<PAGE>   1

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                    FORM 10-Q
                                QUARTERLY REPORT

                     PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934


FOR THE QUARTER ENDED                                     Commission File Number
SEPTEMBER 30, 1998                                                       0-20963



                          UROQUEST MEDICAL CORPORATION
             (Exact name of Registrant as specified in its charter)


DELAWARE                                    59-3176454
(state or other jurisdiction                (IRS Employer Identification Number)
of incorporation or organization)

              173 CONSTITUTION DRIVE, MENLO PARK, CALIFORNIA 94025
               (Address of principal executive offices) (Zip Code)


                                 (650) 463-5180
              (Registrant's telephone number, including area code)



Indicate by check mark whether the Registrant (1) 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 (2) has been subject to such filing
requirements for the past 90 days.

Yes [X]     No [ ]

Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date.



            Class                                Outstanding at October 30, 1998
-----------------------------                    -------------------------------
Common Stock, $.001 par value                              12,118,322



<PAGE>   2



                                      INDEX



PART I - FINANCIAL INFORMATION

       Item 1 -  Condensed Consolidated Financial Statements

                 Condensed Consolidated Statements of Operations for the Three
                 Months and the Nine Months Ended September 30, 1998 and 1997
                 (unaudited)

                 Condensed Consolidated Balance Sheets as of September 30, 1998
                 (unaudited) and December 31, 1997

                 Condensed Consolidated Statements of Cash Flows for the Nine
                 Months Ended September 30, 1998 and 1997 (unaudited)

                 Notes to Condensed Consolidated Financial Statements


        Item 2 - Management's Discussion and Analysis of Financial Condition
                 and Results of Operations




PART II - OTHER INFORMATION

        Item 1 - Legal Proceedings
        Item 2 - Changes in Securities and Use of Proceeds 
        Item 3 - Defaults upon Senior Securities
        Item 4 - Submission of Matters to a Vote of Security Holders 
        Item 5 - Other Information
        Item 6 - Exhibits and Reports on Form 8-K

Signatures



                                       2


<PAGE>   3

PART I - FINANCIAL INFORMATION

ITEM 1.  CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


                          UROQUEST MEDICAL CORPORATION
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                               (UNAUDITED)


<TABLE>
<CAPTION>
                                               Three months ended September 30,      Nine months ended September 30,
                                               -------------------------------       -------------------------------
                                                   1998               1997               1998               1997
                                               ------------       ------------       ------------       ------------
<S>                                            <C>                <C>                <C>                <C>         
Net sales ...............................      $  4,426,670       $  4,287,298       $ 12,947,140       $ 11,947,676

Cost of sales ...........................         2,210,863          2,515,033          6,520,856          6,577,120
                                               ------------       ------------       ------------       ------------
  Gross profit ..........................         2,215,807          1,772,265          6,426,284          5,370,556
                                               ------------       ------------       ------------       ------------
Operating expenses:
  Research and development ..............           986,520            680,025          2,991,036          1,975,321
  General and administrative ............         1,263,593          1,147,471          3,612,856          2,864,533
  Sales and marketing ...................           638,387            613,495          2,010,375          1,413,297
  Severance costs .......................                --                 --                 --          1,600,000
  Amortization of goodwill ..............           158,046            157,359            474,138            485,996
                                               ------------       ------------       ------------       ------------
    Total operating expenses ............         3,046,546          2,598,350          9,088,405          8,339,147
                                               ------------       ------------       ------------       ------------

Operating loss ..........................          (830,739)          (826,085)        (2,662,121)        (2,968,591)

Other income (expense):
  Interest expense ......................           (39,156)           (43,816)          (106,871)          (142,224)
  Interest income .......................           107,932            157,763            356,129            451,976
                                               ------------       ------------       ------------       ------------
    Other income (expenses), net ........            68,776            113,947            249,258            309,752

Loss before provision for income taxes ..          (761,963)          (712,138)        (2,412,863)        (2,658,839)

Provision for income taxes ..............            35,000             40,000             76,000            122,000
                                               ------------       ------------       ------------       ------------

Net loss ................................      $   (796,963)      $   (752,138)      $ (2,488,863)      $ (2,780,839)
                                               ============       ============       ============       ============

Basic and diluted net loss per share ....      $      (0.07)      $      (0.06)      $      (0.21)      $      (0.23)
                                               ============       ============       ============       ============

Weighted average shares used in computing
  basic and diluted net loss per share ..        12,087,222         11,879,566         12,026,752         11,856,385
                                               ============       ============       ============       ============
</TABLE>


See accompanying notes to condensed consolidated financial statements.



                                       3

<PAGE>   4


                          UROQUEST MEDICAL CORPORATION
                      CONDENSED CONSOLIDATED BALANCE SHEETS


                                    
<TABLE>
<CAPTION>
                                                                September 30,      December 31,
                                                                    1998              1997
                                                                ------------       ------------
                        ASSETS                                  (Unaudited)
<S>                                                             <C>                <C>         
Current assets:
    Cash and cash equivalents ...............................   $  7,757,864       $ 11,054,088
    Accounts receivable, net of allowance for 
      doubtful accounts .....................................      2,792,342          2,610,764
    Inventories .............................................      2,797,611          2,449,072
    Prepaid expenses and other current assets ...............        258,264            317,319
                                                                ------------       ------------
       Total current assets .................................     13,606,081         16,431,243
                                                                ------------       ------------

Property, plant and equipment, net ..........................      4,826,816          4,413,131
Goodwill and intangible assets, at cost, less
    accumulated amortization ................................     10,506,455         11,079,377
Other noncurrent asset ......................................        200,000                 --
                                                                ------------       ------------
       Total assets .........................................   $ 29,139,352       $ 31,923,751       .
                                                                ============       ============        

          LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
    Accounts payable ........................................   $    488,043       $    659,769
    Accrued compensation ....................................        853,403            599,306
    Accrued severance costs .................................        123,199            666,376
    Other accrued expenses ..................................      1,163,085            810,790
    Current portion of long-term debt .......................        490,360            490,360
                                                                ------------       ------------
       Total current liabilities ............................      3,118,090          3,226,601
                                                                ------------       ------------

Long-term debt, net of current portion ......................        929,619          1,293,175

Stockholders' equity:
    Preferred stock, $.001 par value; 16,000,000 shares 
       authorized; none issued and outstanding ..............             --                 --
    Common stock, $.001 par value; 31,000,000 shares 
        authorized; 12,118,322 and 11,954,010 
        shares issued and outstanding as of September
        30, 1998 and December 31, 1997,
        respectively ........................................         12,118             11,954
    Additional paid-in capital ..............................     37,146,806         36,979,740
    Deferred compensation ...................................        (36,166)           (45,467)
    Accumulated deficit .....................................    (12,031,115)        (9,542,252)
                                                                ------------       ------------
       Total stockholders' equity ...........................     25,091,643         27,403,975
                                                                ------------       ------------
       Total liabilities and stockholders' equity ...........   $ 29,139,352       $ 31,923,751
                                                                ============       ============        
</TABLE>



See accompanying notes to condensed consolidated financial statements.



