
interests in Muirfield Square, Ltd. The Company believes that the lease was on
terms at least as favorable to the Company as available for office space of a
similar size and quality in the locality. Effective July 31, 1999, the Company
terminated the net lease with Murfield Square, Ltd. without further liability to
the Company.

         On April 20, 1999, the Company entered into an agreement with the
holders of its 6% Convertible Preferred Stock to redeem all of the outstanding
shares shares of preferred stock for a total payment of $125,000, plus 400
common shares of OxyNet. Additionally, the Company agreed to pay the holders an
amount equal to the lesser of 50% of the net cash proceeds received by the
Company as a creditor in the NSI bankruptcy, or $100,000.

                                       15
<PAGE>   16
                                     PART IV

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.

         (a)      The following documents are filed as part of this Annual
                  Report on Form 10-KSB:

                  (1)      The following financial statements are included in
                           this report under Item 7:

                                    Balance Sheet as of December 31, 1999.

                                    Statements of Operations for the two years
                                    ended December 31, 1999.

                                    Statements of Stockholders' Equity for the
                                    two years ended December 31, 1999.

                                    Statements of Cash Flows for the two years
                                    ended December 31, 1999.

                                    Notes to the Financial Statements.

                                    Independent Auditors' Report.


                  (2)      Exhibits:

EXHIBIT
NUMBER                                     DESCRIPTION
------                                     -----------
  3.1                Amended and Restated Articles of Incorporation of the
                     Registrant. (Previously filed as Appendix A to the
                     Registration Statement on Form S-4, Registration No.
                     333-8199, and incorporated herein by reference.)

  3.2                Amended and Restated Regulations of the Registrant.
                     (Previously filed as Appendix A to the Registration
                     Statement on Form S-4, Registration No. 333-8199, and
                     incorporated herein by reference.)

  3.3                Form of Specimen Stock Certificate. (Previously filed as
                     Exhibit 3(e) to the Registration Statement on Form S-4,
                     Registration No. 333-8199, and incorporated herein by
                     reference.)

  4.1                Articles FOURTH, SIXTH, SEVENTH, EIGHTH, TENTH, and
                     ELEVENTH, of the Registrant's Amended and Restated
                     Articles of Incorporation and Articles I, V and VII
                     of the Registrant's Amended and Restated Regulations.
                     (Previously filed as Exhibit 4(b) to the Registration
                     Statement on Form S-4, Registration No. 333-8199, and
                     incorporated herein by reference.)

 10.1                Amended and Restated 1995 Stock Option Plan of the
                     Registrant. (Previously filed as Exhibit 10(i) to the
                     Registration Statement on Form S-4, Registration No.
                     333-8199, and incorporated herein by reference.)

 10.2       *        Sublease Agreement between OxyNet, Inc. and the Business
                     Technology Center, dated March 7, 1999.

 10.3                Investment Agreement among the Registrant, CeramPhysics,
                     Inc. and Ceram Oxygen Technologies, Inc., dated February
                     28, 1997. (Previously filed as Exhibit 10(j) to
                     Registrant's 1996 Annual Report on Form 10-K, Commission
                     file no. 1-12529, and incorporated herein by reference.)

                                       16
<PAGE>   17
 10.4                Revolving Loan-Grid Note, between the Registrant as the
                     lender and Ceram Oxygen Technologies, Inc. as maker, dated
                     February 28, 1997, as amended December 16, 1997.
                     (Previously filed as Exhibit 10.7 to Registrant's 1997
                     Annual Report on Form 10-K, Commission file no. 1-12529,
                     and incorporated herein by reference.)

 10.5                Settlement Agreement and Mutual Release effective as
                     of May 14, 1999, entered into by and among David J.
                     Richards, the Company and OxyNet, Inc. (Previously
                     filed as Exhibit 10(a) to Registrant's Quarterly
                     Report on Form 10-Q for the quarter ending June 30,
                     1999, and incorporated herein by reference.)

 10.6       *        Settlement Agreement among the Registrant, Neuromedical
                     Systems, Inc. as debtor in possession, and the official
                     committee of unsecured creditors Case No. 99-00703, United
                     States Bankruptcy Court, District of Delaware, dated
                     October 29, 1999.

 10.7       *        Intellectual Property Development and Ownership Agreement
                     among the Registrant, OxyNet, Inc. and MG Generon, Inc.
                     dated April 30, 1999.

 10.8       *        Exclusive License Agreement among the Registrant, OxyNet,
                     Inc. and MG Generon, Inc., dated April 30, 1999.

 10.9       *        Reimbursement and Security Agreement among the Registrant,
                     OxyNet, Inc. and MG Generon, Inc., dated April 30, 1999.

 10.10      *        Preferred Stock Redemption Agreement between the Registrant
                     and the holders of the Registrant's 6% Convertible
                     Preferred Stock, dated April 20, 1999.

 21         *        Subsidiaries of the Registrant

 23         *        Consent of Ernst & Young LLP.

 24         *        Powers of Attorney.

 27         *        Financial Data Schedule.


*        Filed with this Report.


         (b)      Reports on Form 8-K

                  Current Report on Form 8-K, dated December 8, 1999, Reporting
                  Settlement Agreement in NSI bankruptcy proceeding. No
                  financial statements were filed.

         (c)      Exhibits

                  The exhibits to this report begin on page F-21.

                                       17
<PAGE>   18
                                   SIGNATURES

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


                                            NetMed, Inc.

Date:  March 29, 2000                       By:  /s/ S. Trevor Ferger
                                               ---------------------------------
                                                     S. Trevor Ferger, President


         Pursuant to the requirements of 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 indicated on the 29th day of March, 2000.


