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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

     (MARK ONE)

        /X/         ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934

                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997

                                       OR

        / /        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934
                FOR THE TRANSITION PERIOD FROM ______ TO _______

                         COMMISSION FILE NUMBER: 0-20963

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


                 Delaware                                  59-3176454
        (State or other jurisdiction                     (IRS Employer
     of incorporation or organization)               Identification Number)

                  173 Constitution Drive, Menlo Park, CA 94025
               (Address of principal executive offices) (Zip Code)

                                 (650) 463-5180
              (Registrant'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 Stock

          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 by check mark if delinquent filers pursuant to Item 405 of
    Regulation S-K is not contained herein, and will not be contained, to the
    best of registrant's knowledge, in definitive proxy of information
    statements incorporated by reference in Part III of this Form 10-K or any
    amendment to this Form 10-K.    X
                                  -----

          As of March 20, 1998, the aggregate market value of the voting stock
    held by non-affiliates of the registrant is approximately $27,068,500 on the
    closing sale price as reported on the Nasdaq National Market on such date.
    Shares of Common Stock held by officers, directors and holders of more than
    5% of the outstanding Common Stock have been excluded from this calculation
    because such persons may be deemed to be affiliates. This determination of
    affiliate status is not necessarily a conclusive determination for other
    purposes.

          The number of shares of Common Stock outstanding on March 20, 1998 was
    11,962,500.

                         DOCUMENTS INCORPORATED BY REFERENCE

          Part III of this Report on Form 10-K incorporates information by
    reference from the Registrant's Proxy statement for its 1998 Annual Meeting
    of Stockholders.
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                          UROQUEST MEDICAL CORPORATION

                                     PART I


Item 1. BUSINESS

   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
developments, 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 1.
"Business" and see Item 7. "Management's Discussion and Analysis of Financial
Condition" and "Results of Operations."

   UroQuest Medical Corporation ("the Company") was formed to design, develop
and market advanced products for the management and diagnosis of both male and
female urological disorders. The Company's principal product, the On-Command
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.

   Clinical trials of the Male On-Command product are being conducted at five
sites in the United States under an Investigational Device Exemption ("IDE")
application approved by the United States Food and Drug Administration (the
"FDA"). The results to date, while promising, are preliminary and additional
clinical testing is required before any definitive conclusions can be reached
concerning the general use of the On-Command product. The Company is conducting
a controlled, randomized clinical study. The study protocol includes the
evaluation of a single device insertion for a period of up to 30 days regarding
an acute indication. The Company expects to complete the study during the third
quarter of 1998.

   Since early 1997, the Company has assumed that a PMA would be required for
the acute indication of the device. This was the result of a policy promulgated
by the FDA at that time which maintained that certain intraurethral devices,
including UroQuest's On-Command products, regardless of indication, would be
regulated under the PMA process. Previously, the Company had been assuming a
510(k) regulatory path. Based on recent communication with the FDA, acute
indications of the Company's Male and Female On-Command urinary outflow
management products may again be reviewable under 510(k) regulations. The
Company is continuing to communicate with the FDA to clarify the proper
regulatory pathway for acute indications of the On-Command products. It is the
Company's understanding that chronic indications for the Company's On-Command
products will continue to be regulated under the PMA process.

   In addition to the acute study currently underway, UroQuest is preparing to
submit an IDE to begin a multi-center trial in support of a PMA application for
a chronic indication for the Male On-Command product.

   An IDE application for the Female On-Command product was approved in March
1996 and the Company is completing a non-randomized feasibility study at two
investigational sites prior to initiating a controlled, randomized study.

   UroQuest was founded as a Florida Corporation in 1992 and reincorporated in
Delaware in October of 1996.


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UroQuest's principal offices are located at 173 Constitution Drive, Menlo Park,
CA. The Company's telephone number is (650) 463-5180.

   In October 1996, the Company acquired BMT, Inc., an Indiana corporation, and
its wholly owned subsidiary, Bivona, Inc., an Indiana corporation (collectively,
"BMT"). BMT designs, develops, manufactures and markets a line of proprietary
silicone medical device products used to manage airway problems, as well as
provides engineering design, development and manufacturing services for silicone
products on an OEM basis for other medical device companies. BMT is one of a
limited number of specialty manufacturers of silicone catheters in the United
States. The acquisition was effected through a merger of BMT with and into an
acquisition subsidiary of the Company pursuant to which shareholders of BMT
received, in the aggregate, a combination of $10 million cash and 2,500,000
newly issued shares of the Company's Common Stock. The acquisition has enabled
the Company to control its own production source while providing necessary
capacity and flexibility in the manufacturing process. The acquisition has also
expanded the Company's limited product line and experience which previously
focused primarily on the On-Command product. The product development and
production expertise of BMT is also being utilized by the Company to develop
additional On-Command products and other new devices related to the
management and diagnosis of urological disorders.

UROLOGY PRODUCTS

   The On-Command product is an intraurethral 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 incontinence (the inability to control one's
urinary function, leading to frequent involuntary urine leakage from the
bladder) or retention (the inability to voluntarily and spontaneously empty
one's bladder) 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.

   Unlike most of the widely used incontinence management products, which are
designed to capture urine flow in an external container or absorbent medium, the
On-Command product enables the incontinent person to remain dry without
interfering with normal lifestyle activities and without the associated medical
and psychological problems. Furthermore, unlike most of the widely used products
for the management of retention, which result in severe lifestyle restrictions,
the On-Command product allows the patient with retention to empty the bladder
conveniently and without the potential complications associated with the use of
an external collection bag or the need for intermittent catheterization ("IC").

   The principal features of the On-Command product include:

   - Patient Control. The On-Command product enables persons with either
         incontinence or retention to maintain control of their urinary outflow.
         The On-Command product prevents urine from leaving the urinary tract
         until the incontinent person chooses to void, enabling such a person to
         remain dry. The On-Command product allows the patient with retention to
         void when desired and without the need for IC.

   - Non-Surgical Application. The On-Command product is designed to be a
         relatively low-risk, non-surgical management application for urinary
         outflow problems when compared to surgery or permanently implanted
         devices. This is particularly important due to the uncertainty and
         complications of invasive treatments, or when the longevity of the
         patient is in question.

   - Ease of Use. The operation of the On-Command product is simple and
         efficient for the patient. The physician is trained to understand how
         to size and insert the catheter which shares several common design
         features with other commonly used indwelling catheters, such as the
         Foley catheter.

   - Convenience and Enhanced Lifestyle. The proprietary intraurethral design of
         the On-Command product eliminates the need for external collection bags
         and absorbents that can restrict mobility and compromise lifestyle.
         Periodic replacement is also convenient when compared to products like
         diapers, intermittent catheters and urethral plugs which must be
         changed or replaced multiple times per day.



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   - Lower Incidence of Complications. The On-Command product, because of its
         intraurethral design, is believed to result in fewer complications than
         other products designed for the treatment or management of urinary
         outflow problems. Incontinent persons are more likely to stay dry,
         reducing the risks of rashes, skin irritations, urethral strictures and
         other complications.

   - Reduced Infection Rate. Preliminarily, male patients with either
         incontinence or retention have been shown in the Company's clinical
         trials to have lower symptomatic Urinary Tract Infection ("UTI") rates
         while using the Male On-Command product, when compared with infection
         rates generally associated with the use of Foley catheters.

   - Cost Effectiveness. The Company believes that less frequent replacement of
         the On-Command product should provide a competitive cost advantage over
         products that are changed daily or multiple times per day. In addition,
         the Company anticipates that the overall treatment cost using the
         On-Command product will be lower due to a reduced incidence of
         complications and side effects.

   Urinary outflow dysfunction can result from a wide range of diseases,
surgical complications or other factors affecting anatomic structures, autonomic
reflexes or neurologic function. As a result, it is difficult for a single
treatment or management alternative to effectively address every specific
condition. There are certain specific patients who would not be able to benefit
from the clinical and lifestyle advantages of the On-Command product. First,
patients who have limited motor function or dementia may not be able to
effectively activate the magnetic valve. Second, the anatomy of patients who
have low bladder capacity or bladder instability may not be able to accommodate
an intraurethral device such as the On-Command product. Finally, patients with
other physical limitations such as excessive obesity or retracted penis may not
be able to use the On-Command product.

   Male On-Command product

   The Male On-Command product consists of two separable units, the
intraurethral catheter portion and the detachable inflator section. When the two
units are connected, prior to use, the device closely resembles a Foley
catheter. The device is inserted non-surgically through the urethra in a
five-minute procedure. Two balloons are inflated, one in the bladder to seal the
bladder neck and one in the urethra on the downstream side of the prostate gland
to anchor the device. The inflator portion is then detached and discarded.
Following proper sizing, the device should reside completely inside the urethra
with no exposed components, thereby reducing the risk of infection. The device
is designed to remain in place for up to 30 days.

   The proprietary magnetic control valve is located at the outlet end of the
catheter section. This valve can be opened by simply placing a matchbook sized
magnet externally along the underside of the penis, allowing the urine to flow.
Removing the magnet closes the valve, shutting off the flow of urine and keeping
the patient dry. Both insertion and removal procedures are non-surgical, take
only a few minutes and can be accomplished by medical staff or other caregivers.
The Company offers a range of sizes, and uses a proprietary sizing catheter to
ensure appropriate fit. The sizing catheter is easy for physicians to use and
promotes a comfortable and customized fit in a variety of anatomies.

   Female On-Command product

   The Female On-Command product also employs a catheter with a detachable
inflator section and a magnetically activated valve. The device is shorter than
the Male On-Command product and substitutes the urethral anchoring balloon with
a small rounded external cap which anchors the device in place beneath the
labial folds of the vagina. The device is designed to remain in place for up to
30 days making it more convenient than many other products requiring multiple
changes per day. Because the external anchoring cap extends past the urethral
opening, symptomatic UTI rates in the Female On-Command product are expected to
be higher than the Male On-Command product which resides entirely inside the
urethra. The procedures for insertion, voiding and removal are similar to those
for the male device.

CLINICAL TRIALS

   The Company designed a controlled, randomized study of the Male-On-Command
product and filed an IDE


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application that was approved in July 1995. The controlled, randomized study was
initially started in September 1995 and then stopped in order to diagnose and
correct a component assembly problem causing migration of the device away from
the bladder. The Company initiated two non-randomized pilot studies to evaluate
several assembly and manufacturing procedures designed to correct the problem
and incorporate other improvements, including a modified magnetic valve and a
new sizing catheter and procedure to enhance the patient fit of the device. The
Company completed the pilot studies prior to recommencing the controlled,
randomized study in December 1996.

   The purpose of the randomized study is to demonstrate the safety and efficacy
of the Male On-Command product when compared to a Foley catheter in managing
urinary outflow dysfunction. The study protocol includes the evaluation of a
single device insertion for a period of up to 30 days regarding an acute
indication. The duration of the study is approximately seven weeks per patient,
including enrollment and both pre-insertion and post-insertion examinations.
Study endpoints include comparison of symptomatic UTI rates, physical changes to
the bladder and urethra and patient assessment of quality of life between study
groups. The Company currently anticipates completing the study during the third
quarter of 1998. There can be no assurance that the study will be completed by
that date.

   Since early 1997, the Company has assumed that a PMA would be required for
the acute indication of the device. This was the result of a policy promulgated
by the FDA at that time which maintained that certain intraurethral devices,
including UroQuest's On-Command products, regardless of indication, would be
regulated under the PMA process. Previously, the Company had been assuming a
510(k) regulatory path. Based on recent communication with the FDA, acute
indications of the Company's Male and Female On-Command urinary outflow
management products may again be reviewable under 510(k) regulations. The
Company is continuing to communicate with the FDA to clarify the proper
regulatory pathway for acute indications of the On-Command products. It is the
Company's understanding that chronic indications for the Company's On-Command
products will continue to be regulated under the PMA process.