                                       4



<PAGE>   5



                          UROQUEST MEDICAL CORPORATION
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)



<TABLE>
<CAPTION>
                                                                              Nine months ended September 30,
                                                                              ------------------------------- 
                                                                                  1998               1997
                                                                              ------------       ------------ 
<S>                                                                           <C>                <C>          
CASH FLOWS FROM OPERATING ACTIVITIES:
       Net loss ........................................................      $ (2,488,863)      $ (2,780,839)
       Adjustments to reconcile net loss to net
         cash used in operating activities:
       Depreciation and amortization ...................................         1,239,640          1,114,603
       Severance expense related to accelerated vesting of stock options                --            712,983
       Changes in operating assets and liabilities:
           Accounts receivable .........................................          (181,578)          (926,876)
           Inventories .................................................          (348,539)          (283,445)
           Prepaid expenses and other assets ...........................            59,055             99,812
           Accounts payable and accrued expenses .......................           434,666            796,144
           Accrued severance costs .....................................          (543,177)           762,601
                                                                              ------------       ------------ 
                  Net cash used in operating activities ................        (1,828,796)          (505,017)
                                                                              ------------       ------------ 

CASH FLOWS FROM INVESTING ACTIVITIES:
           Purchases of property, plant and equipment ..................        (1,071,102)          (510,931)
           Other asset .................................................          (200,000)                --
                                                                              ------------       ------------ 
                  Net cash used in investing activities ................        (1,271,102)          (510,931)
                                                                              ------------       ------------ 

CASH FLOWS FROM FINANCING ACTIVITIES:
           Proceeds from issuance of common stock ......................           167,230             43,333
           Repayment of notes payable and long-term debt ...............          (363,556)          (480,275)
                                                                              ------------       ------------ 
               Net cash used in financing activities ...................          (196,326)          (436,942)
                                                                              ------------       ------------ 

Net decrease in cash and cash equivalents ..............................        (3,296,224)        (1,452,890)
Cash and cash equivalents at beginning of period .......................        11,054,088         12,694,047
                                                                              ------------       ------------ 
Cash and cash equivalents at end of period .............................      $  7,757,864       $ 11,241,157
                                                                              ============       ============

Supplemental disclosures of cash flow information:
      Cash paid for interest ...........................................      $     86,426       $    142,224
      Cash paid for income taxes .......................................            15,000             80,000
</TABLE>



See accompanying notes to condensed consolidated financial statements.



                                       5


<PAGE>   6



                          UROQUEST MEDICAL CORPORATION
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                               SEPTEMBER 30, 1998
                                   (UNAUDITED)



NOTE 1 - BASIS OF PRESENTATION

        The condensed consolidated financial statements include the assets and
liabilities of UroQuest Medical Corporation (the "Company") and its wholly owned
subsidiaries. All significant intercompany transactions have been eliminated in
consolidation.

        In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments (consisting of only
normal recurring adjustments) necessary to present fairly the Company's
consolidated financial position as of September 30, 1998, the results of its
operations for the three months and the nine months ended September 30, 1998 and
1997, and its cash flows for the nine months ended September 30, 1998 and 1997.
The results of operations for any interim period are not necessarily indicative
of results to be expected for the full fiscal year. The balance sheet at
December 31, 1997 has been derived from audited financial statements at such
date, but does not include all of the information and footnotes required by
generally accepted accounting principles.

        The accompanying condensed consolidated financial statements should be
read in conjunction with the audited consolidated financial statements and the
notes thereto included in the Company's Form 10-K (File No. 0-20963) for the
year ended December 31, 1997 filed with the Securities and Exchange Commission.

        In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information ("SFAS 131"), which is effective in annual
financial statements for years beginning after December 15, 1997. SFAS 131
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers. Management
has not completed its review of SFAS 131, but does not anticipate that the
adoption of this statement will have a significant effect on the Company's
financial reporting.

        Certain reclassifications were made to the 1997 condensed consolidated
financial statements to conform with the 1998 presentation.

NOTE 2 - NET LOSS PER SHARE

        Basic net loss per share has been calculated based on the weighted
average number of shares of common stock outstanding. If the Company had been in
a net income position in the periods presented, diluted earnings per share would
have been presented separately and would have included the effect of outstanding
stock options and warrants, calculated using the treasury stock method.



                                       6


<PAGE>   7



                          UROQUEST MEDICAL CORPORATION
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                               SEPTEMBER 30, 1998
                                   (UNAUDITED)



NOTE 3 - INVENTORIES

        Inventories consist of the following:

<TABLE>
<CAPTION>
                                          September 30,    December 31,
                                              1998            1997
                                          -------------    ------------
<S>                                        <C>             <C>       
Finished goods ........................    $  853,443      $  589,169
Work-in-process .......................     1,249,490       1,046,127
Raw materials and supplies ............       694,678         813,776
                                           ----------     -----------
                                           $2,797,611     $ 2,449,072
                                           ==========     ===========
</TABLE>



                                       7


<PAGE>   8



ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
        RESULTS OF OPERATIONS.

        The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Condensed
Consolidated Financial Statements and the related Notes thereto included
elsewhere in this Report and the Company's annual report on Form 10-K for the
year ended December 31, 1997. The following Management's Discussion and Analysis
of Financial Condition and Results of Operations contains forward-looking
statements, within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended,
that involve risks and uncertainties. The Company's actual results of operations
could differ materially from those anticipated in such forward-looking
statements as a result of certain factors including those discussed under
"Factors Affecting Operating Results" and elsewhere in this Report.

OVERVIEW

        Since its inception in April 1992, the Company has devoted its efforts
primarily to the design and development of advanced products for the management
and diagnosis of both male and female urological disorders. The Company's
principal product, the On-Command(R) product, is an intraurethral (inside the
urethra) catheter incorporating a proprietary anchoring system and a proprietary
patient controlled, magnetically activated valve used to regulate urine flow.
The On-Command product is designed to enable persons with either urinary
incontinence or urinary retention to manage their condition without the
restricted mobility, medical complications, discomfort and embarrassment
generally associated with many of the existing management alternatives,
including intermittent, Foley, external and suprapubic catheters, diapers and
absorbents, and penile clamps. The On-Command product is an investigational
device that has not been approved by the FDA and will not be available for
commercial distribution in the United States unless and until such approval is
obtained.

        Since 1996, Bivona Medical Technologies ("BMT") has been a wholly owned
subsidiary of the Company. BMT develops, manufactures and markets a line of
proprietary silicone medical device products and provides engineering design,
development and manufacturing services for silicone products on an OEM basis for
other medical device companies. All of the Company's current revenues relate to
sales of BMT products. BMT is one of a limited number of specialty manufacturers
of silicone catheters in the United States. BMT manufactures the Company's
On-Command product currently being used in clinical trials.