          Signature                          Title

   /s/ S. Trevor Ferger                      President and Director
------------------------------
       S. Trevor Ferger


       *Kenneth B. Leachman                  Vice President - Finance
------------------------------               Treasurer
       Kenneth B. Leachman


       *Cecil J. Petitti                     Director
------------------------------
       Cecil J. Petitti


       *James F. Zid                         Director
------------------------------
       James F. Zid


       *Michael S. Blue                      Director
------------------------------
       Michael S. Blue


       *Robert J. Massey                     Director
------------------------------
       Robert J. Massey


       *Susan M. O'Toole                     Director
------------------------------
       Susan M. O'Toole


*By: /s/ S. Trevor Ferger
    ---------------------------------------
         S. Trevor Ferger, Attorney in fact

                                       18
<PAGE>   19
                          Annual Report on Form 10-KSB

                             Item 7 and Item 13(a)

                          List of Financial Statements

                                Certain Exhibits

                          Year ended December 31, 1999

                                  NetMed, Inc.

                                 Columbus, Ohio

                                       19
<PAGE>   20
                                  NetMed, Inc.
                                 and Subsidiary

                    Audited Consolidated Financial Statements


                     Years ended December 31, 1999 and 1998



                                    CONTENTS

Report of Independent Auditors............................................F-2

Audited Consolidated Financial Statements

Consolidated Balance Sheet................................................F-3
Consolidated Statements of Operations.....................................F-4
Consolidated Statements of Stockholders' Equity...........................F-5
Consolidated Statements of Cash Flows.....................................F-6
Notes to Consolidated Financial Statements................................F-7

                                       F-1
<PAGE>   21
                         Report of Independent Auditors


The Board of Directors and Stockholders
NetMed, Inc.


We have audited the accompanying consolidated balance sheet of NetMed, Inc. and
subsidiary (the Company) as of December 31, 1999, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
two years in the period ended December 31, 1999. 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
Company at December 31, 1999, and the consolidated results of its operations and
its cash flows for each of the two years in the period ended December 31, 1999,
in conformity with generally accepted accounting principles.

As discussed in Note 14 to the consolidated financial statements, the Company's
recurring losses, decreasing revenues, and net capital deficiency raise
substantial doubt about its ability to continue as a going concern. Management's
plans as to these matters are described in Note 14. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.


                                               ERNST & YOUNG LLP


Columbus, Ohio
March 25, 2000

                                      F-2
<PAGE>   22
<TABLE>
                                  NetMed, Inc.

                           Consolidated Balance Sheet
                                December 31, 1999

<S>                                                                 <C>
ASSETS
Current assets:
   Cash and cash equivalents                                        $   416,238
   Prepaid assets                                                        25,208
                                                                    -----------
Total current assets                                                    441,446

Investment in TriPath--available for sale                               103,125
Furniture and equipment (net of accumulated
   depreciation of $81,154)                                              29,098
License (net of accumulated amortization
    of $64,873)                                                         278,253
Deposits and other assets                                                 4,411
                                                                    -----------
Total assets                                                        $   856,333
                                                                    ===========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Accounts payable                                                 $    48,611
   Accrued expenses                                                      10,779
   Other liabilities                                                     58,639
                                                                    -----------
Total current liabilities                                               118,029
Preferred stock of subsidiary                                           491,000
Stockholders' equity:
   Common stock, no par value, 20,000,000 shares authorized,
     12,868,951 issued and outstanding at December 31, 1999           8,094,466
   Accumulated other comprehensive loss                                 (16,875)
   Retained deficit                                                  (7,830,287)
                                                                    -----------
Total stockholders' equity                                              247,304
                                                                    -----------
Total liabilities and stockholders' equity                          $   856,333
                                                                    ===========
</TABLE>

See accompanying notes.

                                      F-3
<PAGE>   23
<TABLE>
                                  NetMed, Inc.

                      Consolidated Statements of Operations

<CAPTION>
                                                         1999            1998
                                                     ----------------------------
<S>                                                  <C>              <C>
Royalty revenue                                      $        --      $   399,848

Operating expenses:
   Selling, general and administrative                   888,168        1,569,136
   Business development                                  151,111          399,610
                                                     ----------------------------
Total operating expenses                               1,039,279        1,968,746
                                                     ----------------------------

Operating loss                                        (1,039,279)      (1,568,898)

Other income (expense):
   Interest income                                        11,822           40,903
   Interest expense                                       (5,023)        (103,771)
   Loss on sale of available-for-sale securities        (385,865)        (894,147)
   Financing costs                                            --         (118,750)
   Income from license settlement                        839,951               --
                                                     ----------------------------
Total other (expense) income                             460,885       (1,075,765)
                                                     ----------------------------
Loss before income taxes and
   minority interest                                    (578,394)      (2,644,663)

Minority interest                                        (16,936)           5,857
                                                     ----------------------------
Net loss                                                (595,330)      (2,638,806)
Preferred dividend                                      (510,573)              --
Gain on redemption of
   preferred stock                                     1,252,142               --
                                                     ----------------------------
Net income (loss) applicable
   to common stockholders                            $   146,239      $(2,638,806)
                                                     ============================

Net income (loss) per share-
    basic and diluted                                $       .01      $      (.23)
                                                     ============================
</TABLE>

See accompanying notes.

                                      F-4
<PAGE>   24
<TABLE>
                                                         NetMed, Inc.