   In addition to the acute study currently underway, UroQuest is preparing to
submit an IDE to begin a multi-center trial in support of a PMA application for
a chronic indication for the Male On-Command product. The Company intends to
submit the chronic study IDE during the second quarter of 1998 and anticipates
beginning this trial during the third quarter of 1998. As a result of
discussions with the FDA regarding the design of this study, the Company intends
to consider patients who have participated in the acute study for enrollment in
the chronic study.

   An IDE for the Female On-Command product was approved in March 1996 by the
FDA. As part of the approved IDE, the Company is completing a non-randomized
feasibility study to test protocols and procedures. The Company is in
discussions with the FDA regarding the design of further Female On-Command
studies to seek indications for acute and chronic applications. The Company is
currently preparing an IDE application for an acute study and anticipates
beginning a multi-center Female On-Command study during the third quarter of
1998. There can be no assurance that such a study will be approved by the FDA or
that it will begin in a timely manner.

MARKETING AND SALES OF THE ON-COMMAND(R) PRODUCT

   The Company's current plan is to market the On-Command product directly in
the United States to physicians and their patients. Marketing plans for
institutions (nursing home and hospital care) are not yet finalized.
Internationally, the Company is in the process of establishing a distribution
network. The Company's marketing strategy is designed to create awareness and
promote the On-Command product as the preferred alternative for the management
of lower urinary tract problems in men and women. The Company's initial
marketing efforts will be directed toward urologists, uro-gynecologists and
other physicians whose patients are seeking relief from urinary outflow
problems.

   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. Patient acceptance of the device will
depend on many factors, including physician recommendations, the degree, rate
and severity of potential complications, the cost and benefits compared to


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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.

   Domestic Sales

   The Company intends to implement its sales strategy through sales specialists
who will educate and train physicians and patients. These specialists may
include field-based paraprofessionals, nurse practitioners and professional
sales representatives with experience demonstrating medical products and
procedures. Initially, the Company will target the sunbelt region of the United
States where there is a greater percentage of older persons in whom the
incidence of urinary dysfunction is higher. The Company then intends to expand
its sales efforts into other areas of the country. There can be no assurance
that such sales effort expansion will occur.

   Based on market research commissioned by the Company, the Company believes
its initial target market includes men who have incontinence or retention whose
condition does not preclude them from using a medical device and who meet
certain additional criteria including age, manual dexterity and dissatisfaction
with their current management modality. This research also indicates that
600,000 to 900,000 men are currently using a catheter-type device to manage
urinary outflow problems. The Company believes that patients currently using
these devices will be the first to recognize the benefits of the On-Command
product. These male patients are accustomed to catheters, see their physician on
a regular basis, and are believed to be the most receptive to alternative
management methods. Patients using absorbents who are dissatisfied with the
wetness, odor, discomfort and embarrassment associated with diapers are also
primary targets.

   Initially, the Company expects to target women who are post-surgical patients
with an acute urinary management need. Subsequently, the Company expects to
target women with moderate to severe stress incontinence who require some form
of continuous management. Based on published research, the Company estimates
that between 2.6 million and 3.4 million women in the United States suffer from
moderate and severe incontinence.

   To date, the Company has not sold any On-Command products and employs only a
small marketing staff. There can be no assurance that the Company can attract
and retain its own qualified marketing and sales personnel or otherwise design
and implement an effective marketing and sales strategy for the On-Command
product. The failure to establish and maintain effective marketing, sales and
distribution channels for the Company's products, or to attract and retain
qualified sales personnel to support commercial sales of the Company's products,
would have a material adverse effect on the Company's business, financial
condition and results of operations.

   International Sales

   International marketing efforts are initially being directed at Europe and
selected other territories. International sales of the On-Command product are
expected to begin in Europe during the second half of 1998 through independent
foreign distributors. Discussions are currently underway with a number of
potential distributors in Europe, Japan and other countries. The Company has
received the right to affix the CE mark for the male and female On-Command
products. There can be no assurance that the Company will be successful in
initiating the launch of its products during this period or be able to maintain
effective marketing, sales and distribution channels internationally.

   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.

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. Certain patient-administered products such
as diapers and


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absorbents that are widely used for incontinence management 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. Currently, the
Company is unable to determine whether the On-Command product reimbursement
amount, if available, will be sufficient to cover the cost of the product. The
Company currently estimates the price of the Male On-Command product will be in
excess of $100 per month, based on the use of one device per month, although the
exact pricing of the Male On-Command product has not yet been set. The pricing
for the Female On-Command product has not yet been determined by the Company.
Current medical reimbursement amounts for existing catheters (Foleys, etc.) are
often significantly less than $100. The Company's long-term strategy is to
obtain separate reimbursement codes for the male and female products and analyze
the cost effectiveness of the On-Command product compared to other device,
absorbent and treatment modalities. There can be no assurance that the Company
will receive such separate codes or successfully perform such analyses.

   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) ("HCFA") for Medicare in the United States
and similar authorities abroad, as well as by private insurers and other payers
who base their reimbursement decisions in part on HCFA's policies and their own
independent analysis of the cost of effectiveness of such procedures.

   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 such physician advocacy will be
obtained or that reimbursement for the On-Command product 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. The foregoing discussion regarding third-party reimbursement for the
On-Command product is generally applicable to BMT's proprietary line of airway
management products as well. Failure to obtain third-party reimbursement for any
of the Company's products may have a material adverse effect on the Company's
business, financial condition and results of operations.

GOVERNMENT REGULATION

   The Company's products, including the On-Command product, will be subject to
pervasive and continuing regulation by the FDA. Pursuant to the Federal Food,
Drug and Cosmetic Act (the "FDC Act") and regulations promulgated thereunder,
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 the 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 authority to
request recall, repair, replacement or refund of the cost of any device
manufactured or distributed by the Company.

   The Company is subject to routine inspection by the FDA and certain state
agencies for compliance with GMP requirements, MDR requirements, and other
applicable regulations. The FDA has proposed changes to the GMP regulations
which will likely increase the cost of compliance with GMP requirements. Changes
in existing requirements or adoption of new requirements could have a material
adverse effect on the Company's business, financial condition and results of
operation. There can be no assurance that the Company will not incur significant


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costs to comply with laws and regulations in the future or that laws and
regulations will not have a material adverse effect upon the Company's business,
financial condition or results of operation.

   The Company is also subject to numerous federal, state and local laws
relating to such matters as safe working conditions, manufacturing practices,
environmental protection, fire hazard control and disposal of hazardous or
potentially hazardous substances. There can be no assurance that the Company
will not be required to incur significant costs to comply with such laws and
regulations in the future or that such laws or regulations will not have a
material adverse effect upon the Company's ability to do business.

   Following the enactment of the Medical Device Amendments to the FDC Act in
May 1976, the FDA has classified medical devices in commercial distribution into
one of three classes, Class I, II or III. This classification is based on the
controls deemed necessary to reasonably ensure the safety and efficacy of
medical devices. Class I devices are those whose safety and efficacy can
reasonably be ensured through general controls, such as adequate labeling,
premarket notification and adherence to GMPs. Class II devices are generally
those whose safety and efficacy can reasonably be ensured through the use of
general and special controls, such as performance standards. post-market
surveillance, patient registries and FDA guidelines. Class III devices are
devices which must receive premarket approval by the FDA to ensure their safety
and efficacy, generally life-sustaining, life-supporting or implantable devices,
and also include all new devices introduced after May 28, 1976 that are not
"substantially equivalent" to legally marketed products. Manufacturers must also
comply with Medical Device Regulations ("MDR") requirements that a firm reports
to the FDA any incident in which its product may have caused or contributed to a
death or serious injury, or in which its product malfunctioned and, if the
malfunction were to recur, it would be likely to cause or contribute to a death
or serious injury. Labeling and promotional activities are subject to scrutiny
by the FDA and, in certain circumstances, by the Federal Trade Commission.
Current FDA enforcement policy prohibits the marketing of approved medical
devices for unapproved uses.

   Before a new device can be introduced into the market in the United States,
the manufacturer or distributor generally must obtain FDA marketing clearance or
approval through either a 5l0(k) premarket notification or a PMA application. If
a manufacturer or distributor of medical products can establish that a new
device is "substantially equivalent" to a legally marketed Class I or Class II
medical device or to a pre-amendment Class III medical device for which the FDA
has not required a PMA, the manufacturer or distributor may seek FDA marketing
clearance for the device by submitting a 510(k) notification. The FDA recently
has been requiring more vigorous demonstration of substantial equivalence than
in the past, including in some cases requiring submission of clinical data. The
510(k) notification and the claim of substantial equivalence may have to be
supported by various types of information indicating that the device is as safe
and effective for its intended use as a legally marketed predicate device.

   Following submission of the 510(k) notification, the manufacturer or
distributor may not place the device into commercial distribution until an order
is issued by the FDA. It generally takes four to 12 months from the date of
submission to obtain 5l0(k) premarket clearance, but it may take longer. The FDA
may agree with the manufacturer or distributor that the proposed device is
"substantially equivalent" to another legally marketed device, and allow the
proposed device to be marketed in the United States. The FDA may, however,
determine that the proposed device is not substantially equivalent, or may
require further information, such as additional clinical data, before a
substantial equivalence determination can be made. Such a determination or
request for additional information could prevent or delay the market
introduction of a new product. For any devices that are cleared through the
510(k) process, modifications or enhancements that could significantly affect
safety or effectiveness, or constitute a major change in the intended use of the
device, will require new 5l0(k) submissions.

   If a manufacturer or distributor cannot establish to the FDA's satisfaction
that a new device is substantially equivalent to a legally marketed medical
device, the manufacturer or distributor will have to seek a PMA for the device.
A PMA must be supported by valid scientific evidence to demonstrate the safety
and effectiveness of the device, typically including the results of preclinical
testing, clinical trials and extensive manufacturing information. The PMA
process can be expensive, uncertain and lengthy. Upon receipt of a PMA
application, the FDA makes a threshold determination as to whether the
application is sufficiently complete to permit a substantive review. If
sufficiently complete, the application is declared fileable by the FDA and the
FDA will begin an in-depth review of the PMA. The FDA review of a PMA
application generally takes one to three years from the date the PMA is


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accepted for filing, but may take significantly longer. A number of devices for
which FDA approval has been sought by other companies have never been approved
for marketing. Modifications to a device that is the subject of an approved PMA,
its labeling or manufacturing process may require approval by the FDA of PMA
supplements or new PMAs. Supplements to a PMA often require the submission of
the same type of information required for an initial PMA, except that the
supplement is generally limited to that information needed to support the
proposed change from the product covered by the original PMA.

   If human clinical trials of a device are required, whether for a 510(k) or a
PMA, and the device presents a "significant risk," the sponsor of the trial
(usually the manufacturer or the distributor of the device) will have to file an
investigational device exemption ("IDE") application prior to commencing human
clinical trials. The IDE application must be supported by data, typically
including the results of animal and laboratory testing. If the IDE application
is approved by the FDA and one or more appropriate Institutional Review Boards
("IRBs"), human clinical trials may begin at a specific number of
investigational sites with a specific number of patients, as approved by the
FDA. If the device presents a "nonsignificant risk" to the patient, a sponsor
may begin the clinical trial after obtaining approval for the study by one or
more appropriate IRBs without the need for FDA approval. Submission of an IDE
does not give assurances that FDA will approve the IDE and, if it is approved,
there can be no assurance that FDA will determine that the data derived from
these studies will support the safety and efficacy of the device or warrant the
continuation of clinical studies. An IDE supplement must be submitted to and
approved by the FDA before a sponsor or investigator may make a change to the
investigational plan that may affect its scientific soundness or the rights,
safety or welfare of human subjects.

   The Company designed a controlled, randomized study of the Male-On-Command
product and filed an IDE application that was approved in July 1995. The
controlled, randomized study was initially started in September 1995 and then
stopped in order to diagnose and correct a component assembly problem causing
migration of the device away from the bladder. The Company initiated two
non-randomized pilot studies to evaluate several assembly and manufacturing
procedures designed to correct the problem and incorporate other improvements,
including a modified magnetic valve and a new sizing catheter and procedure to
enhance the patient fit of the device. The Company completed the pilot studies
prior to recommencing the controlled, randomized study in December 1996.