        The Company has experienced substantial losses since inception and, as
of September 30, 1998, had an accumulated deficit of $12 million. In October
1996, the Company raised approximately $17.8 million through the initial public
offering of its Common Stock.


RESULTS OF OPERATIONS

THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED 
SEPTEMBER 30, 1997:

        Net sales and cost of sales. Net sales, which were generated from sales
by BMT of primarily proprietary airway management products and other medical
device products to OEM customers, increased 3% to $4,427,000 for the three
months ended September 30, 1998 from $4,287,000 for the three months ended
September 30, 1997. The increase is attributable primarily to increased
quantities of proprietary products sold. Cost of sales of $2,211,000 for the
quarter ended September 30, 1998 decreased 12% from $2,515,000 for the same
quarter in 1997, due partly to a greater percentage of higher margin proprietary
product sales in the third quarter of 1998. In addition, during the three months
ended September 30, 1997, scale-up costs and validation costs related to certain
OEM product lines were incurred. Gross margin for the third quarter of 1998
increased to 50% from 41% for the same period in the prior year. The improvement
in gross margin is due primarily to favorable growth in sales of higher margin
proprietary products, price increases in certain OEM products and other
manufacturing efficiency improvements.



                                       8

<PAGE>   9


        Research and development. Research and development expenses include
product development, clinical testing and regulatory expenses. For the three
months ended September 30, 1998, research and development expenses increased to
$987,000 from $680,000 for the three months ended September 30, 1997. The
increase was attributable primarily to the increase in research and development
expenditures primarily related to the On-Command product and additional clinical
and site-monitoring personnel hired to assist in the completion of the clinical
studies necessary to support regulatory submissions. Research and development
expenses are expected to continue to increase in the foreseeable future as the
result of additional product development, clinical testing and regulatory
efforts.

        General and administrative. General and administrative expenses
increased to $1,264,000 for the quarter ended September 30, 1998 from $1,147,000
for the quarter ended September 30, 1997. The increase was attributable
primarily to increased personnel costs, facilities and other expenses. General
and administrative expenses are expected to increase to support the anticipated
expansion of the Company's business.

        Sales and marketing. Sales and marketing expenses increased to $638,000
for the three months ended September 30, 1998 from $613,000 for the three months
ended September 30, 1997. This increase was due primarily to increased personnel
costs, travel, marketing materials and other expenses. Sales and marketing
expenses are expected to increase in the foreseeable future, due in part to the
Company's European marketing evaluation studies of its Male and Female
On-Command product that have been initiated in the fourth quarter of 1998.

        Amortization of goodwill. Amortization of goodwill of $158,000 for the
quarter ended September 30, 1998 and $157,000 for the quarter ended September
30, 1997 related to the goodwill recognized as a result of the acquisition of
BMT in October 1996. The goodwill is being amortized over an estimated life of
20 years.

        Other income (expense). Other income (expense) decreased to net interest
income of $69,000 for the three months ended September 30, 1998 from a net
interest income of $114,000 for the same period in 1997. Interest income
decreased to $108,000 for the third quarter of 1998 from $158,000 for the same
quarter of 1997. The decrease in interest income was attributable to lower net
average cash balances, due primarily to net cash being used in operating
activities and purchases of property and equipment. Interest expense decreased
to $39,000 for the third quarter of 1998 from $44,000 for the same quarter of
1997. The decrease in interest expense was attributable primarily to the lower
net average debt balances as the Company is repaying existing loans and has not
incurred any new loans.

NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED 
SEPTEMBER 30, 1997:

        Net sales and cost of sales. Net sales, which were generated from sales
by BMT of primarily proprietary airway management products and other medical
device products to OEM customers, increased 8% to $12,947,000 for the nine
months ended September 30, 1998 from $11,948,000 for the nine months ended
September 30, 1997. The increase is attributable primarily to the increase in
sales of proprietary products. Cost of sales of $6,521,000 for the nine months
ended September 30, 1998 decreased 1% from $6,577,000 for the same period in
1997, due partly to a greater percentage of higher margin proprietary product
sales in the nine-month period ended September 30, 1998. In addition, during the
three months ended September 30, 1997, scale-up costs and validation costs
related to certain OEM product lines were incurred. Gross margin for the nine
months ended September 30, 1998 increased to 50% from 45% for the same period in
the prior year. The improvement in gross margin is due primarily to favorable
growth in sales of higher margin proprietary products, price increases in
certain OEM products and other manufacturing efficiency improvements.


        Research and development. Research and development expenses include
product development, clinical testing and regulatory expenses. For the nine
months ended September 30, 1998, research and 



                                       9

<PAGE>   10


development expenses increased to $2,991,000 from $1,975,000 for the nine months
ended September 30, 1997. The increase was attributable primarily to the
increase in research and development expenditures primarily related to the
On-Command product and additional clinical and site-monitoring personnel hired
to assist in the completion of the clinical studies necessary to support
regulatory submissions. Research and development expenses are expected to
continue to increase in the foreseeable future as the result of additional
product development, clinical testing and regulatory efforts.

        General and administrative. General and administrative expenses
increased to $3,613,000 for the nine months ended September 30, 1998 from
$2,865,000 for the nine months ended September 30, 1997. The increase was
attributable primarily to increased personnel costs, facilities and other
expenses. General and administrative expenses are expected to increase to
support the anticipated expansion of the Company's business.

        Sales and marketing. Sales and marketing expenses increased to
$2,010,000 for the nine months ended September 30, 1998 from $1,413,000 for the
nine months ended September 30, 1997. This increase was due primarily to
increased personnel costs, travel, marketing materials and other expenses. Sales
and marketing expenses are expected to increase in the foreseeable future, due
in part to the Company's European marketing evaluation studies of its Male and
Female On-Command product that have been initiated in the fourth quarter of
1998.

        Severance costs. The Company did not recognize any severance costs in
the nine months ended September 30, 1998. Severance costs of $1,600,000 incurred
in the nine months ended September 30, 1997 were related to the employment
termination of certain members of senior management in May 1997. Of this amount,
approximately $713,000 was related to non-cash compensation expense due to the
acceleration of vesting periods for stock options.

        Amortization of goodwill. Amortization of goodwill of $474,000 for the
nine months ended September 30, 1998 and $486,000 for the nine months ended
September 30, 1997 related to the goodwill recognized as a result of the
acquisition of BMT in October 1996. The goodwill is being amortized over an
estimated life of 20 years.

        Other income (expense). Other income (expense) decreased to net interest
income of $249,000 for the nine months ended September 30, 1998 from a net
interest income of $310,000 for the same period in 1997. Interest income
decreased to $356,000 for the nine months ended September 30, 1998 from $452,000
for the nine months ended September 30, 1997. The decrease in interest income
was attributable to lower net average cash balances, due primarily to net cash
being used in operating activities and purchases of property and equipment.
Interest expense decreased to $107,000 for the nine months ended September 30,
1998 from $142,000 for the same period in 1997. The decrease in interest expense
was attributable primarily to the lower net average debt balances as the Company
is repaying existing loans and has not incurred any new loans.