                                        Consolidated Statements of Stockholders' Equity

<CAPTION>
                                           CONVERTIBLE                      ACCUMULATED OTHER      RETAINED
                                            PREFERRED                         COMPREHENSIVE        EARNINGS
                                              STOCK         COMMON STOCK      INCOME (LOSS)        (DEFICIT)         TOTAL
                                           ----------------------------------------------------------------------------------
<S>                                        <C>              <C>             <C>                   <C>             <C>
Balance, January 1, 1998                   $        --       $5,417,151         $(499,478)        $(4,085,578)    $   832,095
   Adjustment to unrealized gains net of
     tax                                                                          138,217                             138,217
   Net loss                                                                                        (2,638,806)     (2,638,806)
                                                                                                                  -----------
   Comprehensive loss                                                                                              (2,500,589)
                                                                                                                  -----------
   Deferred compensation
     stock options                                              148,730                                               148,730
   Warrants issued and discount on
     convertible debentures                                     129,750                                               129,750
   Stock issued                                                 427,673                                               427,673
   Options sold                                                  61,664                                                61,664
                                           ----------------------------------------------------------------------------------
Balance, December 31, 1998                          --        6,184,968          (361,261)         (6,724,384)       (900,677)
   Adjustment to unrealized loss                                                  344,386                             344,386
   Net loss                                                                                          (595,330)       (595,330)
                                                                                                                  -----------
   Comprehensive loss                                                                                                (250,944)
                                                                                                                  -----------
   Deferred compensation
     stock options                                               43,370                                                43,370
   Beneficial conversion charge on
     redemption of convertible
     debentures in exchange for
     convertible preferred stock                                489,000                              (489,000)             --
   Issuance of preferred stock in
     exchange for convertible
     debentures                              1,467,634                                                              1,467,634
   Conversion of preferred stock              (100,686)         100,686                                                    --
   Accrued dividends on
     preferred stock                            21,573                                                (21,573)             --
   Redemption of preferred stock            (1,388,521)       1,252,142                                              (136,379)
   Warrants issued                                               24,300                                                24,300
                                           ----------------------------------------------------------------------------------
Balance, December 31, 1999                 $        --       $8,094,466         $ (16,875)        $(7,830,287)    $   247,304
                                           ==================================================================================
</TABLE>

See accompanying notes.

                                      F-5
<PAGE>   25
<TABLE>
                                     NetMed, Inc.

                         Consolidated Statements of Cash Flows

<CAPTION>
                                                                  DECEMBER 31,
                                                              1999            1998
                                                           --------------------------
<S>                                                        <C>            <C>
OPERATING ACTIVITIES
Net loss                                                   $(595,330)     $(2,638,806)
Adjustments to reconcile net loss to net cash used for
   operating activities:
     Depreciation and amortization                            52,280           47,010
     Write off NSI note receivable                             6,757               --
     Loss on available-for-sale securities                   385,865          894,147
     Compensation on extended stock options                   43,370          148,730
     Warrants issued for consulting                               --           38,374
     Warrants issued to former officer                        24,300               --
     Minority interest                                        16,936           (5,857)
     Gain on license settlement                             (839,951)              --
     Financing costs                                              --          118,750
     Changes in operating assets and liabilities:
       Accounts receivable                                    30,000          186,356
       Prepaid assets                                              1               (1)
       Accounts payable                                       (2,671)         (61,894)
       Accrued expenses and other liabilities                (61,111)        (129,908)
                                                           --------------------------
Net cash used in operating activities                       (939,554)      (1,403,099)
                                                           --------------------------

INVESTING ACTIVITIES
Sale of TriPath stock                                        719,951               --
Acquisition of OxyNet                                             --         (200,000)
Proceeds from joint development partner                      250,000               --
Notes receivable - NSI                                            --           14,686
Note receivable-COTI                                              --          (84,931)
Purchase of furniture and equipment                               --          (21,896)
Other assets                                                  (2,871)             (82)
                                                           --------------------------
Net cash provided (used) by investing activities             967,080         (292,223)
                                                           --------------------------

FINANCING ACTIVITIES
Sale of options                                                   --           61,664
Sale of preferred stock by subsidiary                             --          491,000
Redemption of preferred stock                               (125,000)              --
                                                           --------------------------
Net cash (used) provided by financing activities            (125,000)         552,664
                                                           --------------------------

Net decrease in cash                                         (97,474)      (1,142,658)
Cash and cash equivalents at beginning
   of period                                                 513,712        1,656,370
                                                           --------------------------
Cash and cash equivalents at end of period                 $ 416,238      $   513,712
                                                           ==========================
</TABLE>

See accompanying notes.

                                       F-6
<PAGE>   26
                                  NetMed, Inc.

                   Notes to Consolidated Financial Statements


1.  ORGANIZATION AND BASIS OF PRESENTATION

NetMed, Inc. is engaged in the business of acquiring, developing and marketing
medical and health-related technologies. NetMed currently has no source of
revenue. During 1998 NetMed's revenues were derived principally from the
marketing of the PAPNET(R) Testing System, an advanced computerized test
licensed from Neuromedical Systems, Inc. ("NSI") that pinpoints and magnifies
precancerous and cancerous cells. On March 26, 1999, NSI commenced
reorganization proceedings under Chapter 11 of the U.S. bankruptcy Code (see
Note 14). No revenues were generated from the PAPNET(R) Testing System in 1999.
NetMed is also investigating other medical technologies, including the
development of an oxygen concentrator device to be sold in the home healthcare
market.

The consolidated financial statements include the accounts of NetMed, Inc. and
its majority owned subsidiary OxyNet, Inc. (OxyNet) a 89.7% owned subsidiary,
beginning April 3, 1998.

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

USE OF ESTIMATES

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

CASH EQUIVALENTS

The Company considers all short-term deposits and highly liquid investments
purchased with an original maturity of three months or less to be cash
equivalents.

FURNITURE AND EQUIPMENT

Furniture and equipment consists of office furniture and computer equipment
recorded at cost which is being depreciated on an accelerated method over
estimated useful lives ranging from three to seven years.

                                      F-7
<PAGE>   27
                                  NetMed, Inc.

                   Notes to Consolidated Financial Statements


2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

ROYALTY REVENUE

Pursuant to the license agreement with NSI ("License Agreement"), the Company
was entitled to receive 50% of per slide revenues, less certain charges for
equipment and transportation of the slides generated by labs within the
Company's territory. The Company earned and accrued the net per slide revenue on
a monthly basis. This is the method used by the Company to record royalty
revenue in 1998. As of May 6, 1999, NSI, as debtor in possession, rejected the
Company's license and the Bankruptcy Court confirmed the rejection, despite the
Company's argument to preserve the agreement of NSI's intellectual property. As
a result, the Company will receive no further royalties.