   The purpose of the randomized study is to demonstrate the safety and efficacy
of the Male On-Command product when compared to a Foley catheter in managing
urinary outflow dysfunction. The study protocol includes the evaluation of a
single device insertion for a period of up to 30 days regarding an acute
indication. The duration of the study is approximately seven weeks per patient,
including enrollment and both pre-insertion and post-insertion examinations.
Study endpoints include comparison of symptomatic UTI rates, physical changes to
the bladder and urethra and patient assessment of quality of life between study
groups. The Company currently anticipates completing the study in the third
quarter of 1998. There can be no assurance that the study will be completed by
that date.

   Since early 1997, the Company has assumed that a PMA would be required for
the acute indication of the device. This was the result of a policy promulgated
by the FDA at that time which maintained that certain intraurethral devices,
including UroQuest's On-Command products, regardless of indication, would be
regulated under the PMA process. Previously, the Company had been assuming a
510(k) regulatory path. Based on recent communication with the FDA, acute
indications of the Company's Male and Female On-Command urinary outflow
management products may again be reviewable under 510(k) regulations. The
Company is continuing to communicate with the FDA to clarify the proper
regulatory pathway for acute indications of the On-Command products. It is the
Company's understanding that chronic indications for the Company's On-Command
products will continue to be regulated under the PMA process.

   In addition to the acute study currently underway, UroQuest is preparing to
submit an IDE to begin a multi-center trial in support of a PMA application for
a chronic indication for the Male On-Command product. The Company intends to
submit the chronic study IDE during the second quarter of 1998 and anticipates
beginning this trial during the third quarter of 1998. As a result of
discussions with the FDA regarding the design of this study, the Company intends
to consider patients who have participated in the acute study for enrollment in
the chronic study.



                                       9
<PAGE>   10
   An IDE for the Female On-Command product was approved in March 1996 by the
FDA. As part of the approved IDE, the Company is completing a non-randomized
feasibility study to test protocols and procedures. The Company is in
discussions with the FDA regarding the design of further Female On-Command
studies to seek indications for acute and chronic applications. The Company is
currently preparing an IDE application for an acute study and anticipates
beginning a multi-center Female On-Command study during the third quarter of
1998. There can be no assurance that such a study will be approved by the FDA or
that it will begin in a timely manner.

   Sales of medical devices outside the United States are subject to foreign
regulatory requirements that vary widely from 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. During 1997, the Company 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. Some countries in which the Company intends to sell devices through
distributors (for example, France, Germany and Spain) either do not currently
regulate medical devices such as the On-Command product or have minimal
registration requirements. However, these countries may develop more extensive
regulations in the future that could impact the Company's ability to market the
On-Command product.

   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. BMT
is also registered with the FDA as a distributor, initial importer, repackager
and relabeler of medical devices. Among its activities, BMT markets a range of
proprietary and OEM products, most of which were required to receive 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 these changes or
would not require BMT 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 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 indicated
that BMT's responses and planned actions to address the FDA's concerns were
acceptable and that the FDA was planning a follow-up inspection in 1998. 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.

   BMT has received certification of conformance to ISO-9001 Standards. BMT has
contracted with a foreign certification services company to act on its behalf
for assessment of compliance with the provisions of the Medical Device Directive
("MDD") of the European Union. BMT's products are classified as Class IIA, and
self certification and authorization for application of the CE mark under Annex
II of the MDD (full quality system in conformance to EN29001 and EN46001).

AIRWAY MANAGEMENT PRODUCTS AND OEM SALES

   The Company manufactures and markets a series of proprietary airway
management products under the BMT label. These products consist primarily of
silicone based medical devices used in a wide variety of clinical applications,
including tracheostomy and endotracheal tubes for airway management and voice
prostheses for voice restoration. BMT also produces a range of complex catheter
type products on an OEM and private label basis for other medical device
companies in areas that include gastrointestinal feeding, esophageal management,
cardiac perfusion, hyperalimentation and dialysis.

   BMT uses a direct sales force to market its proprietary airway management
products to medical specialists including ear, nose and throat ("ENT") surgeons,
respiratory therapists, speech pathologists and


                                       10
<PAGE>   11
anesthesiologists. A group of specialty medical dealers is used in international
markets. Approximately 13% of the Company's net sales are currently derived from
sales in international markets.

   The current proprietary airway management product line includes over 400
different products sold to approximately 9,000 customers in 40 different
countries. The OEM product line includes approximately 500 additional products
sold to approximately 20 different companies, some of which are Fortune 500
medical device companies. For the year ended December 31, 1997, OEM sales
accounted for approximately 45% of the Company's net sales. Sales to one
customer accounted for approximately 24% of total net sales. Although BMT
continues to develop its OEM business, there can be no assurance that its OEM
customers will continue to use BMT as a manufacturing resource. The loss of OEM
customers could have a material adverse effect on the Company's business,
financial conditions and results of operations.

   The OEM business is serviced by a team of contract sales agents with support
from BMT's engineering staff. BMT is positioned as a value added manufacturer
providing complete product development, regulatory affairs, manufacturing and
packaging service. BMT emphasizes its broad expertise in complex catheter
manufacturing, silicone fabrication techniques and surface enhancement
technologies.

MANUFACTURING

   Through BMT, the Company currently produces limited quantities of the
On-Command product for use in its clinical trials to date. The manufacturing
facilities are currently operated in compliance with existing FDA-mandated Good
Manufacturing Practices ("GMPs") as well as the United Kingdom's Department of
Health.

   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 indicated
that BMT's responses and planned actions to address the FDA's concerns were
acceptable and that the FDA was planning a follow-up inspection in 1998. 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.

   BMT has specialized in the manufacture of medical devices using predominantly
silicone technology for over 25 years. BMT manufactures a broad range of
silicone-based catheter-type products used in various segments of the health
care industry. BMT has obtained ISO-9001 certification from BSI Product
Certification of the United Kingdom, which is based on adherence to established
standards in the area of quality assurance and manufacturing process control,
and CE mark status. There can be no assurance that BMT will be able to maintain
such standards and certifications.

   BMT purchases certain of the components used to manufacture the On-Command
product from several single source suppliers, with whom BMT has no long-term
agreements. Any interruptions or delays associated with any component shortages,
particularly as BMT 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.

   BMT's manufacturing capabilities include custom compounding, where special
pigmentation, radiopacity agent, or unique ratio blending are necessary to
customize end product performance specifications. Liquid silicones and high
consistency silicones are utilized in injection, transfer, compression, insert
or blow molding processes to manufacture components in a variety of custom
configurations. BMT also has the capability to extrude single or multi-lumen
tubing, special round or compound profiles or even coextrusion with other
silicone or non-silicone substrates in a range of sizes from as small as 0.002"
inside diameter tubing to as large as 1.6" outside diameter. In some cases,
these basic processes yield a finished device. In most cases these molded or
extruded products become the components and/or subassemblies from which a broad
range of catheter-type devices are manufactured, including the On-Command
product.



                                       11
<PAGE>   12
   BMT has extensive assembly and fabrication capabilities. The molded or
extruded silicone components are combined together with any number of
non-silicone components to produce a variety of products. In addition to both
Class 100,000 and Class 10,000 certified cleanroom assembly and packaging
capability, BMT's other custom assembly processes include adhesiving, bonding,
potting, forming, porting, drilling, notching, cutting, printing, coating,
dispensing and reinforcing with wires or other non-silicone substrates. In
addition, BMT has developed proprietary surface enhancement technologies and
processes which provide a wide range of alternative product characteristics.
Over 800,000 silicone catheter-type devices are currently manufactured annually
and BMT currently has excess manufacturing capacity.

   The manufacture of the On-Command product over the past two years has
included design and process steps which have evolved over this period to its
current design. The processes and techniques required to manufacture and
assemble the On-Command product are similar to those currently used by BMT to
manufacture other silicone catheter-type devices. The On-Command product also
requires the procurement of several non-silicone components. The sources for
each component have been identified and a limited inventory of certain
components is currently available. In addition, the Company is seeking to
develop alternative sources for such components.

   As previously mentioned, the Company intends to launch the On-Command product
in Europe in the second half of 1998. The Company may encounter difficulties,
delays and significant expenses as BMT scales up production of the On-Command
product, including potential problems involving production yields, quality
control, component supply and shortage 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.
Notwithstanding BMT's manufacturing expertise, 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 event, these difficulties or costs could
result in a material adverse effect on the Company's business, financial
condition and results of operations.

ENVIRONMENTAL COMPLIANCE

   Many raw materials used in the manufacturing process 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, the costs of remedial actions and
could also be subject to revocation of permits necessary to conduct its
business. Any such revocations could require the Company 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. The Company
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. There can be no assurance that the
Company 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.

RESEARCH AND DEVELOPMENT

   The Company's current research and development efforts are focused
primarily on broadening the number of Male and Female On-Command configurations
to address additional clinical indications and patient populations.
Additionally, the Company is continuing to develop the Snap-Shot Urine
Chemistry Test System. The Company also intends to continue to build upon its
clinical knowledge and relationships to develop additional advanced, innovative
products for the management, treatment and diagnosis of other urological
problems. Accordingly, the Company intends to continue to devote significant
funds to its research and development activities.

   The Company has a fully-staffed pilot production laboratory with a range of
capabilities including product molding, extrusion, testing and assembly as well
as extensive experience in silicone manufacturing and in materials selection for
specific applications. The research and development staff consists of 12
engineers and 11 skilled technicians.

Products in developement include:

   Male On-Command Product

   The Male On-Command product is being developed for use in male patients
requiring acute and chronic management of urinary outflow dysfunctions. The
basic configuration incorporates a magnet valve and is intended to treat
community dwelling patients in the urologist office.

   Female On-Command Product

   The Female On-Command product is being developed for use in female patients
requiring acute management of uninary outflow as in post-surgical procedures.
This same configuration is applicable in chronic patients as well.



                                      12
<PAGE>   13
   On-Command Control Product

   The On-Command Control Product is being developed for use with
semi-ambulatory or bed-ridden male and female patients in long-term or home care
environments. The On-Command Control Product incorporates a valve system that
can be easily opened or closed by the patient or most importantly by a caregiver
to facilitate patient voiding. The Company believes the device will be useful in
the management of incontinence in nursing homes and extended care settings,
replacing adult diapers, Foley catheters, male external catheters and suprapubic
catheters.

   On-Command Convertible Product

   The On-Command Convertible Product is being developed for use in patients
requiring temporary bladder management in a clinical setting where a Foley or
intermittent type catheter would normally be used and can then be converted to a
valved configuration with the features of the Male and Female On-Command
products. The On-Command Convertible Product would initially function like a
Foley catheter allowing for continuous bladder drainage. When continuous
monitoring is no longer necessary and continence has not yet returned, the
On-Command Convertible Product can be configured to function in the controlled
flow mode. The patient can then move about without restriction or without the
attendant problems associated with an indwelling Foley catheter, external tubing
and collection bag.

   Snap-Shot Urine Chemistry Test System

   The urine chemistry test system, to be identified under the trademark
"Snap-Shot," is a simple disposable device used for the chemical analysis of
urine samples. The product is a completely closed system in which urine can be
easily collected and tested for various chemical components. Two product
configurations are being explored. One to provide urinalysis for the physicians
office market and another to perform drug screening testing.

   The Company believes that the Snap-Shot will be classified as a Class I
device, and therefore the Company will seek FDA marketing clearance or approval
through a 510(k) premarket notification. The Snap-Shot is in the prototype stage
of development and there can be no assurance that the Company will be able to
develop it as a product, will receive regulatory approval, will be accepted by
the market or generate significant sales. The Company has not sold any Snap-Shot
products to date.