PROVISION FOR INCOME TAXES:

        The Company recorded a $35,000 and $40,000 provision for state income
taxes for the three months ended September 30, 1998 and 1997, respectively. For
the nine months ended September 30, 1998 and 1997, the provision for state
income taxes recorded is $76,000 and $122,000, respectively. The provision for
state income taxes is recorded primarily as a result of taxable income earned by
the Company's subsidiary in a state where the Company is required to file tax
returns on a separate company basis. The Company has not paid any federal income
taxes since its inception due to net operating losses. Realization of deferred
tax assets is dependant on future earnings, if any, the timing and amount of
which are uncertain. Accordingly deferred tax asset valuation allowances have
been established as of September 30, 1998 and December 31, 1997 to reflect these
uncertainties.

        As of December 31, 1997, the Company had federal net operating loss
carryforwards of approximately $5,400,000. The net operating loss carryforwards
will expire beginning in 2007, if not 



                                       10

<PAGE>   11


utilized. Utilization of the net operating loss carryforwards may be subject to
a substantial annual limitation due to ownership change limitations provided by
the Internal Revenue Code of 1986, as amended. This annual limitation may result
in the expiration of net operating loss carryforwards before utilization.

YEAR 2000 COMPLIANCE

        Many currently installed computer systems and software products are
coded to accept only two digit entries in the date code field. Beginning in the
year 2000, these date code fields will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, in less
than two years, computer systems (hardware and software) and/or devices with
embedded date-sensitive chips used by many companies may need to be upgraded or
replaced to comply with such "Year 2000" requirements. Significant uncertainty
exists in the software industry concerning the potential effects associated with
such compliance.

        Based on recent assessment that has been completed, the Company believes
that all its computer programs and hardware that have date-sensitive software or
embedded chips will properly utilize dates beyond December 31, 1999, primarily
as a result of system upgrades which were originally planned to enhance business
operations.

        The completed assessment indicated that most of the Company's
significant information technology systems, if not upgraded or modified, could
be affected. These systems include accounting programs, internally developed
software and other PC-based applications. The Company is currently completing an
upgrade to its accounting system; such upgrade was originally intended to
facilitate business operations. The upgraded accounting system is certified by
the vendor that it is Year 2000 compliant. Regarding its internally developed
software, the Company determined that approximately 5% of the lines of codes in
the software had to be changed to resolve the Year 2000 Issue. The Company
believes such changes have been fully completed. PC-based applications that are
currently used by the Company are certified by the vendors at time of purchase
that they are Year 2000 compliant; therefore, no replacements or upgrades are
considered necessary. The assessment also indicated that the embedded chips used
in production and manufacturing equipment are not date-sensitive and thus will
not be affected by the Year 2000 Issue. The cost directly related to addressing
Year 2000 issues has been determined to be immaterial.

        The Company is planning to purchase software to test all its information
technology systems regarding Year 2000 compliance. The Company is now
identifying and evaluating certain testing programs and anticipates completing
the testing process by the first half of calendar year 1999.

        The Company has also begun making queries to its significant suppliers
of their Year 2000 readiness. To date, the Company is not aware of any suppliers
with a Year 2000 issue that would materially impact the Company's results of
operations, liquidity, or capital resources. However, the Company has no means
of ensuring that its suppliers will be Year 2000 ready. The inability of
suppliers to complete their Year 2000 resolution process in a timely fashion
could materially impact the Company. The effect of noncompliance by suppliers is
not determinable.

        The Company presently believes that with upgrades or modifications of
existing computer systems, the Year 2000 Issue can be mitigated. However, if
such upgrades or modifications fail to address the Year 2000 issues, the
Company's business, financial condition and result of operations could be
materially adversely affected. The extent of the financial impact due to a Year
2000 noncompliance cannot be reasonably estimated at this time.

        The Company currently has no contingency plans in place in the event
that its computer systems are not Year 2000 compliant. The Company plans to
evaluate and determine whether such a plan is necessary after the internal
testing process is completed in the first half of calendar year 1999. The
Company is considering developing certain strategies in the case that its key
suppliers do not resolve their Year 2000 issues in a timely manner.



                                       11

<PAGE>   12


LIQUIDITY AND CAPITAL RESOURCES

        The Company has financed its operations primarily through the public and
private sale of equity securities and through bank-provided working capital
financing, short-term borrowings and equipment lease financing and, beginning in
1997, cash generated from operations at BMT. Since inception, the Company has
raised approximately $28 million in net proceeds from equity financings which
include the net proceeds of $17.8 million from the initial public offering of
the Company's Common Stock in October 1996.

        During the nine months ended September 30, 1998, net cash used in
operating activities amounted to $1,829,000. During the nine months ended
September 30, 1997, net cash used in operating activities amounted to $505,000.
The increase in net cash flows used in operating activities in the first nine
months in 1998 compared to the same period in 1997 was due primarily to
increased activities in research and development, general and administrative,
and sales and marketing operations, and cash severance payments.

        Additions of property and equipment for the nine months ended September
30, 1998 and 1997 were $1,071,000 and $511,000, respectively. The Company
expects the increase in additions of property and equipment to continue through
the end of 1998 due primarily to additional purchases of property and equipment
to support the urological product development and infrastructure development at
BMT.

        The Company's primary internal source of liquidity presently consists of
existing borrowings, cash balances and cash generated from BMT's operations. The
Company's primary external sources of liquidity are equity financings and
bank-provided debt financing.

        As of September 30, 1998 and December 31, 1997, the Company had cash of
$7,758,000 and $11,054,000, respectively. The decrease since December 31, 1997
was due primarily to the net cash used in operations, purchases of fixed assets
and repayment of long-term debt. As of September 30, 1998, the Company had no
significant noncancelable commitments for capital expenditures or raw material
purchases, although the Company may enter into such commitments in the future.

        The Company's capital requirements depend on numerous factors, including
the extent to which the On-Command product and other products gain market
acceptance, actions relating to regulatory and reimbursement matters, progress
of clinical trials, the effect of competitive products, the cost and effect of
future marketing programs, the resources the Company devotes to manufacturing
and developing its products, the success of BMT's proprietary airway management
products and OEM sales, general economic conditions and various other factors.
The timing and amount of such capital requirements cannot accurately be
predicted. The Company believes that existing cash and cash equivalents and cash
anticipated to be generated from BMT's operations will provide adequate funding
for the Company's currently anticipated capital requirements through June 30,
1999. Prior to achieving profitability, the Company may require additional
capital and there can be no assurance that such additional funding will be
available on terms satisfactory to the Company, if at all. Any additional equity
financing may be dilutive to stockholders, and debt financing, if available, may
involve significant restrictive covenants. Failure to raise capital when needed
could have a material adverse effect on the Company's business, financial
condition and results of operations.