INCOME TAXES

The Company accounts for income taxes using the liability method under Statement
of Financial Accounting Standards No. 109 "Accounting for Income Taxes."
Deferred items are determined based on differences between the financial
reporting and tax basis of assets and liabilities, and are measured using the
enacted rates and laws that will be in effect when the differences are expected
to reverse.

STOCK-BASED COMPENSATION

The Company accounts for stock compensation arrangements in accordance with APB
Opinion No. 25, "Accounting for Stock issued to Employees." The pro forma
information regarding income and earnings per share as required by Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123") is disclosed in "Note 9 - Stock Options and
Warrants."

                                      F-8
<PAGE>   28
                                  NetMed, Inc.

                   Notes to Consolidated Financial Statements


2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

NET INCOME (LOSS) PER SHARE

The following table sets forth the computation of basic and diluted earnings
(loss) per share:

<TABLE>
<CAPTION>
                                                  1999               1998
                                              -------------------------------
<S>                                           <C>                 <C>
      Net income (loss) applicable to
          common stockholders                 $   146,239         $(2,638,806)

      OxyNet preferred dividend charge             40,000              N/A
                                              -------------------------------
                                              $   186,239         $(2,638,806)
                                              ===============================

      Weighted average shares                  12,709,060          11,477,392
      Effect of dilutive stock options
          and warrants                             N/A                 N/A
      Assumed conversion of OxyNet
          preferred stock                      17,548,387              N/A
                                              -------------------------------
                                               30,257,447          11,477,392
                                              ===============================

      Basic and diluted income (loss)
          per share                           $       .01         $      (.23)
                                              ===============================
</TABLE>


The outstanding convertible debentures (see Note 4) were not included in the
diluted earnings per share calculation for 1998 because the effect would be
antidilutive.

COMPREHENSIVE INCOME

As of January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, Reporting Comprehensive Income. Statement 130 requires
unrealized gains or losses on the Company's available-for-sale securities, which
prior to adoption were reported separately in shareholders' equity, to be
included in other comprehensive loss.

3.  INVESTMENT IN NSI

The Company owns stock in NSI as a result of the exercise of warrants and
settlement of certain claims with NSI. The investment is classified as
available-for-sale and is carried at fair value, with the unrealized gains and
losses, net of tax, reported as a separate component of stockholders' equity.
NSI trades publicly on the NASD OTC Bulletin Board under the symbol "NSIX." The
Company recorded a loss on available-for-sale securities in 1999 in the amount
of $385,865. The securities are common shares of NSI and the decline in value is
considered permanent. In addition, the Company used 352,000 shares in exchange
for a reduction of $470,000 in 1998 in the debentures payable more fully
described in Note 4. The exchange resulted is a loss of $894,147 in 1998.

                                      F-9
<PAGE>   29
                                  NetMed, Inc.

                   Notes to Consolidated Financial Statements


3.  INVESTMENT IN NSI (CONTINUED)

As of December 31, 1998, the Company owned 98,411 shares of NSI stock at a cost
of $385,864. No value has been assigned to the NSI common stock in the
accompanying balance sheet.

4.  CONVERTIBLE DEBENTURES

In August 1997, the Company issued $3,000,000 of 6% Convertible Debentures (the
"Debentures") resulting in net proceeds to the Company of $2,743,644 and
recorded associated expenses of $1,106,452 in 1997. Those expenses included
$750,000 representing the 1997 portion of the discount, $100,000 for the cost of
warrants issued to placement agents and the purchasers of the Debentures,
$170,000 in placement fees and $87,000 in professional, stock exchange and
registration fees associated with the Debentures and subsequent registration
statement. The Company recorded an additional $100,000 of finance expense in
1998 to reflect the amortization of the remaining discount on the Debentures.
The Company initially reserved 1,500,000 shares for the conversion of the
Debentures.

The Debentures were originally secured by 475,000 shares of common stock of
Neuromedical Systems, Inc. owned by the Company (the "NSI Shares"). During 1998,
the Company exchanged 352,200 NSI Shares for a reduction of $470,000 in the
Debentures payable.

On January 22, 1999, pursuant to an exchange agreement between the Company and
the holders of the outstanding Debentures, 97,712 Series A, 6% Convertible
Preferred Shares were issued in exchange for the outstanding Debentures, which
at the time of the exchange had a principle balance of $1,350,000 and accrued
interest of $117,634 (see Footnote 5).

In connection with this financing, the Company issued warrants to the purchasers
of the Debentures and to placement agents. The warrants are exercisable at any
time prior to August 13, 2000, at exercise prices of $7.79 per share (for up to
150,000 shares) and $9.35 per share (for up to 65,000 shares).

5.  CONVERTIBLE PREFERRED STOCK

On January 22, 1999, pursuant to an exchange agreement between NetMed and the
holders of the Company's outstanding 6% Convertible Debentures ("Debentures"),
97,712 Series A, 6% Convertible Preferred Shares ("Preferred Stock") were issued
in exchange for the outstanding Debentures, which at the time of the exchange
had a principal balance of $1,350,000 and accrued interest of $117,634.

The Preferred Stock was convertible into Common Stock at a conversion price
equal to 75% of the average closing price of the Common Stock for the three
business days immediately preceding the date of conversion. The Preferred Stock
could be redeemed for cash at the Company's option. Dividends were cumulative,
and at the option of the Company could be paid in cash or converted to Common
Stock at the conversion price. The Company recorded a preferred dividend
financing charge to retained earnings in the amount of $489,000 to reflect the
value of the discount as of the closing date.