COMPETITION

   Competition in the market for treatment and management of urological
disorders is intense and is expected to increase. The Company believes that the
primary competitive factors for its products will include the level of physician
and consumer awareness and acceptance of available management methods, the
degree, rate and severity of potential complications, price and related
benefits, lifestyle implications, available reimbursement and the training of
health care professionals and consumers in the use of available management
methods. The Company's ability to compete in this market will also be affected
by its product development capabilities and innovation, its ability to obtain
required regulatory approval, its ability to protect the proprietary technology,
its manufacturing and marketing capabilities and its ability to attract and
retain skilled employees.

   The Company believes its principal competition will come from existing
incontinence management modalities, such as adult diapers and absorbents, with
additional competition from existing catheter and surgery products. Current
major competitors who compete in the adult absorbent market include
Kimberly-Clark Corporation, Procter & Gamble Company, Johnson & Johnson Co.,
Confab Technologies, Inc. and INBRAND Corporation. Current major competitors who
compete in the catheter/urine collection bag drainage system market include C.R.
Bard, Inc., Kendall Co., Mentor Corporation, Convatec and Baxter Technologies,
Inc. Current major competitors who compete in the market for surgical or
implantable products for incontinence include American Medical


                                       13
<PAGE>   14
Systems. Inc., C.R. Bard, Inc., Mentor Corporation, Johnson & Johnson Co.,
Boston Scientific Corporation and Medtronic, Inc. The Company is not aware of
any new products or technologies currently being tested that compete directly
with the On-Command product in the male urinary outflow dysfunction market
although several companies have expressed interest in this market segment.

   The Company is aware that UroMed Corp., Imagyn Medical Technologies, Inc.,
Rochester Medical Corporation, HK Medical Technologies, Inc., Influence, Inc.
and others are developing a number of alternative products for the management of
female stress incontinence.

   BMT competes with a number of other silicone fabricators for OEM and private
label business. The OEM business is highly competitive and the timing and volume
of orders can fluctuate significantly. BMT does not attempt to compete with the
high volume molded part producers, but specializes in complete device assemblies
of complex 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's proprietary silicone products compete primarily against non-silicone
counterparts produced by a number of large multinational companies, including
Mallinkrodt Group Inc., Sims and Rusch Inc. In addition, there are a number of
smaller companies that compete in other BMT market areas, including InHealth in
voice restoration and Xomed Surgical Products, Inc. in ENT. Competition in the
markets for BMT's proprietary products is also intense.

   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. It is possible that
other large health care and consumer product companies may also enter the
Company's markets in the future. Furthermore, academic institutions,
governmental agencies and other public and private research organizations will
continue to conduct research, seek patent protection and establish arrangements
for commercializing products that may compete with products offered by 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.

PATENTS AND PROPRIETARY RIGHTS

   The Company's success will depend, in part, on its ability to obtain and
maintain patent protection for its products, to preserve its trade secrets and
to operate without infringing the proprietary rights of third parties. The
Company's strategy regarding the protection of its proprietary rights and
innovations is to seek patents on those portions of its technology that it
believes are patentable and to protect as trade secrets other confidential
information and proprietary know-how.

   UroQuest holds fourteen United States patents, ten of which relate to the
On-Command product and numerous foreign patents and has five United States
patents applications and various foreign patent applications pending. Three
United States patents and one patent application relate to the Snap Shot
chemistry test system. The issued United States patents include both method and
device claims. UroQuest's first two patents, which relate to the On-Command
product, expire in 2000 and 2001 and the remainder of all other patents,
including six related to the On-Command product, expire in the years from 2007
through 2014. In addition, BMT holds fifteen United States patents and nine
foreign patents relating to proprietary airway management products. Except for
two patents that expire in 1999 and 2000, theses patents have expiration dates
ranging from 2002 to 2016. The Company believes that its patents contain claims
which may provide a substantial competitive advantage to the Company. However,
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. 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 whom have substantial resources and have made significant
investments in competing technologies, will not apply for and obtain patents
that will prevent, limit or


                                       14
<PAGE>   15
interfere with the Company's ability to make, use or sell its products either in
the United States or internationally.

   Some of the technology used in, and that may be important to, the Company's
products is not covered by any patent or patent application of the Company.
Therefore, the Company also relies on trade secrets and proprietary know-how,
which it seeks to protect, in part, through proprietary information agreements
with certain 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 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. Moreover, litigation associated with the
enforcement by the Company of its trade secrets and proprietary know-how can be
lengthy and costly, with no guarantee of success.

   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 (the "PTO").

   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 ongoing royalties. 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.

   To date, no claims have been brought against the Company alleging that its
technology or products infringe intellectual property rights of others. However,
there can be no assurance that such claims will not be brought against the
Company in the future or that any such claims will not be successful.

   The Company seeks to protect its trademarks through registration. UroQuest(R)
On-Command(R) are registered trademarks of UroQuest. In addition, UroQuest has
filed intent to use applications for other marks which have been approved by the
PTO and for which notices of use have been filed. BMT also holds four registered
trademarks, including Bivona(R), Fome-Cuf(R), Aire-Cuf(R) and Saf T Flo(R) and
16 trademarks for which United States and foreign registrations are pending.
There can be no assurance, however, that registration of the Company's
trademarks will provide any significant protection.


PRODUCT LIABILITY AND INSURANCE

   The business of the Company entails significant product liability and recall
risks. Product liability may exist despite regulatory approval and future court
decisions may also affect the Company's risk of product liability. The Company
maintains product liability insurance on products it currently sells and those
currently under clinical evaluation in the amount of $5 million and evaluates
its insurance requirements on an ongoing basis. A successful product liability
claim or series of claims brought against the Company that are not covered by
insurance or are in excess of existing insurance coverage could have a material
adverse effect on the Company's business, financial condition and results of
operations. In addition, there can be no assurance that future product recalls,
which could have a material adverse effect on the Company's business, financial
condition and results of operations, will not occur.



                                       15
<PAGE>   16
EMPLOYEES

   As of December 31, 1997, the Company employed a total of 267 full-time
employees. The Company believes that it has been successful in attracting
experienced and capable personnel. However, there can be no assurance that the
Company will continue to do so.

   None of the Company's employees is covered by collective bargaining
agreements. The Company considers relations with its employees to be good. In
the past seven years, BMT has faced two union election contests at its
manufacturing facility, each of which failed. There can be no assurances that
the Company will not face additional attempts to unionize its employees. In the
event the Company 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.

ADDITIONAL RISK FACTORS

   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
developments, 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 1.
"Business" and see Item 7. "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 Male On-Command product is currently in a controlled,
randomized clinical study in the United States with respect to single use
insertions up to 30 days for an acute indication. During the past several
months, the Company has expanded the number of sites participating in the
clinical study, hired additional clinical and site-monitoring personnel and
increased the training and clinical product availability at these clinical sites
in order to obtain product performance feedback necessary to direct current and
future product designs and to assist in the completion of the clinical study
necessary to support a regulatory submission. 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. In addition to the acute study currently underway, UroQuest is preparing to
submit an IDE to begin a multi-center trial in support of a PMA application for
a chronic indication for the Male On-Command product. The Company intends to
submit the chronic study IDE during the second quarter of 1998 and anticipates
beginning this trial during the third quarter of 1998. 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 is nearing
completion. The results of this study will be used to prepare an IDE submission
for a controlled, randomized clinical study of this device. There can be no
assurance that the FDA will approve such a submission. 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 in the United States, or
that FDA 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


                                       16
<PAGE>   17
completion of such testing, as has been experienced in early clinical trials of
the Male On-Command product. 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. See
"Urology Products," "Clinical Trials" and "Government Regulation."

   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 sole source of 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. Although the Company markets a line of proprietary medical device
products through BMT, there can be no assurance that such products will receive
continued market acceptance or generate significant sales. Furthermore, even
though the Company is in the process of developing new products in addition to
the On-Command product, there can be no assurance that such development efforts
will be successful or that any resulting products will achieve market
commercialization. The life cycle of the On-Command product is difficult to
estimate, particularly in light of current and future technological
developments, 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. See "Urology
Products," and "Clinical Trials."

   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 physicians and the time required to
complete such training could result in a delay or dampening of market
acceptance. Moreover, health care payers' approval of reimbursement 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 cost 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. See "Marketing and Sales of the On-Command product," and
"Third Party Reimbursement."

   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 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 December 31, 1997, had an
accumulated deficit of approximately $9.5 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. See Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations."




                                       17
<PAGE>   18
   Risks Associated with BMT Acquisition

   The acquisition of BMT constitutes the Company's first acquisition of another
business. The acquisition may result in a number of unforeseen difficulties and
problems that could have a material adverse effect on the Company's business,
financial condition and results of operations. The acquisition of BMT has
resulted in approximately $12.3 million of goodwill being recognized upon
consolidation. This goodwill will be amortized over 20 years resulting in an
amortization charge of approximately $629,000 annually. This amortization and
other depreciation charges related to the acquisition, totaling approximately
$823,000 annually, will reduce the Company's earnings. There can be no assurance
that the anticipated benefits of the acquisition will be realized. Moreover, the
acquisition could have the effect of disrupting the current business and
operations of BMT by adversely affecting material relationships with significant
customers and others, including principal suppliers and key employees. In
particular, approximately 45% of BMT's net sales during 1997 were derived from
its manufacture of OEM medical device products. BMT maintains no long-term OEM
customer contracts and, during 1997, BMT derived approximately 24% of its net
sales from one such customer. Although BMT continues to develop its OEM
business, there can be no assurance that BMT will be successful in its efforts
or that its OEM customers will continue to use BMT as a manufacturing resource.
The acquisition of BMT could also redirect significant management attention and
other resources that would otherwise be devoted to the ongoing development of
the On-Command product.

   Government Regulation

   The Company's products, including the On-Command product, will be subject to
pervasive and continuing regulation by the FDA. Pursuant to the Federal Food,
Drug and Cosmetic Act (the "FDC Act"). 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 of 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.

   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
significantly 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 trails 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 from initial filing 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 approved medical devices for unapproved
uses. The Company will be required to adhere to applicable FDA regulations
regarding Good Manufacturing Practices ("GMP") and similar regulations in other
countries, which include testing, control, and documentation requirements, and
with Medical Device Reporting ("MDR") 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


                                       18
<PAGE>   19
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. Some countries in which
the Company intends to sell devices through distributors (for example, France,
Germany and Spain) either do not currently regulate medical devices such as the
On-Command product or have minimal registration requirements. However, these
countries may develop more extensive regulations in the future that could impact
the Company's ability to market On-Command product.

   There can be no assurance that the Company will be able to obtain FDA
approval to market the On-Command product or other products in the United States
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. BMT
is registered with the FDA and is a manufacturer, distributor, initial importer,
repackager and relabeler of medical devices. 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 prohibited from marketing the modified device
until the 510(k) notice is cleared by the FDA. See "Clinical Trials" and
"Governmental Regulation."

   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 indicated
that BMT's responses and planned actions to address the FDA's concerns were
acceptable and that the FDA was planning a follow-up inspection in 1998. 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 products. 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 intends to market the On-Command product internationally through
independent foreign distribution arrangements, none of which are currently 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. See "Marketing and Sales of 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 catheters, 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


                                       19
<PAGE>   20
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. See "Manufacturing."

   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 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. See "Patents
and Proprietary Rights."

   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 its
principal competition will come from existing incontinence management
modalities, such as adult diapers and absorbents. The market for adult
absorbents is currently dominated by companies such as Kimberly-Clark
Corporation, Procter & Gamble Company and Johnson & Johnson Co. 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 incontinence. 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. See "Competition."

   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. Certain patient-administered products such
as diapers and absorbents that are widely used for incontinence management
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.
Currently, the Company is unable to determine whether the On-Command product
reimbursement amount, if available, 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


                                       20
<PAGE>   21
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. See "Third-Party Reimbursement."

   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
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 calendar year 1998, 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 Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."