        The Company expects its operating losses to continue until the
On-Command product achieves significant market acceptance. The Company continues
to expend substantial resources in funding clinical trials in support of
regulatory and reimbursement approvals, expansion of marketing and sales
activities, and research and development. In addition, the Company's results of
operations may fluctuate significantly during future quarterly periods. All
management estimates regarding liquidity and capital requirements are 



                                       12

<PAGE>   13


subject to the factors discussed above and in the following section titled
"Factors Affecting Operating Results".

FACTORS AFFECTING OPERATING RESULTS

        The statements contained in this Report that are not purely historical
are "forward-looking statements" within the meaning of Section 21E of the
Securities Exchange Act of 1934, as amended. All forward looking statements
involve various risks and uncertainties and include statements regarding the
Company's product development, commercial opportunities, regulatory approval,
expectations, strategies, plans and intentions for the future. All
forward-looking statements are made as of this date based on information
available to the Company as of such date, and the Company assumes no obligation
to update any forward-looking statement. It is important to note that such
statements may not prove to be accurate and that the Company's actual results
and future events could differ materially from those anticipated in such
statements. Among the factors that could cause actual results to differ
materially from the Company's expectations are described below and elsewhere in
this Report. All subsequent written and oral forward-looking statements
attributable to the Company or persons acting on its behalf are expressly
qualified in their entirety by this Section and other factors included elsewhere
in this Report. See other portions of this Item 2. "Management's Discussion and
Analysis of Financial Condition and Results of Operations".

Lack of Regulatory Approval and Limited Clinical Data

        The Company's principal product, the On-Command product, is an
investigational device that has not been approved by the FDA and will not be
available for commercial distribution in the United States unless and until such
approval is obtained. The Company has recently completed a controlled,
randomized clinical study in the United States on its Male On-Command product
with respect to single-use insertions up to 30 days for an acute indication. The
Company submitted a 510(k) premarket notification to the FDA for the acute
indication for its Male On-Command product during the third quarter of this
year. There can be no assurance that the FDA will determine that the data
derived from the clinical study will support the safety and efficacy of the
device nor that the 510(k) application will be cleared by the FDA. In addition
to the acute study, the FDA granted the Company conditional approval to begin a
Male On-Command chronic single arm trial involving multiple sequential monthly
insertions. The Company began enrolling patients in September 1998 in this
clinical trial. Upon completion of the chronic study, the Company expects to
apply for marketing approval of the On-Command for chronic indications under PMA
regulations. There can be no assurance that the FDA will determine that the data
derived from the clinical study will support the safety and efficacy of the
device nor that the data will be sufficient to file a PMA application or that
such application will be approved by the FDA. A feasibility study of the Female
On-Command product was completed and a report on the feasibility study was
submitted to the FDA in the second quarter of 1998. The results of this study
were used to prepare an IDE submission for a controlled, randomized clinical
study of this device, which the Company submitted in August 1998, and which
received conditional FDA approval in September 1998. The Company anticipates
beginning the clinical trial in support of a regulatory application for an acute
indication for the Female On-Command product during the next 90 days. There can
be no assurance that the FDA will determine that the data derived from the
clinical study will support the safety and efficacy of the device nor that the
data will be sufficient to file a regulatory application or that such
application will be approved by the FDA. If either the Male or Female On-Command
product does not prove to be safe and effective in clinical testing to the
satisfaction of the FDA, the Company will not be able to market or commercialize
these On-Command products in the United States. Furthermore, approval for single
use insertions of the On-Command product, if obtained, does not mean that use of
successive device insertions will be approved. There can be no assurance that
either single use or successive insertion use of the On-Command product will
prove to be safe and effective, or that FDA clearance or approval will be
obtained on a timely basis, if at all. In addition, the clinical studies may
identify technical, manufacturing, design or other factors that could delay
completion of such testing. If the On-Command product does not prove to be safe
and effective in clinical testing or if the Company is otherwise unable to
obtain necessary regulatory approval, the Company's business, financial
condition and results of operations will be materially adversely affected.



                                       13

<PAGE>   14


Dependence Upon the On-Command Product

        The Company expects to derive a substantial majority of its future
revenues from sales of the On-Command product. Although the operations of BMT
are expected to be the source of most of the Company's revenues in the
short-term, the Company's long-term revenues and future success are
substantially dependent upon its ability to market and commercialize the
On-Command product in the United States and abroad. The life cycle of the
On-Command product is difficult to estimate, particularly in light of continued
technological advances, competition and other factors. The failure of the
Company to successfully commercialize the On-Command product or to realize
significant revenues therefrom would have a material adverse effect on the
business, financial condition and results of operations of the Company.

Uncertainty of Market Acceptance

        The On-Command product represents a new management modality for urinary
outflow dysfunction, and there can be no assurance that the On-Command product
will gain any significant degree of market acceptance among physicians, health
care payers or patients, even if necessary domestic or international regulatory
and reimbursement approvals are obtained. The Company believes that
recommendations of the On-Command product by physicians will be essential for
market acceptance of the On-Command product, and there can be no assurance that
any such recommendations will be obtained. Broad use of the On-Command product
will require the training of numerous health care professionals and the time
required to complete such training could result in a delay or dampening of
market acceptance. Additionally, health care payers' approval of sufficient
reimbursement levels for the On-Command product will be an important factor in
establishing market acceptance. Patient acceptance of the device will depend on
many factors, including physician recommendations, the degree, rate and severity
of potential complications, the costs and benefits compared to competing
products, lifestyle implications, available reimbursement and other
considerations. Failure of the On-Command product to achieve substantial market
acceptance would have a material adverse effect on the Company's business,
financial condition and results of operations.

Limited Operating History; History of Losses and Expectation of Future Losses

        The Company has a limited history of operations. Since its inception in
April 1992, the urology portion of the Company has been primarily engaged in
research and development of the On-Command product. The Company has experienced
substantial operating losses since inception and, as of September 30, 1998, had
an accumulated deficit of approximately $12 million. The Company expects its
operating losses to continue until the On-Command product achieves significant
market acceptance. The Company continues to expend substantial resources in
funding clinical trials in support of regulatory and reimbursement approvals,
expansion of marketing and sales activities, and research and development. There
can be no assurance that the Company will achieve or sustain profitability in
the future.


Government Regulation

        The Company's products, including the On-Command product, will continue
to be subject to pervasive and continuing regulation by the FDA. The FDA
regulates the preclinical and clinical testing, manufacture, labeling,
distribution and promotion of medical devices in the United States. Prior to
commercialization in the United States, a medical device generally must receive
FDA clearance or approval, which can be an expensive, lengthy and uncertain
process. Regulatory agencies in various foreign countries in which the Company's
products may be sold may impose additional or varying regulatory requirements.
Noncompliance with applicable 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 premarket
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.



                                       14

<PAGE>   15


        Companies desiring to market a new medical device generally must obtain
either a premarket notification clearance under Section 510(k) of the FDC Act
("510(k)") or premarket approval ("PMA") prior to the introduction of such
medical device into the market. In addition, changes to a medical device that
affect the safety or efficacy of the device are also subject to FDA review and
clearance or approval. Although generally believed to be a shorter, less costly
regulatory path than a PMA, the process of obtaining a 510(k) clearance
generally requires the submission of supporting data, which may include data
from clinical trials of the device. The time period required to assemble and
compile this data can be extensive and can extend the regulatory process for a
considerable length of time. The PMA process can take several years longer than
the 510(k) clearance process and requires the submission of extensive clinical
data and supporting information.