                                      F-10
<PAGE>   30
                                  NetMed, Inc.

                   Notes to Consolidated Financial Statements


5.  CONVERTIBLE PREFERRED STOCK (CONTINUED)

In May 1999, the Company redeemed the remaining outstanding Preferred Stock
(with an aggregate stated value and accrued dividends of $1,388,521) for an
immediate payment of $125,000 and 400 shares of OxyNet, Inc. common stock owned
by the Company. In addition, the Company agreed to pay as additional
consideration, fifty percent (50%) of any net cash proceeds received by the
Company in respect of claims of the Company allowed in the Chapter 11
reorganization proceedings of Neuromedical Systems, Inc., pending in the United
States Bankruptcy Court for the District of Delaware, but with the maximum
amount of such additional consideration payable capped at $100,000.

6.  ACQUISITION OF CERAM OXYGEN TECHNOLOGIES, INC.

On April 3, 1998, the Company acquired from Ceram Oxygen Technologies, Inc.
("COTI") (now known as OxyNet, Inc.) 95 common shares, representing 95% of
COTI's outstanding common shares immediately following the closing, in exchange
for a cash payment of $50,000 and delivery of a note in the principal amount of
$150,000 (the "Note"). The Note provided for three equal principal payments of
$50,000 on each of June 1, July 1, and August 1, 1998, together with interest at
the rate of 8.5% per annum. The remaining 5% of COTI's outstanding common equity
is owned by CeramPhysics, Inc. ("Ceram") of Westerville, Ohio. COTI holds an
exclusive worldwide license to Ceram's patented oxygen generation technology for
all applications of the technology except oxygen sensors and fuel cells. The
consideration was applied by COTI to payment of a $200,000 license fee owed to
Ceram, with $50,000 being paid in cash, and the balance by assignment of the
Note. The acquisition has been accounted for using the purchase method of
accounting with the results of COTI being consolidated with those of NetMed on a
prospective basis beginning April 3, 1998. Unaudited proforma results of
operations, assuming the acquisition had occurred at the beginning of 1998, are
presented below.

The pro forma amounts include adjustments that the Company believes are
reasonable.

<TABLE>
<CAPTION>
                                                     Twelve Months Ended
                                                      December 31, 1998
                                                      -----------------
<S>                                                   <C>
                  Revenue                                $   399,848
                  Net loss                               $(2,723,777)
                  Loss per share basic & diluted         $      (.24)
</TABLE>

The acquisition was made pursuant to a February 1997, agreement among the
Company, COTI and Ceram, whereby the Company agreed to make advances to COTI to
complete the fabrication and testing of a ceramic element incorporating the
licensed technology. Pursuant to the agreement, through April 3, 1998, the
Company had advanced $363,470 to COTI for this purpose which was collateralized
by the patents held by Ceram. The agreement also provided that upon completion
of an acceptance test of the ceramic element satisfactory to the Company, the
Company had the right to acquire 95% of the equity of COTI for $200,000.

                                      F-11
<PAGE>   31
                                  NetMed, Inc.

                   Notes to Consolidated Financial Statements


6.  ACQUISITION OF CERAM OXYGEN TECHNOLOGIES, INC. (CONTINUED)

The total cost of the acquisition of $563,470 was allocated to the acquired
assets of Ceram Oxygen Technologies, Inc. (COTI). As the only asset of COTI was
the acquired technology and the underlying license, the entire acquisition cost
was allocated to this asset. The license will be amortized over the remaining
twelve-year life of the patent which underlies the license agreement with
CeramPhysics, Inc. The recorded value of the license will be reviewed quarterly
for indications of impairment. If it is determined that the recorded value is
not fully recoverable, a charge will be recorded in the period that such a
determination is made. In May 1999, the Company received a payment of $250,000
as a result of a joint development and licensing agreement more fully described
in Note 7. The Company recorded the payment as a reduction in the carrying value
of the license on the accompanying balance sheet.

                                      F-12
<PAGE>   32
                                  NetMed, Inc.

                   Notes to Consolidated Financial Statements


7.  JOINT DEVELOPMENT AGREEMENT

On April 30, 1999, the Company and OxyNet completed a joint development
agreement and a licensing agreement with MG Generon, Inc. to pursue development
of a device to produce highly concentrated nitrogen from gas mixtures through
the removal of oxygen from such mixtures. The Company granted a first security
interest in the license agreement between the Company, OxyNet and Ceram, and if
joint development efforts are successful, MG Generon would have exclusive rights
to the nitrogen purification technology and the Company would be paid a royalty.
MG Generon made a payment of $250,000 to the Company upon execution of the joint
development agreement, and agreed to fund additional development costs based
upon a project schedule to be approved by MG Generon. Under certain conditions
relating to the litigation with Ceram as described in Note 8, payments made by
MG Generon could be refundable. As described in Note 6, the Company has recorded
the payment of the $250,000 as a reduction in the carrying value of the license
on the accompanying balance sheet.

8.  LITIGATION

On March 1, 1999, the Company and OxyNet commenced a lawsuit in the Common Pleas
Court of Franklin County, Ohio against CeramPhysics, Inc. of Westerville, Ohio
("Ceram") and its principals over a purported termination of the license for the
ceramic oxygen generation technology, as well as over other disputes, including
whether oxygen "scrubbing" applications are included in the scope of the license
and whether minimum royalties are payable prior to the manufacture or sale of
products incorporating the technology. On March 3, 1999, the Company and OxyNet
obtained a temporary restraining order prohibiting Ceram from taking any action
to terminate the license or that otherwise is inconsistent with the rights of
the Company and Ceram under the license. On March 24, 1999, the court issued a
decision finding that the license had not been terminated and granting a
preliminary and permanent injunction against Ceram from taking any action
inconsistent with the Company's rights under the license. Ceram's appeal from
the grant of the preliminary injunction was dismissed on June 17, 1999. The
Company expects that a trial on the merits of this case will be held in the
second quarter of 2000. While the Company is confident that it will ultimately
prevail on the merits in this litigation, it is unable to predict the ultimate
outcome of the litigation.