   Dependence Upon Key Employees

   The Company is dependent upon a number of key management and technical
personnel. The loss of the services of one or more key employees would have a
material adverse effect on the Company. The Company's ability to manage its
transition to commercial-scale operations, and hence its success, will depend in
large part on the efforts of these individuals. The Company's success will also
depend on its ability to attract and retain additional highly qualified
management and technical personnel. The Company faces intense competition for
qualified personnel, and there can be no assurance that the Company will be able
to attract and retain such personnel.

   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 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


                                       21
<PAGE>   22
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 ongoing royalties.
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. See
"Marketing and Sales of the On-Command product."

   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 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. See
"Product Liability and Insurance."

   Uncertainty Related to Health Care Reform

   Political, economic and regulatory influences are subjecting the health care
industry in the United States to fundamental change. Although Congress has
failed to pass comprehensive health care reform legislation to date, the Company
anticipates that Congress, state legislatures and the private sector will
continue to review and assess alternative health care delivery and payment
systems. Potential approaches that have been considered include mandated basic
health care benefits, controls on health care spending through limitations on
the growth of private health insurance premiums and Medicare and Medicaid
spending, the creation of large insurance purchasing groups, price controls and
other fundamental changes to the health care delivery system. Legislative debate
is expected to continue in the future, and market forces are expected to demand
reduced costs. The Company cannot predict what impact the adoption of any
federal or state health care reform measures, future private sector reform or
market forces may have on its business.

   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. See "Manufacturing."




                                       22
<PAGE>   23
   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. 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. See Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Employees."

   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. 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. See
"Manufacturing."

   Control by Directors, Executive Officers and Affiliated Entities

   The Company's directors, executive officers and entities affiliated with
them, in the aggregate, beneficially own approximately 52% of the Company's
Common Stock. As a result, these stockholders, if acting together, are able to
exert substantial influence over and could possibly control all matters
requiring approval by the stockholders of the Company, including the election of
directors and mergers or other business combination transactions. In addition,
each of Warburg, Pincus Investors, L.P. ("Warburg"), the Company's principal
stockholder, and Vertical Fund Associates, L.P. ("Vertical") is entitled to
designate, in certain circumstances, three members of the Board of Directors,
which may not have more than 11 directors without consent of each such
stockholder. In this event, Warburg and Vertical, if acting together, would be
able to control the direction, management and policies of the Company.

   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
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


                                       23
<PAGE>   24
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.

   Certain Anti-Takeover Effects of Charter, Bylaw and Other Provisions

   Certain provisions of the Company's Certificate of Incorporation and Bylaws
may have the effect of making it more difficult for a third party to acquire, or
of discouraging a third party from attempting to acquire, control of the
Company. Such provisions could discourage bids for the Common Stock at a premium
over its market price or otherwise limit the price that certain investors might
be willing to pay in the future for shares of the Common Stock. The Board of
Directors may issue Preferred Stock without any vote or further action by the
stockholders, which issuance may have the effect of preventing or delaying a
change in control of the Company and may adversely affect the rights of the
holders of the Common Stock.

   Absence of Dividends

   The Company has never paid cash dividends on its Common Stock and does not
anticipate paying cash dividends in the foreseeable future. The Company's
wholly owned subsidiary, BMT, is restricted from declaring dividends to the
Company due to a restrictive covenant contained in a bank loan agreement.

Item 2. PROPERTIES

   The Company's principal administrative offices are located in Menlo Park,
California and its manufacturing and distribution facility is located in Gary,
Indiana. The Company believes that its facilities are adequate for its current
operations.

   Since August 1997, the Company has leased approximately 5,000 square feet in
Menlo Park, California pursuant to a lease expiring in January 1999. The annual
rate on the lease is $123,700. Current space is dedicated to administration,
marketing and regulatory activities.

   The Company owns its manufacturing plant which is a 45,000 square foot
facility located on a 10 acre parcel of land in Gary, Indiana. The plant's space
is allocated as follows: approximately 12,000 square feet dedicated to
equipment-intensive production, approximately 10,000 square feet dedicated to
office and support activity, and approximately 23,000 square feet dedicated to
cleanroom production and packaging. Additionally, the Company leases an 18,600
square foot warehouse and shipping facility located approximately five miles
from the manufacturing plant. The lease runs through December 1998 and the
current annual rate on the lease is approximately $60,000.

Item 3. LEGAL PROCEEDINGS

   The Company is not currently involved in any significant legal proceedings.
There can be no assurance, however, that the Company will not experience
material litigation with respect to the operation of its business.

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

   The Company solicited proxies for an annual meeting of stockholders on
September 25, 1997 to all of the Company's stockholders.  The election of all
directors was conducted and the following nominees were elected:  Richard C.
Davis, M.D., Terry E. Spraker, Ph.D., Tom E. Brandt, Jack W. Lasersohn, Gary
Nei, Maynard Ramsey, III, M.D. Ph.D., Elizabeth H. Weatherman.  The vote with
respect to each nominee was as follows:

<TABLE>
<CAPTION>
Name                                                 Votes                 Votes
                                                      For                Withheld
                                                      ---                --------
<S>                                                <C>                   <C>
Richard C. Davis, M.D.                             9,167,403             351,537
Terry E. Spraker, Ph.D.                            9,402,884             116,056
</TABLE>


                                       24
<PAGE>   25
<TABLE>
<S>                                                <C>                   <C>
Tom E. Brandt                                      9,408,897             110,043
Jack W. Lasersohn                                  9,162,303             356,637
Gary Nei                                           9,405,897             113,043
Maynard Ramsey, III, M.D. Ph.D.                    9,408,897             110,043
Elizabeth H. Weatherman                            9,408,897             112,043
</TABLE>

   The Company's Stock Plan was amended and the number of shares of Common Stock
reserved for issuance under the plan was increased by 2,000,000 shares to
3,428,571 shares with 5,842,177 votes in favor, 2,364,209 votes against, 549,202
abstentions and 763,412 non-votes.

   Ernst & Young LLP was ratified as the independent auditors of the Company for
the fiscal year ending December 31, 1997 with 9,425,391 votes in favor, 11,467
votes against and 82,082 abstentions.





                                       25
<PAGE>   26
                                     PART II



    Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
            MATTERS AND USE OF PROCEEDS

      The information required by this item is set forth under the caption
    "Market for the Company's Common Stock and Related Matters" on page F-24 and
    Use of Proceeds on page F-25 hereof.

    Item 6. SELECTED FINANCIAL DATA

      The information required by this item is set forth under the caption "Five
    Year Selected Financial Data" on page F-2 hereof.

    Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
            RESULTS OF OPERATIONS

       The statements and information required by this item is set forth under
    the caption "Management's Discussion and Analysis of Financial Condition and
    Results of Operations" on pages F-3 through F-7 hereof.

     Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

       The consolidated financial statements of the Company and its subsidiaries
    are set forth on pages F-8 through F-23 hereof.

     Item 9. CHANGES IN REGISTRANT'S CERTIFYING ACCOUNTANT

       Effective September 3, 1997, the Board of Directors of UroQuest Medical
     Corporation engaged the accounting firm of Ernst & Young LLP as independent
     auditors for the Registrant. KPMG Peat Marwick LLP, the Registrant's
     previous independent accountants, was dismissed by the Registrant's Board
     of Directors effective September 2, 1997. The Registrant's audit committee
     recommended these actions.

       During the two most recent fiscal years and subsequent interim periods
     prior to September 2, 1997, there were no disagreements with KPMG Peat
     Marwick LLP on any matter of accounting principles or practices, financial
     statement disclosure, auditing scope or procedure, or any reportable
     events.

       The report of KPMG Peat Marwick LLP on the financial statements of the
     Registrant for the two years ended December 31, 1996 contained no
     adverse opinion or other disclaimer of opinion and was not qualified or
     modified as to uncertainty, audit scope or accounting principles.

       The Registrant has not consulted with Ernst & Young LLP during the two
     most recent fiscal years or subsequent interim periods prior to September
     2, 1997 on either the application of accounting principles to any
     transaction or type of audit opinion Ernst & Young LLP might issue on the
     Registrant's financial statements.

       The Registrant provided KPMG Peat Marwick LLP with a copy of the above
     statements, and requested that KPMG Peat Marwick LLP furnish a letter
     addressed to the Securities and Exchange Commission stating whether KPMG
     Peat Marwick LLP agrees with such statements. A copy of the KPMG Peat
     Marwick LLP letter to the SEC, dated September 4, 1997, is filed as an
     exhibit to the Company's Current Report on Form 8-K dated September 8,
     1997.




                                       26
<PAGE>   27
                                    PART III



     Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

       The required information concerning directors and executive officers set
     forth in the Company's definitive Proxy Statement to be filed with the
     Commission on or before April 30, 1998 is incorporated herein by reference.

     Item 11. EXECUTIVE COMPENSATION

       The required information concerning executive compensation set forth in
     the Registrant's definitive Proxy Statement to be filed with the Commission
     on or before April 30, 1998 is incorporated herein by reference.

     Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

      The required statements concerning security ownership of certain
     beneficial owners and management set forth in the Company's definitive
     Proxy Statement to be filed with the Commission on or before April 30, 1998
     are incorporated herein by reference.

     Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      The required statements concerning certain relationships and related
     transactions set forth in the Company's definitive Proxy Statement to be
     filed with the Commission on or before April 30, 1998 are incorporated
     herein by reference.

                                     PART IV


   Item 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K

   (a)   Documents filed as part of this report.

         1. Financial Statements.

            The financial statements of the Company are listed at Item 8 of this
            Report.

         2. Financial Statement Schedules.

            No schedules are required in connection with the filing of this
            Report as amounts are either immaterial or are disclosed in the
            financial statements.

         3. Exhibits

             3.  1  Restated Certificate of Incorporation of UroQuest Medical
                    Corporation, a Delaware corporation (1)

             3.  2  Bylaws of UroQuest Medical Corporation, a Delaware
                    corporation (1)

             3.  3  Specimen Stock Certificate (2)

             10. 1* Form of Indemnification Agreement between the Registrant
                    and each of its directors and officers (2)

             10. 2* 1994 Stock Plan

             10. 3* 1996 Employee Stock Purchase Plan and form of Subscription
                    and Contribution Election Form (2)

             10. 4  Letter of Intent dated February 20, 1996 between B. Braun
                    Biotrol, S.A. and UroQuest Medical Corporation (2)

             10. 5  Lease Agreement of office space dated July 6, 1995 between
                    265 East Associates and the Registrant (2)

             10. 6  Lease dated December 16, 1995 between JVM Realty
                    Corporation and Bivona, Inc. (2)

             10. 7* Employment Agreement (as amended) dated November 1, 1994
                    for Eric B. Hale (2)

             10. 8* Employment Agreement (as amended) dated December 1, 1994
                    for Richard C. Davis, Jr., M.D. (2)

             10. 9* Employment Agreement effective June 1, 1995 for Terrence L.
                    Domin (2)

             10.10* Employment Agreement effective June 1, 1995 for Gregory S.
                    Ayers (2)

             10.11* Employment Agreement effective June 27, 1996 for Tom E.
                    Brandt (2)

             10.12* Letter dated August 15, 1996 from the Registrant to J.J.
                    Donohue (2)

             10.13* Right of First Refusal and Co-Sale Agreement dated June 15,
                    1995 among the Registrant, Warburg, Pincus Investors, L.P.,
                    Vertical Fund Associates, L.P. and Richard C. Davis, Jr.,
                    M.D. (the "Co-Sale Agreement") (2)

             10.14* Letter Agreement dated September 30, 1996, as amended
                    October 23, 1996, among UroQuest Medical Corporation,
                    Warburg, Pincus Investors, L.P., Vertical Fund Associates,
                    L.P. and Richard C. Davis, Jr., M.D., amending the Co-Sale
                    Agreement (2)

             21. 1  Subsidiaries of Registrant (2)

             23. 1a Consent of Ernst & Young LLP, Independent Auditors

             23. 1b Consent of KPMG Peat Marwick LLP

             27. 1  Financial Data Schedule for the year ended December 31, 1997

             ---------------
             (1) Incorporated by Reference from the UroQuest Medical
                 Corporation Annual Report on Form 10-K dated March 27, 1997

             (2) Incorporated by Reference from the UroQuest Medical
                 Corporation Registration Statement on Form S-1, File No.
                 333-07277

             *  Management contract or compensatory plan arrangement



                                       27
<PAGE>   28
    (b)   Reports on Form 8-K:

         The Company did not file any reports on Form 8-K during the fourth
         quarter of 1997.