        Regulatory approvals, if granted, may include significant limitations on
the indicated uses for which a product may be marketed. FDA enforcement policy
strictly prohibits the marketing of medical devices for unapproved uses. The
Company is required to adhere to applicable FDA regulations regarding Good
Manufacturing Practices ("GMP") and with Medical Device Reporting ("MDR")
requirements and similar regulations in other countries, which include testing,
control, and documentation requirements. Ongoing compliance with GMP and other
applicable regulatory requirements will be monitored through periodic
inspections by state and federal agencies, including the FDA, and by comparable
agencies in other countries. In addition, changes in existing regulations or
adoption of new governmental regulations or policies could prevent or delay
regulatory approval of the Company's products.

        Sales of medical devices outside the United States are subject to
foreign regulatory requirements that vary widely for country to country. The
time necessary to obtain approval for sales in foreign countries may be longer
or shorter than that required for FDA approval, and requirements may differ from
FDA requirements. The Company has received the right to affix the CE mark, an
international symbol of adherence to quality assurance standards and compliance
with applicable European medical device directives, to the On-Command product.
The CE mark allows the On-Command product to be commercially available in the
European Union. Some countries in which the Company intends to sell devices
through distributors either do not currently regulate medical devices such as
the On-Command product or have minimal registration requirements other than the
CE mark requirement. However, these countries may develop more extensive
regulations in the future that could affect the Company's ability to market
On-Command product.

        There can be no assurance that the Company will be able to obtain or
maintain the required clearances or approvals, both domestically and
internationally, which would allow the Company to market the On-Command product
or other products for their intended uses on a timely basis or at all, and
delays in receipt of or failure to receive such clearances or approvals, or
failure to comply with existing or future regulatory requirements would have a
material adverse effect on the Company's business, financial condition and
results of operations.

        BMT, as a developer and manufacturer of Class I and Class II medical
devices, is also subject to all of the foregoing regulatory requirements of the
FDA. Among its activities, BMT markets a range of proprietary and OEM products,
most of which have received 510(k) clearance. BMT has made modifications to one
or more of its cleared proprietary devices that BMT believes do not require the
submission of new 510(k) notices. There can be no assurance, however, that the
FDA would agree with any of BMT's determinations not to submit a new 510(k)
notice for any of the changes made to BMT's devices. If the FDA requires BMT to
submit a new 510(k) notice for any device modification, BMT may be required to
recall the modified device and/or be prohibited from marketing the modified
device until the 510(k) notice is cleared by the FDA.

        In January 1998, BMT received a Warning Letter from the FDA following
BMT's response to the FDA regarding certain deficiencies noted during an on-site
FDA inspection in December 1997. BMT management addressed the FDA's concerns
noted in the Warning Letter in both written and verbal communication in January
and February 1998. In March 1998, BMT received a letter in which the FDA



                                       15

<PAGE>   16


acknowledged BMT's responses and planned actions to address the FDA's concerns
and informed BMT that the FDA was planning a follow-up inspection in 1998, which
to date has not yet occurred. There can be no assurance that the FDA will
determine that BMT has fully addressed the FDA's concerns. Nor can there be any
assurance that the FDA will not issue additional Warning Letters in the future.
Failure by BMT to adequately address the FDA's concerns could cause the FDA to
take additional actions that might cause disruptions in BMT's operations. These
disruptions could have a material, adverse effect on the Company's business,
financial condition and results of operations.

Lack of Marketing and Sales Experience

        To date, the Company has not sold any On-Command product. The Company is
currently analyzing various sales and marketing methods it intends to use to
market the On-Command product in the United States if and when necessary
regulatory approvals are obtained. The Company currently employs a small number
of marketing and no sales employees for the On-Command product. In addition, the
Company began marketing evaluation studies of the On-Command product in Europe
in the fourth quarter of 1998, and intends to market the On-Command product
internationally through independent foreign distribution arrangements, none of
which is formally in place. There can be no assurance that the Company can
attract and retain its own qualified marketing and sales personnel, establish
acceptable international arrangements or otherwise design and implement an
effective marketing and sales strategy for the On-Command product.

Manufacturing Risks

        Through BMT, the Company has only manufactured the On-Command product in
limited quantities for clinical testing purposes to date. Although BMT has
extensive experience in manufacturing custom silicone products, including
urological products, the Company does not have experience in manufacturing the
On-Command product in commercial quantities. As the Company begins to launch its
On-Command product into various markets, the Company may encounter difficulties,
delays and significant expenses in scaling up production of the On-Command
product, including potential problems involving production yields, quality
control, component supply and shortages of qualified personnel. The Company may
also experience higher than expected manufacturing costs that could prevent the
Company from selling the On-Command product at a commercially reasonable price.
There can be no assurance that difficulties or unfavorable costs will not be
encountered in mass-production of the On-Command product and, in such an event,
these difficulties or costs could result in a material adverse effect on the
Company's business, financial condition and results of operations.

Reliance On Patents and Protection 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 technology. There
can be no assurance that the Company's issued patents, or any patents which may
be issued as a result of the Company's applications, will offer any degree of
protection. 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 any
of the Company's patents or patent applications will not be challenged,
invalidated or circumvented in the future. In addition, there can be no
assurance that competitors, many of which have substantial resources and have
made significant investments in competing technologies, will not seek to apply
for and obtain patents that may prevent, limit or interfere with the Company's
ability to make, use or sell its products either in the United States or
internationally.

        In addition to patents, the Company relies on trade secrets and
proprietary know-how, which it seeks to protect, in part, through proprietary
information agreements with certain of its employees, consultants and other
parties. The Company's proprietary information agreements with employees and
consultants contain standard confidentiality provisions and, in certain
instances, require such individuals to assign to the Company without additional
consideration any inventions conceived or reduced to practice by them while
employed or retained by the Company, subject to customary exceptions. There can
be no 



                                       16

<PAGE>   17


assurance that proprietary information agreements with employees, consultants
and others will not be breached, that the Company would have adequate remedies
for any breach, or that the Company's trade secrets will not otherwise become
known to or independently developed by competitors. The Company also seeks to
protect its trademarks through registration. There can be no assurance, however,
that registration of such marks will provide any significant protection.

Intense Competition and Technological Advances

        Competition in the market for treatment and management of urological
disorders is intense and is expected to increase. The Company believes it will
face considerable competition from existing incontinence management modalities,
such as intermittent, Foley, external and suprapubic catheters, adult diapers
and absorbents, and penile clamps. The Company also expects to face significant
competition from other domestic and international companies that are developing
similar and other products and technologies for the management of urological
disorders. Most of the Company's competitors and potential competitors have
significantly greater financial, technical, research, manufacturing, 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 which may be offered by the Company, or that such
competitors will not succeed in obtaining regulatory approval, introducing or
commercializing any such products prior to the Company. Such developments could
have a material adverse effect on the Company's business, financial condition
and results of operations.