                                      F-13
<PAGE>   33
                                  NetMed, Inc.

                   Notes to Consolidated Financial Statements


9.  STOCK OPTIONS AND WARRANTS

The Company's 1995 Stock Option Plan (the "Stock Option Plan") provides for the
granting of options that may either meet the requirements of Section 422
("Incentive Options") of the Internal Revenue Code of 1986, as amended (the
"Code") or not meet such requirements ("Nonqualified Options"). Key employees,
officers, and directors of, and consultants and advisors who render services to
the Company are eligible to receive options under the Stock Option Plan.

The following represents the activity for the Stock Option Plan for the years
ended December 31, 1999 and 1998:

<TABLE>
<CAPTION>
                                                  1999                        1998
                                                       Weighted                    Weighted
                                                       Average                     Average
                                         Number of     Exercise      Number of     Exercise
                                          Options       Price         Options       Price
                                         --------------------------------------------------
<S>                                      <C>           <C>           <C>           <C>
Options outstanding, beginning of year    584,926        $.96         538,667       $7.92
Options granted                           572,500        $.04         574,259       $ .83
Options exercised                              --                          --
Options cancelled                        (267,248)       $.87        (528,000)      $7.92
Options outstanding, end of year          890,178        $.40         584,926       $ .96
Options exercisable at year end           570,928        $.57         414,126       $1.15
</TABLE>

The number and weighted-average fair value of options granted during 1999 and
1998 is as follows:

<TABLE>
<CAPTION>
                                                    1999                         1998
                                                          Weighted                     Weighted
                                                          Average                      Average
                                                         Fair Value                   Fair Value
                                           Number of     of Options     Number of     of Options
                                            Options       Granted        Options       Granted
                                           -----------------------------------------------------
<S>                                        <C>           <C>            <C>           <C>
Stock price equal to exercise price         572,500         $.02         574,259         $.28

Stock price greater than exercise price          --          N/A              --          N/A

Stock price less than exercise price             --          N/A              --          N/A
</TABLE>

At December 31, 1999, there were 140,178 options granted in excess of the amount
available under the Stock Option Plan. It is the intention of the Company to
seek stockholder approval for an increase in the total available options under
the Stock Option Plan. The number of shares available for grants under the Stock
Option Plan was 165,074 at December 31, 1998.

                                      F-14
<PAGE>   34
                                  NetMed, Inc.

                   Notes to Consolidated Financial Statements


9.  STOCK OPTIONS AND WARRANTS (CONTINUED)

Pro forma information regarding net income and earnings per share is required by
SFAS No. 123, which also requires that the information be determined as if the
Company has accounted for its employee stock options granted subsequent to
December 31, 1994, under the fair value method of that Statement. The fair value
for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions for 1998
and 1999: risk-free interest rate of 5.75%, no dividend yield; volatility factor
of the expected market price of the Company's common stock of .44 and expected
lives ranging from 2 to 5 years.

If the Company had elected to recognize compensation cost based on the fair
value of options at the grant date as prescribed by SFAS No. 123, the following
displays what reported net income (loss) and per share amounts would have been:

<TABLE>
<CAPTION>
                                                 PRO FORMA YEARS ENDED DECEMBER 31,
                                                      1999            1998
                                                    --------------------------
<S>                                                 <C>           <C>
          Net income (loss)                         $35,636       $(2,956,558)
          Diluted income (loss) per share           $   .00       $      (.26)
</TABLE>

The pro forma financial effects of applying SFAS No. 123 are not likely to be
representative of the pro forma effects on reported results of operations for
future years.

During the second quarter of 1998, officers of the Company agreed to reduce
their cash compensation received in exchange for receiving stock options of the
Company. The officers received 3.125 options for each dollar of compensation
reduced. The value of the options was determined using the Black-Scholes option
pricing model. The Company recorded compensation expense of $61,664 in 1998 as a
result of this transaction.

During the third quarter of 1998, the Company entered into Replacement Option
Agreements, each dated as of July 21, 1998, with certain Company employees
participating in the Stock Option Plan (each such agreement, a "Replacement
Option Agreement"). Pursuant to the terms of the Replacement Option Agreements,
the Company canceled 321,000 employee stock options at exercise prices ranging
from $4.95 to $12.00 per share and issued 230,140 replacement options, each at
an exercise price of $.50 per share representing the fair market value of the
common stock on the grant date (collectively, the "Replacement Options"). Senior
management received Replacement Options covering shares equal only to 66% of
their respective original option grant amounts.

                                      F-15
<PAGE>   35
                                  NetMed, Inc.

                   Notes to Consolidated Financial Statements


9.  STOCK OPTIONS AND WARRANTS (CONTINUED)

The following is a summary of the stock option activity for a prior
non-qualified plan (no additional options may be granted under this plan) for
the two years ended December 31, 1999:

<TABLE>
<CAPTION>
                                                        NUMBER OF    WEIGHTED AVERAGE
                                                         SHARES       EXERCISE PRICE
                                                        -----------------------------
<S>                                                     <C>          <C>
NON-QUALIFIED PLAN
Outstanding at January 1, 1998                           328,000           $1.76

Expired                                                  (32,000)          $7.13
                                                        --------
Outstanding and exercisable
       at December 31, 1998                              296,000           $1.18

Cancelled                                               (240,000)          $1.09
Expired                                                  (40,000)          $1.55
                                                        --------
Outstanding and exercisable
       at December 31, 1999                               16,000           $1.56
                                                        ========
</TABLE>

The exercisable options for the non-qualified plan had a remaining contract life
of 4 years.