    (c)   See Item 14(a)  3 above

    (d)   See Item 14(a)  2 above




                                       28
<PAGE>   29
                                   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, hereunto duly authorized in Menlo
    Park, California, on the 30th day of March 1998.

                                        UroQuest Medical Corporation

                                           By: /s/ Terry E. Spraker
                                                   Terry E. Spraker
                                                   President and Chief Executive
                                                   Officer

      POWER OF ATTORNEY

      KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
    appears below hereby constitutes and appoints Jeffrey L. Kaiser, as his
    attorney-in-fact, with full power of substitution, for him in any and all
    capacities, to sign any and all amendments to this Report on Form-10K, and
    to file the same, with exhibits thereto and other documents in connection
    therewith, with the Securities and Exchange Commission, hereby ratifying and
    confirming our signatures as they may be signed by our said attorney to any
    and all amendments to said Report.

      Pursuant to the requirements of the Securities Exchange Act of 1934, this
    Report has been signed by the following persons in the capacities and on the
    dates indicated:

<TABLE>
<CAPTION>
                  SIGNATURE                                    TITLE                              DATE
<S>                                        <C>                                              <C>
    /s/ Terry E. Spraker                   President, Chief Executive Officer               March 30, 1998
    ------------------------------------
        Terry E. Spraker                   and Director (Principal Executive Officer)

    /s/ Jeffrey L. Kaiser                  Vice President, Chief Financial Officer          March 30, 1998
    ------------------------------------
        Jeffrey L. Kaiser                  Secretary, and Treasurer (Principal Financial
                                           and Accounting Officer)

    /s/ Tom E. Brandt                      Director and Chief Operating Officer             March 30, 1998
    ------------------------------------
        Tom E. Brandt

    /s/ Richard C. Davis, Jr., MD.         Director, Chairman of the Board                  March 30, 1998
    ------------------------------------
        Richard C. Davis, Jr., M.D.

    /s/ Jack W. Lasersohn                  Director                                         March 30, 1998
    ------------------------------------
        Jack W. Lasersohn

    /s/ Gary E. Nei                        Director                                         March 30, 1998
    ------------------------------------
        Gary E. Nei

    /s/ Maynard Ramsey, III, M.D., Ph.D.   Director                                         March 30, 1998
    ------------------------------------
        Maynard Ramsey, III, M.D., Ph.D.

    /s/ Elizabeth H. Weatherman            Director                                         March 30, 1998
    ------------------------------------
        Elizabeth H. Weatherman
</TABLE>




                                       29
<PAGE>   30
                          UroQuest Medical Corporation

                       CONSOLIDATED FINANCIAL INFORMATION


<TABLE>
<CAPTION>
                                                                                              Page
                                                                                              ----
<S>                                                                                           <C>
Five-Year Selected Financial Data .......................................................     F- 2
Management's Discussion and Analysis of Financial Condition and Results of Operations ...     F- 3
Independent Auditors' Reports ...........................................................     F- 8
Consolidated Statements of Operations ...................................................     F-10
Consolidated Balance Sheets .............................................................     F-11
Consolidated Statements of Stockholders' Equity .........................................     F-12
Consolidated Statements of Cash Flows ...................................................     F-13
Notes to Consolidated Financial Statements ..............................................     F-14
Market for the Company's Common Stock and Related Matters ...............................     F-24
Use of Proceeds .........................................................................     F-25
</TABLE>




                                      F-1
<PAGE>   31
                          UROQUEST MEDICAL CORPORATION

                        FIVE-YEAR SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
                                                                                  Years Ended December 31,
                                                          ----------------------------------------------------------------------
                                                             1997           1996           1995           1994           1993
                                                             ----           ----           ----           ----           ----
<S>                                                       <C>            <C>            <C>            <C>              <C>
OPERATING DATA (1):
Net sales ...........................................    $16,541,161     $2,299,895     $       --     $    2,801     $      979
Cost of sales .......................................      9,307,272      1,308,730             --          2,381            832
                                                          ----------------------------------------------------------------------
Gross profit ........................................      7,233,889        991,165             --            420            147
Research and development expenses ...................      2,901,050      2,173,312      1,106,631        431,295        120,531
General and administrative expenses .................      3,997,210      1,091,857        397,523        483,399        156,647
Sales and marketing expenses ........................      2,258,963        297,587         46,262         30,257         38,392
Severance costs .....................................      1,600,000             --             --             --             --
Amortization of goodwill ............................        643,355         90,982             --             --             --
                                                          ----------------------------------------------------------------------
Operating loss ......................................     (4,166,689)    (2,662,573)    (1,550,416)      (944,531)      (315,423)
Other income (expense), net .........................        420,745         41,863         36,669       (260,663)            --
                                                          ----------------------------------------------------------------------
Loss before taxes ...................................     (3,745,944)    (2,620,710)    (1,513,747)    (1,205,194)      (315,423)
Provision for income taxes ..........................        130,000             --             --             --             --
                                                          ----------------------------------------------------------------------
Net loss ............................................    $(3,875,944)   $(2,620,710)   $(1,513,747)   $(1,205,194)    $ (315,423)
                                                          ======================================================================
Basic and diluted net loss per share (2) ............    $     (0.33)   $     (0.45)   $     (0.36)   $     (0.36)    $    (0.21)
                                                          ======================================================================
Shares used in computing basic and diluted net loss
per share ...........................................      11,872,647      5,768,198      4,156,968      3,382,974      1,502,596
</TABLE>


<TABLE>
<CAPTION>
                                                                                     December 31,
                                                          ----------------------------------------------------------------------
                                                             1997            1996           1995           1994          1993
                                                             ----            ----           ----           ----          ----
<S>                                                       <C>             <C>            <C>            <C>             <C>
BALANCE SHEET DATA (1):
Cash and cash equivalents............................    $11,054,088    $12,694,047    $ 1,113,594     $  564,097       $187,422
Working capital .....................................     13,204,642     15,991,290        463,594        325,723         33,491
Total assets ........................................     31,923,751     35,039,517      1,721,027      1,205,273        221,581
Long-term debt, excluding current portion ...........      1,293,175      1,787,437             --        552,188           --
Accumulated deficit ................................      (9,542,252)    (5,666,308)    (3,045,598)    (1,531,851)      (326,657)
Stockholders' equity (3) ...........................      27,403,975     30,486,314      1,047,126        412,621         65,560
</TABLE>



(1)  On October 30, 1996, concurrent with the closing of Company's initial
     public offering, the Company completed its acquisition of BMT, Inc. The
     transaction, which was accounted for as a purchase, was effected through
     the payment of $10 million cash, and the issuance of 2.5 million newly
     issued shares of UroQuest Common Stock.

(2)  Basic and diluted net loss per share in 1996, 1995, 1994, and 1993 reflects
     the assumed conversion of the preferred stock upon the completion of the
     Company's initial public offering (using the as-if converted method) from
     the date of issuance. See Note 1 of Notes to Consolidated Financial
     Statements.

(3)  On October 24, 1996, the Company sold 3,350,000 shares of Common Stock in
     its initial public offering at $6.00 per share. Concurrent with and
     subsequent to the offering, warrants totaling 1,454,494 shares were
     exercised at $3.50 per share. Combined, the Company realized net proceeds
     of $22,894,082.



                                      F-2
<PAGE>   32
                          UroQuest Medical Corporation

     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
                                  OF OPERATIONS

OVERVIEW

   The following discussion of the financial condition and results of operations
of the Company should be read in conjunction with the Consolidated Financial
Statements and the related Notes thereto included elsewhere in this Report. 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 and Section 21E of the Securities
Exchange Act of 1934, 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 discussed under Item
1. "Business" and elsewhere in this Report.

   UroQuest Background

   Since its inception in April 1992, the Company has devoted its efforts 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 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 Company has experienced substantial losses since inception and, as of
December 31, 1997, had an accumulated deficit of $9.5 million. In October 1996,
the Company raised approximately $17.8 million through the initial public
offering of its Common Stock ("IPO").

   Acquisition of BMT

   On October 30, 1996, concurrent with the closing of the IPO, the Company
acquired BMT, Inc. ("BMT"), which became a wholly owned subsidiary of the
Company. BMT develops, manufactures and markets a line of proprietary silicone
medical device products as well as provides engineering design, development and
manufacturing services for silicone products on an OEM basis for other medical
device companies. BMT is one of a limited number of specialty manufacturers of
silicone catheters in the United States. Prior to the acquisition, BMT was a
contract manufacturer for the Company.

   The Company believes the acquisition provides a number of significant
benefits. The acquisition enables the Company to control its own manufacturing
source while providing necessary capacity and flexibility in the manufacturing
process, as well as expands the Company's limited product line and experience
which has focused primarily on the On-Command product. The product development
and engineering expertise of BMT is also being utilized by the Company to
develop additional On-Command products and other new devices related to the
management and diagnosis of urological disorders.

   The ongoing operations of BMT are expected to provide a source of revenues
and cash flow while the Company completes its clinical testing and prepares to
market the On-Command product. There can be no assurance, however, that such
revenues and cash flow or BMT's current profitability and growth rate will
continue in the future or that the expected benefits of the acquisition will be
realized. The acquisition of BMT constitutes the Company's first acquisition of
another business. BMT's operations are significantly different in many respects
from the Company's current operations, and the acquisition may result in a
number of unforeseen difficulties and problems that could have a material
adverse effect on the Company's business, financial condition and results of
operations.




                                      F-3
<PAGE>   33
RESULTS OF OPERATIONS

   Net sales and cost of sales. Net sales increased to $16,541,161 for the year
ended December 31, 1997 from $2,299,895 for the year ended December 31, 1996.
Included in 1997 net sales were twelve months' BMT sales of proprietary airway
management products and other medical device products to OEM customers; included
in 1996 net sales were only two months' BMT sales following the acquisition. On
a pro forma twelve month basis, BMT sales for 1996 were $14,634,838. The Company
had no material sales prior to 1996. Cost of sales of $9,307,272 and $1,308,730
related to the BMT sales in 1997 and two months in 1996 following the
acquisition, respectively. On a pro forma twelve month basis, BMT cost of sales
for 1996 were $8,231,780. Gross margin of $7,233,889 and $991,165 related to BMT
sales in 1997 and two months in 1996, respectively. On a pro forma twelve month
basis, BMT gross margin for 1996 was $6,403,058. The gross margin percentage for
1997 and 1996 (for twelve months on a pro forma basis) was 44% and 44%,
respectively.

   Research and development. Research and development expenses include product
development, clinical testing and regulatory expenses. For the year ended
December 31, 1997, research and development expenses increased to $2,901,050
from $2,173,312 for the year ended December 31, 1996. Included in 1997 expenses
were twelve months' research and development expenses related to BMT totaling
$1,636,079; included in 1996 expenses were only two months' research and
development expenses related to BMT totaling $213,122 and a $783,000 write-off
of in-process research and development costs related to the acquisition of BMT.
The remaining increase was attributable primarily to increased personnel costs,
clinical study costs and other research and development expenditures primarily
related to the On-Command product. Research and development expenses increased
to $2,173,312 in 1996 from $1,106,631 in 1995 resulting primarily from the
inclusion of two months' research and development expenses related to BMT and
the write-off of in-process research and development costs related to the
acquisition of BMT in 1996 totaling $996,122. The remaining increase was due
primarily to hiring of clinical personnel, conducting clinical trials and
implementing improvements in product design and the manufacturing process in
1996. Research and development expenses are expected to continue to increase for
the foreseeable future.