Uncertainty Relating to Third-Party Reimbursement

        In the United States and in foreign countries, third-party reimbursement
is generally available for medical devices such as intermittent, Foley, external
and suprapubic catheters for the management of urinary outflow dysfunction,
including incontinence and retention. Diapers and absorbents generally do not
receive third-party reimbursement and are paid for by the patient. The Company
believes, based on the availability of third-party reimbursement for certain
other medical devices, that the On-Command product will likely be eligible for
coverage by third-party reimbursement programs. There can be no assurance,
however, that such reimbursement will be available for the On-Command product
or, if available, that it will be sufficient to cover the cost of the product.
If third-party reimbursement is unavailable, consumers will have to pay for the
On-Command product themselves, resulting in greater relative out-of-pocket costs
for the device as compared to surgical procedures and other management options
for which third-party reimbursement is available. The Company does not expect
that third-party reimbursement will be available, if at all, unless and until
FDA and foreign regulatory approval is received. After such time, if ever, as
applicable regulatory approval is received, third-party reimbursement for the
On-Command product will be dependent upon decisions by the Health Care Financing
Administration (and its associates) for Medicare in the United States and
similar authorities abroad, as well as by private insurers and other payers.

        Changes in the availability of third-party reimbursement for the
On-Command product, for products of the Company's competitors or for surgical
procedures may affect the pricing of the On-Command product or the relative cost
to the patient. Regardless of the type of reimbursement system, the Company
believes that physician advocacy of the On-Command product will be required to
obtain reimbursement. There can be no assurance that reimbursement for the
Company's products will be available in the United States or in international
markets under either governmental or private reimbursement systems, or that
physicians will support the On-Command product. Failure to obtain such
reimbursement may have a material adverse effect on the Company's business,
financial condition and results of operations.

Future Capital Needs; Uncertainty of Additional Funding

        The Company's capital requirements depend on numerous factors, including
the extent to which the On-Command product and other products gain market
acceptance, actions relating to regulatory and reimbursement matters, progress
of clinical trials, the effect of competitive products, the cost and effect of



                                       17

<PAGE>   18


future marketing programs, the resources the Company devotes to manufacturing
and developing its products, the success of non-urological operations, general
economic conditions and various other factors. The timing and amount of such
capital requirements cannot adequately be predicted. Consequently, although the
Company believes existing cash balances and cash anticipated to be generated
from BMT operations will provide adequate funding for its capital requirements
through June 30, 1999, there can be no assurance that the Company will not
require additional funding or that such additional funding, if needed, will be
available on terms satisfactory to the Company, if at all. Any additional equity
financing may be dilutive to stockholders, and debt financing, if available, may
involve significant restrictive covenants. Failure to raise capital when needed
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Liquidity and Capital Resources".

Intellectual Property Litigation Risks

        The medical device industry has been characterized by extensive
litigation regarding patents and other intellectual property rights, and
companies in the medical device industry have employed intellectual property
litigation to gain a competitive advantage. The Company is aware of patents held
by other participants in the urological disorder management market, and there
can be no assurance that the Company will not in the future become subject to
patent infringement claims and litigation or interference proceedings before the
United States Patent and Trademark Office ("PTO"). The defense and prosecution
of intellectual property suits, PTO interference proceedings and related legal
and administrative proceedings are both costly and time consuming. Litigation
may be necessary to enforce patents issued to the Company, to protect trade
secrets or knowhow owned by the Company or to determine the enforceability,
scope and validity of the proprietary rights of others.

        Any litigation or interference proceedings would result in substantial
expense to the Company and significant diversion of attention by the Company's
technical and management personnel. An adverse determination in litigation or
interference proceedings to which the Company may become a party could subject
the Company to significant liabilities to third parties or require the Company
to seek licenses from third-parties. 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
and could include future royalty payments. Furthermore, there can be no
assurance that necessary licenses would be available to the Company on
satisfactory terms or at all. Accordingly, an adverse determination in a
judicial or administrative proceeding or failure to obtain necessary licenses
could prevent the Company from manufacturing and selling its products, which
would have a material adverse effect on the Company's business, financial
condition and results of operations.

International Sales Risks

        The Company plans to sell the On-Command product and other products both
in the United States and in foreign markets. Any international sales are
expected to be made through independent foreign distributors and involve a
number of inherent risks. Consequently, there can be no assurance that the
Company will be able to achieve significant sales of the On-Command product or
other products in any foreign market. International sales may be adversely
affected by the imposition of government controls, export license requirements,
political instability, trade restrictions, changes in tariffs, distributor
difficulties, communications problems, fluctuations in foreign currency rates,
foreign competition and other factors. Any one or more of these factors could
limit the Company's international sales and have a material adverse effect on
the Company's business, financial condition and results of operations.

Product Liability Risk; Product Recall Risk

        The manufacture and sale of medical devices entails significant product
liability and recall risks. Product liability may exist despite FDA approval and
future court decisions may also affect the Company's risk of product liability.
Although the Company maintains product liability insurance with respect to its
products, a successful product liability claim or series of claims brought
against the Company which are in excess of the Company's insurance coverage
could have a material adverse effect on the Company's 



                                       18

<PAGE>   19


business, financial condition and results of operations. In addition, there can
be no assurance that product recalls, which could have a material adverse effect
on the Company's business, financial condition and results of operations, will
not occur.

Dependence Upon Key Suppliers

        Through BMT, the Company purchases certain of the components used to
manufacture the On-Command product from several single source suppliers with
whom the Company has no long-term agreements. Any interruptions or delays
associated with any component shortages, particularly as the Company scales up
its manufacturing activities in support of commercial sales of the On-Command
product, could have a material adverse effect on the Company's business,
financial condition and results of operations.

Uncertainty of BMT Operations

        Although the business operations of BMT have continued since 1971, there
can be no assurance that BMT's revenues, cash flow or current profitability and
growth rate will continue in the future. Approximately 45% and 39% of BMT's net
sales during 1997 and the nine months ended September 30, 1998, respectively,
were derived from its manufacture of OEM medical device products. BMT maintains
no long-term OEM customer contracts and, during 1997 and the nine months ended
September 30, 1998, BMT derived approximately 24% and 17%, respectively, of its
net sales from one such customer. There can be no assurance that BMT's OEM
customers will continue to use BMT as a manufacturing resource. Furthermore, BMT
is subject to general business risks associated with operations of its size and,
in particular, to the same risks faced by other companies that manufacture and
market medical device products. Because virtually all of BMT's proprietary and
OEM products incorporate silicone components, any cost increase or other
negative development associated with this material could adversely affect its
business, financial condition and results of operations. BMT has faced two labor
union election contests in the past seven years and may face additional
elections in the future. In the event BMT becomes subject to a collective
bargaining agreement, it may experience increased labor and related costs that
could have a material adverse effect on the Company's business, financial
condition and results of operations.