In May 1999, the Company's president and chief executive officer resigned. As
complete settlement for all contractual obligations the Company owed to the
former officer, the Company issued 390,775 warrants to purchase NetMed common
stock at an exercise price of $.10 per share, the market price at the date of
grant. The warrants may be exercised for a period of 60 months from the date of
issue. In addition, OxyNet issued a warrant to purchase 100 convertible
preferred shares at an exercise price of $1,000 per share. The term of the
OxyNet warrant is 12 months. As a result of issuing the warrants, the Company
recorded a non-cash expense of $24,000 in 1999.

In 1999, the Company issued 209,357 warrants to purchase NetMed common stock at
an exercise price of $.10 per share, the market price at the date of grant, in
lieu of compensation to a current officer. The warrants may be exercised for a
period of 60 months from the date of issue.

                                      F-16
<PAGE>   36
                                  NetMed, Inc.

                   Notes to Consolidated Financial Statements


9.  STOCK OPTIONS AND WARRANTS (CONTINUED)

During 1998, the Company issued a total of 350,000 warrants at exercise prices
ranging from $.75 to $2.50 per share to consultants performing investor
relations activities. The Company recorded consulting expense of $11,000 in
conjunction with the issuance of the warrants. As of December 31, 1999, there
were outstanding warrants to purchase common stock at exercise prices from $.875
per share to $9.35 per share. The following is a summary of warrant activity for
the two years ended December 31, 1999:

<TABLE>
<CAPTION>
                                                        NUMBER OF    WEIGHTED AVERAGE
                                                         SHARES       EXERCISE PRICE
                                                        -----------------------------
<S>                                                     <C>          <C>
Outstanding at January 1, 1998                           286,020           $6.46

Issued during 1998                                       350,000           $1.39
                                                        --------


Outstanding and exercisable at
   December 31, 1998                                     636,020           $3.67

Issued during 1999                                       600,132           $ .10
Expired during 1999                                     (300,000)          $1.42
Cancelled during 1999                                    (47,020)          $ .88

                                                        --------
Outstanding  and exercisable at
   December 31, 1999                                     889,132           $2.17
                                                        ========
</TABLE>


10.  INCOME TAXES

Significant components of deferred tax assets and liabilities are as follows:

<TABLE>
<CAPTION>
                                                   1999                 1998
                                               --------------------------------
<S>                                            <C>                  <C>
Loss carryforwards                             $ 1,958,684          $ 2,007,167
Gain on NSI warrants                                    --             (260,100)
Stock options issued                               447,676              430,328
Valuation allowance provided                    (2,406,360)          (2,177,395)
                                               -----------          -----------
Net deferred tax liability                     $        --          $        --
                                               ===========          ===========
</TABLE>

At December 31, 1999, the Company had unused NOL carryforwards for tax purposes
of approximately $208,000, $320,000, $211,000, $711,000 $1,151,000 and 2,187,000
which expire in 2007, 2008, 2009, 2010, 2011 and 2012, respectively.

                                      F-17
<PAGE>   37
                                  NetMed, Inc.

                   Notes to Consolidated Financial Statements


10.  INCOME TAXES (CONTINUED)

At December 31, 1999, a full valuation allowance was recorded due to the lack of
deferred tax liabilities, historical income and tax planning strategies.

The reconciliation of income tax computed at the statutory rate to the recorded
tax provision (benefit) is:

<TABLE>
<CAPTION>
                                                            1999           1998
                                                         ------------------------
<S>                                                      <C>            <C>
           Tax provision (benefit) at statutory rate     $(196,654)     $(899,185)
           Benefit of state loss carryforward              (34,345)      (158,680)
           Permanent differences:
                Convertible discount and interest               --         73,525
                Other permanent                              2,034          4,071
           Valuation allowance provided                    228,965        980,269
                                                         ---------      ---------

           Total tax provision (benefit)                 $      --      $      --
                                                         =========      =========
</TABLE>


11.  LEASES

The Company leases facilities and equipment under operating leases. Commitments
for these leases approximate $12,000 for the year ending December 31, 2000. Rent
expense for the years ended December 31, 1999 and 1998 was $51,000 and $48,000,
respectively.

12.  PREFERRED STOCK ISSUANCE

In September 1998, OxyNet completed the sale of 500 shares of 8% Cumulative
Convertible Preferred Shares (the "Shares") in a private offering, with net
proceeds to OxyNet of $491,000. The net proceeds of $491,000 has been recorded
as a minority interest in the accompanying financial statements. The Shares are
entitled to cumulative dividends at the rate of 8% per annum payable in
additional shares, and are convertible into common shares of OxyNet, Inc. on a
one share for one share basis (subject to adjustments for dilution in certain
events). The Shares were sold with a one time right to exchange them at their
original stated value, plus accrued dividends, for common shares of NetMed, for
a period of 30 days following a date which is 18 months from the date of
issuance, at the then-prevailing market price of NetMed common shares (not to
exceed $3.00 per share), if there has been no initial public offering for common
shares of OxyNet. The 18 month period expired in March 2000 without a public
offering having occurred, but holders of 350 of the OxyNet shares have agreed to
extend the period for an additional 12 months. A holder of 50 preferred shares
has notified the Company of the exercise of the exchange right, which will
require the Company to issue the holder approximately 845,000 common shares.

NetMed is the parent of OxyNet. NetMed would own approximately 89.1% of OxyNet's
outstanding common shares on a fully converted basis if the preferred shares are
exchanged for OxyNet common stock.

                                      F-18
<PAGE>   38
                                  NetMed, Inc.

                   Notes to Consolidated Financial Statements


13.  SEGMENT REPORTING

The Company has adopted FASB Statement No. 131, "Disclosures about Segments of
an Enterprise and Related Information." For 1998, the Company had determined
that it had two reportable segments - the marketing of the PAPNET Testing System
and the pursuit and development of other medical related technologies. In 1999,
the Company had only one reportable segment, the development of Medical
Technologies. All of the Company's business activities are conducted in the
United States, and there is no reliance on foreign customers or suppliers.