   General and administrative. General and administrative expenses increased to
$3,997,210 for the year ended December 31, 1997 from $1,091,857 for the year
ended December 31, 1996. Included in 1997 expenses were twelve months' general
and administrative expenses related to BMT totaling $3,035,038; included in 1996
expenses were only two months' general and administrative expenses related to
BMT totaling $322,337. The remaining increase was attributable primarily to
additional personnel costs, public company expenses and office relocation
expenses. General and administrative expenses increased to $1,091,857 in 1996
from $397,523 in 1995 due primarily to the inclusion of two months' general and
administrative expenses related to BMT totaling $322,337 and the public company
administration expenses in 1996. General and administrative expenses are
expected to increase to support anticipated expansion of the Company's business.

   Sales and marketing. Sales and marketing expenses increased to $2,258,963 for
the year ended December 31, 1997 from $297,587 for the year ended December 31,
1996. Included in 1997 expenses were twelve months' sales and marketing expenses
related to BMT totaling $1,840,578; included in 1996 expenses were only two
month's sales and marketing expenses related to BMT totaling $256,991. The
remainder of the increase was attributable primarily to marketing and
international selling efforts. Sales and marketing expenses increased to
$297,587 in 1996 from $46,262 in 1995. This increase was primarily attributable
to the inclusion of two months' sales and marketing expenses related to BMT
totaling $256,991 in 1996. Sales and marketing expenses are expected to increase
in 1998 partially related to the Company's anticipated launch of the On-Command
product in Europe in the second half of 1998.

   In September 1997, the Company terminated its relationship with B. Braun
Biotrol. Previously, UroQuest had signed a Letter of Intent with B. Braun
Biotrol that included, among other items, a possible five year distribution
agreement for numerous European countries. B. Braun Biotrol also had
responsibilities for initiating a Male On-Command product clinical trial in
France, which trial never commenced. The Company is currently pursuing other
distribution alternatives.

   Severance costs. Severance costs amounted to $1,600,000 for the year ended
December 31, 1997. No severance costs were incurred for the year ended December
31, 1996. The severance costs related to accrued


                                      F-4
<PAGE>   34
severance payments, stock option compensation expenses and expenses incurred due
primarily to certain changes in management personnel in May 1997. Of this
amount, approximately $713,000 is related to non-cash compensation expense due
to the acceleration of vesting periods for stock options.

   Amortization of goodwill. Amortization of goodwill of $643,355 for the year
ended December 31, 1997 and $90,982 for the year ended December 31,1996 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) increased to net
interest income of $420,745 for the year ended December 31, 1997 from a net
interest income of $41,863 for the year ended December 31, 1996. Interest
income increased to $601,379 in 1997 from $124,227 in 1996. The increase in
1997 in comparison to 1996 was attributable to higher net average cash
balances, due primarily to the receipt and holding of proceeds from the
Company's IPO in October 1996. Interest expense increased to $180,634 in 1997
from $82,364 in 1996. Included in 1997 expense were twelve months' interest
expense related to BMT totaling $175,749; included in 1996 expense were only
two months' interest expense related to BMT totaling $33,201. Other income
(expense) increased to net other income of $41,863 in 1996 from $36,669 in
1995. Interest income increased to $124,227 in 1996 from $60,688 in 1995,
primarily as a result of interest income earned on net cash and cash
equivalents obtained from the IPO in October 1996. Interest expense increased
to $82,364 in 1996 from $54,809 in 1995 primarily due to the inclusion of two
months' interest expense related to BMT totaling $33,201.

   Provision for income taxes. The Company recorded a $130,000 provision
for state income taxes in 1997 as a result of taxable income earned by its
subsidiary in a state where the Company is required to file tax returns on a
separate company basis. There was no federal income tax expense in 1997, 1996,
and 1995 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 December 31, 1997, 1996 and 1995 to reflect these
uncertainties. In 1997, the Company reduced the valuation allowance to the
extent of the deferred tax liabilities generated primarily through the
acquisition of BMT and recorded a corresponding reduction in goodwill.

   As of December 31, 1997, the Company had federal net operating loss
carryforwards of approximately $5,900,000. The net operating loss carryforwards
will expire beginning in 2007, if not utilized. Utilization of the net operating
loss carryforwards may be subject to a substantial annual limitation due to the
ownership change limitations provided by the Internal Revenue Code of 1986, as
amended. The 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 and/or software used by many
companies may need to be upgraded to comply with such "Year 2000" requirements.
Significant uncertainty exists in the software industry concerning the potential
effects associated with such compliance. The Company is in the process of
establishing procedures for evaluating and managing the risk and costs
associated with Year 2000 problems. While the Company believes its software will
be Year 2000 compliant by the end of the 1998 calendar year, there can be no
assurances that the Company's software will contain all necessary date code
changes to prevent processing errors potentially arising from calculation using
the Year 2000 date. Any disruptions in the Company's business as a result of
Year 2000 noncompliance could have a material adverse effect on the Company's
business, financial condition and result of operations.

   The Company believes that the purchasing patterns of customers and potential
customers may be affected by Year 2000 issues. For example, Year 2000 issues
could cause a significant number of companies, including existing customers of
the Company, to reevaluate their manufacturing needs, and as a result consider
switching to other manufacturing suppliers.




                                      F-5
<PAGE>   35
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 in 1997, cash
generated from operations at BMT. Since inception, the Company has raised
approximately $27 million in net proceeds of equity financing which includes the
net proceeds of $17,803,352 generated through the initial public offering of the
Company's Common Stock in October 1996.

   During the year ended December 31, 1997, net cash flows used in operating
activities amounted to $497,008. During the year ended December 31, 1996 net
cash used in operating activities amounted to $1,035,073. The decrease in net
cash flows used in operating activities in 1997 from 1996 was due primarily to
cash provided by BMT's operations and cash provided from investment income.
During the year ended December 31, 1996 and the year ended December 31, 1995,
UroQuest consumed cash in operations of $1,035,073 and $1,282,485, respectively.
The decrease in cash used in operations in 1996 from 1995 was due primarily to
cash provided by BMT's operations.

   Net additions of property and equipment for the years ended December 31,
1997, 1996 and 1995 were $700,068, $132,143 and $83,468 respectively. Included
in the additions of $132,143 in 1996 were two months of BMT additions following
the acquisition. Additions of $83,468 in 1995 were related to UroQuest only,
prior to the acquisition of BMT. On a pro forma basis as if the BMT acquisition
had occurred at the beginning of the respective years, additions for the years
ended December 31, 1996 and 1995 were $682,369 and $652,450, respectively. The
Company expects the net addition of property and equipment will increase in 1998
due primarily to additional purchases of property and equipment to support
urological products.

   During 1996, the Company issued 10% demand promissory notes totaling $500,000
which were repaid by year end. The 12% secured promissory notes totaling
$390,000 issued by the Company in December 1994 were also repaid in 1996. In
connection with the placement of the 12% secured promissory notes, UroQuest
issued and the holders of such notes exercised approximately 26,000 warrants for
Common Stock at an exercise price of $3.50 per share in 1996.

   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 private debt, equity
financings and bank-provided debt financing.

   As of December 31, 1997 and December 31, 1996, the Company had cash of
$11,054,088 and $12,694,047, respectively. The decrease since December 31, 1996
was due to the net cash used in operations, purchases of fixed assets and
repayment of long-term debt. As of December 31, 1997, 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 proprietary airway management
products and OEM sales, general economic conditions and various other factors.
The timing and amount of such capital requirements cannot adequately 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 its currently anticipated capital requirements through the calendar year
1998. 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


                                      F-6
<PAGE>   36
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 subject to
the factors discussed above and those set forth under "Risk Factors" and
elsewhere in Item 1. "Business."




                                      F-7
<PAGE>   37
                REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors UroQuest Medical Corporation

We have audited the accompanying consolidated balance sheet of UroQuest Medical
Corporation as of December 31, 1997, and the related consolidated statements of
operations, stockholders' equity, and cash flows for the year then ended. 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 audit.

We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the 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 audit provides 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
UroQuest Medical Corporation at December 31, 1997, and the consolidated results
of its operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles.


                                             /s/ ERNST & YOUNG LLP


Palo Alto, California
February 13, 1998





                                      F-8
<PAGE>   38
INDEPENDENT AUDITORS' REPORT


The Board of Directors and Stockholders
UroQuest Medical Corporation:

   We have audited the accompanying consolidated balance sheets of UroQuest
Medical Corporation and subsidiaries as of December 31, 1996, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the years in the two year period ended December 31, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

   We conducted our 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 financial position of UroQuest
Medical Corporation and subsidiaries as of December 31, 1996, and the results of
their operations and their cash flows for each of the years in the two year
period ended December 31, 1996, in conformity with generally accepted accounting
principles.



                                        /s/ KPMG Peat Marwick LLP



Salt Lake City, Utah
February 10, 1997




                                      F-9
<PAGE>   39
                          UROQUEST MEDICAL CORPORATION
                      CONSOLIDATED STATEMENTS OF OPERATIONS



<TABLE>
<CAPTION>
                                                           Years Ended December 31,
                                              -----------------------------------------------------
                                                  1997                1996                1995
                                               ------------        ------------        ------------
<S>                                            <C>                 <C>                 <C>
Net sales ..............................       $ 16,541,161        $  2,299,895        $         --

Cost of sales ..........................          9,307,272           1,308,730                  --
                                               ------------        ------------        ------------
  Gross profit .........................          7,233,889             991,165                  --
                                               ------------        ------------        ------------

Operating expenses:
  Research and development .............          2,901,050           2,173,312           1,106,631
  General and administrative ...........          3,997,210           1,091,857             397,523
  Sales and marketing ..................          2,258,963             297,587              46,262
  Severance costs ......................          1,600,000                  --                  --
  Amortization of goodwill .............            643,355              90,982                  --
                                               ------------        ------------        ------------
    Total operating expenses ...........         11,400,578           3,653,738           1,550,416
                                               ------------        ------------        ------------

Operating loss .........................         (4,166,689)         (2,662,573)         (1,550,416)

Other income (expense):
  Interest expense .....................           (180,634)            (82,364)            (54,809)
  Interest income ......................            601,379             124,227              60,688
  Other, net ...........................                 --                  --              30,790
                                               ------------        ------------        ------------
                                                    420,745              41,863              36,669

Loss before provision for income taxes .         (3,745,944)         (2,620,710)         (1,513,747)

Provision for income taxes..............            130,000                  --                  --
                                               ------------        ------------        ------------

Net loss ...............................       $ (3,875,944)       $ (2,620,710)       $ (1,513,747)
                                               ============        ============        ============


Basic and diluted net loss per share....       $      (0.33)
                                               ============

Pro forma basic and diluted net
loss per share (assuming conversion
of preferred stock).....................                           $      (0.45)       $      (0.36)
                                                                   ============        ============
Weighted average shares used in
computing basic and diluted
net loss per share .....................         11,872,647           5,768,198           4,156,968
                                               ============        ============        ============
</TABLE>



See accompanying notes to consolidated financial statements.