Environmental Risks

        BMT utilizes many raw materials in the manufacturing process that are
subject to various environmental laws and regulations. Proper disposal of waste
including metals and chemicals used in the manufacturing process is a major
consideration for medical device manufacturers. In the event of a violation of
environmental laws, the Company could be held liable for damages and for the
costs of remedial actions and could also be subject to revocation of permits
necessary to conduct its business. Any such revocations could require BMT to
cease or limit production at its facilities, which could have a material adverse
effect on the Company's business, financial condition and results of operations.
BMT is also subject to environmental laws relating to the storage, use and
disposal of chemicals, solid waste and other hazardous materials, as well as air
quality regulations. Changes or restrictions on discharge limits, emissions
levels, or material storage or handling might require a high level of unplanned
capital investment and/or subsequent relocation to another location. Although
there has not been any problem complying with the environmental laws and
regulations, there can be no assurance that BMT will be able to comply with the
discharge levels mandated or that the costs of complying with such regulations
will not require additional capital expenses. Furthermore, there can be no
assurance that compliance with such regulations will not have a material adverse
effect on the Company's business, financial condition and results of operations.

Possible Volatility of Stock Price

        The stock market has from time to time experienced significant price and
volume fluctuations that are unrelated to the operating performance of
particular companies. These broad market fluctuations may adversely affect the
market price of the Company's Common Stock. In addition, the market price of the



                                       19

<PAGE>   20


Common Stock has been volatile. Factors such as fluctuations in the Company's
operating results, announcements of technological innovations or new products by
the Company or its competitors, FDA and international regulatory actions,
actions with respect to reimbursement matters, developments with respect to
patents or proprietary rights, public concern as to the safety of products
developed by the Company or others, changes in health care policy in the United
States and internationally, changes in stock market analyst recommendations
regarding the Company, other medical device companies or the medical device
industry generally and general market conditions may have a significant effect
on the market price of the Common Stock. In addition, it is likely that during
future quarterly periods, the Company's results of operations may fluctuate
significantly or may fail to meet the expectations of stock market analysts and
investors and, in such event, the Company's stock price could be materially
adversely affected. In the past, securities class action litigation has been
initiated following periods of volatility in the market price of a company's
securities. Such litigation, if brought against the Company, could result in
substantial costs and a diversion of management's attention and resources, which
could have a material adverse effect on the Company's business, financial
condition and results of operations.



                                       20


<PAGE>   21



PART II - OTHER INFORMATION

Item 1 - Legal Proceedings

         Not applicable.

Item 2 - Changes in Securities and Use of Proceeds

        The following information is provided as an amendment to the initial
report on Form SR, "Report of Sales of Securities and Use of Proceeds
Therefrom", regarding the use of proceeds from the sale of common stock under
the Company's Registration Statement on Form S-1 (SEC file number 333-07277),
which was declared effective on October 24, 1996 (CUSIP number 917285). The
information provided is for the period from October 24, 1996 through September
30, 1998. All amounts in the table below represent actual payments, unless
otherwise stated.



<TABLE>
<CAPTION>
Use of Net Proceeds              Directors/Officers(1)      Others(3)         Total
-------------------              ---------------------     ----------      -----------
<S>                                  <C>                   <C>              <C>        
Construction of plant, 
building, and facilities.......      $        --           $        --      $        --
Purchases and installation of  
     machinery and equipment ..               --               201,504          201,504
Purchases of real estate ......               --                    --               --
Acquisition of other business..        8,476,330             1,523,670       10,000,000
Repayment of indebtedness .....          152,219               750,331          902,550
Working capital/general        
  corporate purposes...........          898,520             2,570,135        3,468,655
Other purposes:
   - Clinical trials and       
     research and development..          179,168             1,547,898        1,727,066
   - Sales and marketing 
     activities ...............          191,150               738,819          929,969
   - Severance payments .......          477,515(2)             96,091          573,606
                                      -----------           ----------      -----------
                                       10,374,902            7,428,448       17,803,350
Temporary investment:
   - Cash and cash equivalents.                --                   --               --
                                      -----------           ----------      -----------
                                      $10,374,902           $7,428,448      $17,803,350
                                      ===========           ==========      ===========
</TABLE>


(1)     Direct or indirect payments to directors, officers, general partners of
        the Company or their associates; to persons owning ten percent or more
        of any class of equity securities of the Company; and to affiliates of
        the Company.

(2)     Direct or indirect payments to former officers of the Company who
        resigned in 1997.

(3)     Direct or indirect payments to others.

        There is no material change in the use of net proceeds as described in
the prospectus, except that the Company has used approximately $3.5 million for
working capital and general corporate purposes.

Item 3 - Defaults upon Senior Securities

         Not applicable.



                                       21

<PAGE>   22


Item 4 - Submission of Matters to a Vote of Security Holders 
         Not applicable.

Item 5 - Other Information
         Not applicable.

Item 6 - Exhibits and Reports on Form 8-K

        (a)     Exhibits:

<TABLE>
<CAPTION>
       EXHIBIT
        NUMBER  EXHIBIT
       -------  -------
        <S>        <C>
        10.17   Indemnification Agreement between the Company and Terry E.
                Spraker dated October 12, 1998

        10.18   Indemnification Agreement between the Company and Jeffrey L.
                Kaiser dated October 12, 1998

        10.19   Indemnification Agreement between the Company and Alan Marquardt
                dated October 12, 1998

        10.20   Indemnification Agreement between the Company and Keith Ward
                dated October 12, 1998

        27.1    Financial Data Schedule
</TABLE>



        (b)     Reports on Form 8-K:

                The Company did not file any reports on Form 8-K during the
                three months ended September 30, 1998.



                                       22


<PAGE>   23




                                   SIGNATURES



        Pursuant to the requirements 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.



                                       UROQUEST MEDICAL CORPORATION


Date: November 13, 1998                /s/ Terry E. Spraker, Ph.D.
                                       -----------------------------------------
                                       Terry E. Spraker, Ph.D. 
                                       President and Chief Executive Officer


Date: November 13, 1998                /s/ Jeffrey L. Kaiser
                                       -----------------------------------------
                                       Jeffrey L. Kaiser
                                       Vice President, Chief Financial Officer,
                                       Treasurer and Secretary
                                       (Principal Financial Officer)


                                       23


<PAGE>   24


                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
       EXHIBIT
        NUMBER  DESCRIPTION
       -------  -----------
        <S>        <C>
        10.17   Indemnification Agreement between the Company and Terry E.
                Spraker dated October 12, 1998

        10.18   Indemnification Agreement between the Company and Jeffrey L.
                Kaiser dated October 12, 1998

        10.19   Indemnification Agreement between the Company and Alan Marquardt
                dated October 12, 1998

        10.20   Indemnification Agreement between the Company and Keith Ward
                dated October 12, 1998

        27.1    Financial Data Schedule
</TABLE>