The following table presents information about reported segment profit and loss
and segment assets for the year ended December 31, 1998.

<TABLE>
<CAPTION>
                                                     DEVELOPMENT OF
                                                        MEDICAL
                                          PAPNET      TECHNOLOGIES   CORPORATE       TOTAL
                                       ------------------------------------------------------
<S>                                    <C>           <C>             <C>          <C>
Revenue from external customers        $   399,848      $      0     $      0     $   399,848
Intersegment revenues                            0             0            0               0
Interest expense                           100,702         3,069            0         103,771
Depreciation expense                        18,980           227            0          19,207
Segment loss                            (2,229,311)      409,495            0      (2,638,806)
Segment assets                              61,630       779,142      631,693       1,472,195
Expenditures for long-lived assets           8,280        13,616            0          21,896
</TABLE>

14.  GOING CONCERN

The Company has incurred losses of approximately $6.5 million over the past
three years and has minimal net worth at December 31, 1999. The Company has been
able to fund its operating losses to date through the receipt of royalty
payments from NSI under the license agreement, the sale of its common stock of
NSI, the sale of common stock, the sale of preferred stock of the OxyNet
subsidiary, and the sale of convertible debentures. Many of these sources of
funding are no longer available to the Company in amounts adequate to continue
to fund operating losses at historic levels. The ability of the Company to
reduce its operating expenses to a level that can be financed by existing cash
and investments is therefore critical to the Company's ability to continue
operating as a going concern.

The Company has the ability to reduce operating expenses significantly. The
Company can also discontinue development efforts on the oxygen generation
device. The Company will institute expense reduction measures as necessary to
ensure the solvency of the Company throughout 2000.

                                      F-19
<PAGE>   39
                                  NETMED, INC.

                FORM 10-KSB FOR THE YEAR ENDED DECEMBER 31, 1999

                                  EXHIBIT INDEX

                                      F-20
<PAGE>   40
                                  EXHIBIT INDEX

EXHIBIT
NUMBER                                    DESCRIPTION
------                                    -----------

 3.1                Amended and Restated Articles of Incorporation of the
                    Registrant. (Previously filed as Appendix A to the
                    Registration Statement on Form S-4, Registration No.
                    333-8199, and incorporated herein by reference.)

 3.2                Amended and Restated Regulations of the Registrant.
                    (Previously filed as Appendix A to the Registration
                    Statement on Form S-4, Registration No. 333-8199, and
                    incorporated herein by reference.)

 3.3                Form of Specimen Stock Certificate. (Previously filed as
                    Exhibit 3(e) to the Registration Statement on Form S-4,
                    Registration No. 333-8199, and incorporated herein by
                    reference.)

 4.1                Articles FOURTH, SIXTH, SEVENTH, EIGHTH, TENTH, and
                    ELEVENTH, of the Registrant's Amended and Restated
                    Articles of Incorporation and Articles I, V and VII
                    of the Registrant's Amended and Restated Regulations.
                    (Previously filed as Exhibit 4(b) to the Registration
                    Statement on Form S-4, Registration No. 333-8199, and
                    incorporated herein by reference.)

10.1                Amended and Restated 1995 Stock Option Plan of the
                    Registrant. (Previously filed as Exhibit 10(i) to the
                    Registration Statement on Form S-4, Registration No.
                    333-8199, and incorporated herein by reference.)

10.2       *        Sublease Agreement between OxyNet, Inc. and the Business
                    Technology Center, dated March 7, 1999.

10.3                Investment Agreement among the Registrant, CeramPhysics,
                    Inc. and Ceram Oxygen Technologies, Inc., dated February 28,
                    1997. (Previously filed as Exhibit 10(j) to Registrant's
                    1996 Annual Report on Form 10-K, Commission file no.
                    1-12529, and incorporated herein by reference.)

10.4                Revolving Loan-Grid Note, between the Registrant as the
                    lender and Ceram Oxygen Technologies, Inc. as maker, dated
                    February 28, 1997, as amended December 16, 1997. (Previously
                    filed as Exhibit 10.7 to Registrant's 1997 Annual Report on
                    Form 10-K, Commission file no. 1-12529, and incorporated
                    herein by reference.)

10.5                Settlement Agreement and Mutual Release effective as
                    of May 14, 1999, entered into by and among David J.
                    Richards, the Company and OxyNet, Inc. (Previously
                    filed as Exhibit 10(a) to Registrant's Quarterly
                    Report on Form 10-Q for the quarter ending June 30,
                    1999, and incorporated herein by reference.)

10.6       *        Settlement Agreement among the Registrant, Neuromedical
                    Systems, Inc. as debtor in possession, and the official
                    committee of unsecured creditors Case No. 99-00703, United
                    States Bankruptcy Court, District of Delaware, dated October
                    29, 1999.

10.7       *        Intellectual Property Development and Ownership Agreement
                    among the Registrant, OxyNet, Inc. and MG Generon, Inc.
                    dated April 30, 1999.

10.8       *        Exclusive License Agreement among the Registrant, OxyNet,
                    Inc. and MG Generon, Inc., dated April 30, 1999.

10.9       *        Reimbursement and Security Agreement the Registrant,
                    OxyNet, Inc. and MG Generon, Inc., dated April 30, 1999.

                                      F-21
<PAGE>   41
10.10      *        Preferred Stock Redemption Agreement between the Registrant
                    and the holders of the Registrant's 6% Convertible Preferred
                    Stock, dated April 20, 1999.

21         *        Subsidiaries of the Registrant

23         *        Consent of Ernst & Young LLP.

24         *        Powers of Attorney.

27         *        Financial Data Schedule.


*        Filed with this Report.

                                      F-22