                                      F-10
<PAGE>   40
                          UROQUEST MEDICAL CORPORATION
                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                         ASSETS                                     December 31,
                                                                           -------------------------------
                                                                              1997                1996
                                                                           ------------        ------------
<S>                                                                        <C>                 <C>
Current assets:
     Cash and cash equivalents .....................................       $ 11,054,088        $ 12,694,047
     Accounts receivable, net of allowance for doubtful accounts
        of $60,000 at December 31, 1997 and 1996 ...................          2,610,764           2,161,849
     Inventories ...................................................          2,449,072           2,622,812
     Prepaid expenses and other current assets .....................            317,319             495,848
                                                                           ------------        ------------
        Total current assets .......................................         16,431,243          17,974,556
                                                                           ------------        ------------

Property, plant and equipment, net .................................          4,413,131           4,542,950

Intangibles, at cost, less accumulated amortization of $1,261,017
     and $476,883 at December 31, 1997 and 1996, respectively ......         11,079,377          12,522,011
                                                                           ------------        ------------
        Total assets ...............................................       $ 31,923,751        $ 35,039,517
                                                                           ============        ============

                          LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
     Notes payable under line of credit ............................       $         --        $    150,000
     Accounts payable ..............................................            659,769             562,442
     Accrued compensation ..........................................            276,639             146,460
     Accrued selling and distribution expenses .....................             73,124             137,500
     Accrued severance costs .......................................            666,376                  --
     Other accrued expenses ........................................          1,060,333             544,500
     Current portion of long-term debt .............................            490,360             442,364
                                                                           ------------        ------------
        Total current liabilities ..................................          3,226,601           1,983,266
                                                                           ------------        ------------

Long-term debt, net of current portion .............................          1,293,175           1,787,437
Deferred income taxes ..............................................                 --             782,500

Commitments

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;
         11,954,010 and 11,844,602 shares issued and outstanding
         as of December 31, 1997 and 1996, respectively ............             11,954              11,845
     Additional paid-in capital ....................................         36,979,740          36,203,483
     Deferred compensation .........................................            (45,467)            (62,706)
     Accumulated deficit ...........................................         (9,542,252)         (5,666,308)
                                                                           ------------        ------------
        Total stockholders' equity .................................         27,403,975          30,486,314
                                                                           ------------        ------------
        Total liabilities and stockholders' equity .................       $ 31,923,751        $ 35,039,517
                                                                           ============        ============
</TABLE>

See accompanying notes to consolidated financial statements.

                                      F-11
<PAGE>   41
                          UROQUEST MEDICAL CORPORATION
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                   For the Three Years Ended December 31, 1997


<TABLE>
<CAPTION>
                                                              Preferred Stock               Voting                    Non-Voting
                                                              Issued in Series            Common Stock               Common Stock
                                                             Shares        Value       Shares       Value          Shares     Value
                                                           -------------------------------------------------------------------------
<S>                                                        <C>          <C>           <C>         <C>             <C>        <C>
Balance, December 31, 1994 ..............................     614,099   $     614      2,861,796  $    2,862       285,715   $  286
Issuance of 628,573 shares of Series D Preferred
    Stock for cash, net of issuance costs of $87,048 ....     628,573         629             --          --            --       --
Issuance of 10,000 shares of Series C Preferred
    Stock, in exchange for notes payable ................      10,000          10             --          --            --       --
Issuance of 85,715 shares of Common Stock
    for cash, upon exercise of stock options ............          --          --         85,715          86            --       --
Net loss ................................................          --          --             --          --            --       --
                                                           ----------   ---------      ---------  ----------       -------   ------
Balance, December 31, 1995 ..............................   1,252,672       1,253      2,947,511       2,948       285,715      286
                                                           ----------   ---------      ---------  ----------       -------   ------
Issuance of 54,220 shares of Common Stock
    for cash, upon exercise of stock options ............          --          --         54,220          54            --       --
Compensation related to grant of stock options ..........          --          --             --          --            --       --
Deferred compensation related to grant of stock options .          --          --             --          --            --       --
Amortization of deferred compensation ...................          --          --             --          --            --       --
Issuance of 3,350,000 shares of Common Stock in Initial
    Public Offering, net of issuance costs of $2,296,648           --          --      3,350,000       3,350            --       --
Issuance of 2,499,990 shares of Common Stock for
    acquisition of Subsidiary ...........................          --          --      2,499,990       2,500            --       --
Issuance of 1,454,494 shares of Common Stock
    for cash, upon exercise of stock warrants ...........          --          --      1,454,494       1,454            --       --
Conversion of Non-Voting Common Stock to Common Stock ...          --          --        285,715         286      (285,715)    (286)
Conversion of Preferred Stock to Common Stock ...........  (1,252,672)     (1,253)     1,252,672       1,253            --       --
Net loss ................................................          --          --             --          --            --       --
                                                           ----------   ---------      ---------  ----------       -------   ------
Balance, December 31, 1996 ..............................          --          --     11,844,602      11,845            --       --
                                                           ----------   ---------      ---------  ----------       -------   ------
Issuance of 106,551 shares of Common Stock
    for cash, upon exercise of stock options ............          --          --        106,551         106            --       --
Issuance of 2,857 shares of Common Stock
    for consulting services .............................          --          --          2,857           3            --       --
Amortization of deferred compensation ...................          --          --             --          --            --       --
Severance expense related to accelerated vesting
    of stock options ....................................          --          --             --          --            --       --
Net loss ................................................          --          --             --          --            --       --
                                                           ----------   ---------      ---------  ----------       -------   ------
Balance, December 31, 1997 ..............................          --   $      --     11,954,010  $   11,954            --   $   --
                                                           ==========   =========     ==========  ==========       =======   ======
</TABLE>

<TABLE>
<CAPTION>
                                                                Additional                                  Total
                                                                 Paid-in      Deferred     Accumulated   Stockholders'
                                                                 Capital    Compensation     Deficit        Equity
                                                           -----------------------------------------------------------
<S>                                                           <C>           <C>            <C>            <C>
Balance, December 31, 1994 ................................   $  1,940,710  $         --   $ (1,531,851)  $    412,621
Issuance of 628,573 shares of Series D Preferred
    Stock for cash, net of issuance costs of $87,048 ......      2,112,323            --             --      2,112,952
Issuance of 10,000 shares of Series C Preferred
    Stock, in exchange for notes payable ..................         34,990            --             --         35,000
Issuance of 85,715 shares of Common Stock
    for cash, upon exercise of stock options ..............            214            --             --            300
Net loss ..................................................             --            --     (1,513,747)    (1,513,747)
                                                              ------------  ------------   ------------   ------------
Balance, December 31, 1995 ................................      4,088,237            --     (3,045,598)     1,047,126
                                                              ------------  ------------   ------------   ------------
Issuance of 54,220 shares of Common Stock
    for cash, upon exercise of stock options ..............         37,900            --             --         37,954
Compensation related to grant of stock options ............          1,268            --             --          1,268
Deferred compensation related to grant of stock options ...         81,360       (81,360)            --             --
Amortization of deferred compensation .....................             --        18,654             --         18,654
Issuance of 3,350,000 shares of Common Stock in Initial
    Public Offering, net of issuance costs of $2,296,648 ..     17,800,002            --             --     17,803,352
Issuance of 2,499,990 shares of Common Stock for
    acquisition of Subsidiary .............................      9,105,440            --             --      9,107,940
Issuance of 1,454,494 shares of Common Stock
    for cash, upon exercise of stock warrants .............      5,089,276            --             --      5,090,730
Conversion of Non-Voting Common Stock to Common Stock .....             --            --             --             --
Conversion of Preferred Stock to Common Stock .............             --            --             --             --
Net loss ..................................................             --            --     (2,620,710)    (2,620,710)
                                                              ------------  ------------   ------------   ------------
Balance, December 31, 1996 ................................     36,203,483       (62,706)    (5,666,308)    30,486,314
                                                              ------------  ------------   ------------   ------------
Issuance of 106,551 shares of Common Stock
    for cash, upon exercise of stock options ..............         44,629            --             --         44,735
Issuance of 2,857 shares of Common Stock
    for consulting services ...............................         18,645            --             --         18,648
Amortization of deferred compensation .....................             --        17,239             --         17,239
Severance expense related to accelerated vesting
    of stock options ......................................        712,983            --             --        712,983
Net loss ..................................................             --            --     (3,875,944)    (3,875,944)
                                                              ------------  ------------   ------------   ------------
Balance, December 31, 1997 ................................   $ 36,979,740  $    (45,467)  $ (9,542,252)  $ 27,403,975
                                                              ============  ============   ============   ============
</TABLE>

       See accompanying notes to consolidated financial statements.

                                      F-12
<PAGE>   42
                          UROQUEST MEDICAL CORPORATION
                      CONSOLIDATED STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
                                                                                           Years Ended December 31,
                                                                             ----------------------------------------------------
                                                                                 1997                1996                1995
                                                                             ------------        ------------        ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                                          <C>                 <C>                 <C>
     Net loss ........................................................       $ (3,875,944)       $ (2,620,710)       $ (1,513,747)
     Adjustments to reconcile net loss to net
       cash used in operating activities:
     Depreciation and amortization ...................................          1,512,056             430,689             139,022
     Issuance of stock for services ..................................             18,648                  --                  --
     Severance expense related to accelerated vesting of stock options            712,983                  --                  --
     Loss on sale of property, plant and equipment ...................             10,556                  --                  --
     Write-off of in-process research and development costs ..........                 --             783,000                  --
     Provisions for reserve and allowance ............................            195,635              83,541                 614
     Changes in operating assets and liabilities:
         Accounts receivable .........................................           (448,915)            155,432                  --
         Inventories .................................................            (21,895)             98,597              (9,590)
         Prepaid expenses and other current assets ...................             54,529            (259,145)            (12,221)
         Accounts payable and accrued expenses .......................            678,963             293,523             113,437
         Accrued severance costs .....................................            666,376                  --                  --
                                                                             ------------        ------------        ------------
                Net cash used in operating activities ................           (497,008)         (1,035,073)         (1,282,485)
                                                                             ------------        ------------        ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
         Purchases of property, plant and equipment, net .............           (700,068)           (132,143)            (83,468)
         Proceeds from sale of property, plant and equipment .........            108,648                  --                  --
         Business acquisition, net of cash acquired ..................                 --          (9,900,262)                 --
         Other .......................................................                 --              25,756                (614)
                                                                             ------------        ------------        ------------
                Net cash used in investing activities ................           (591,420)        (10,006,649)            (84,082)
                                                                             ------------        ------------        ------------


CASH FLOWS FROM FINANCING ACTIVITIES:
         Proceeds from issuance of common stock ......................             44,735          22,932,036           2,113,252
         Proceeds from issuance of notes payable and long-term debt ..                 --             650,000                  --
         Repayment of notes payable and long-term debt ...............           (596,266)           (959,861)           (197,188)
                                                                             ------------        ------------        ------------
               Net cash (used in) provided by financing activities ...           (551,531)         22,622,175           1,916,064
                                                                             ------------        ------------        ------------

Net increase (decrease) in cash and cash equivalents .................         (1,639,959)         11,580,453             549,497

Cash and cash equivalents at beginning of year .......................         12,694,047           1,113,594             564,097
                                                                             ------------        ------------        ------------

Cash and cash equivalents at end of year .............................       $ 11,054,088        $ 12,694,047        $  1,113,594
                                                                             ============        ============        ============

Supplemental disclosures of cash flow information:
      Cash paid for interest .........................................       $    180,634        $     80,851        $     63,849
      Cash paid for income taxes .....................................            118,000             254,541                  --
</TABLE>



See accompanying notes to consolidated financial statements.


                                      F-13
<PAGE>   43
                          UroQuest Medical Corporation

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               DECEMBER 31, 1997

 1.       DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 Description of Business

          The Company commenced its operations in April 1992 for the purpose of
 designing, developing, and marketing advanced products for the management and
 diagnosis of both male and female urological disorders. Prior to October 30,
 1996, the Company was considered a development stage company. On October 30,
 1996, the Company completed an initial public offering ("IPO") of its Common
 Stock which generated net proceeds of approximately $17.8 million and acquired
 all of the Common Stock of BMT, Inc. and its wholly-owned subsidiary, Bivona,
 Inc. (collectively "BMT"). BMT designs, develops, manufactures and markets a
 line of proprietary silicone medical device products as well as provides
 engineering design, development and manufacturing services for silicone
 products on an OEM basis for other medical device companies. The Company's
 principal markets are in the United States, Western Europe and Japan.

 Basis of Presentation

          The consolidated financial statements include the assets and
 liabilities of the Company and its subsidiaries, all of which are wholly-owned.
 The results of operations of entities purchased are included in the
 accompanying consolidated statements of operations since acquisition. All
 significant intercompany transactions have been eliminated in consolidation.

          Certain reclassifications were made to the 1996 and 1995 consolidated
 financial statements to conform with the 1997 presentation.

  Cash and Cash Equivalents

          The Company considers all highly liquid investments with an original
 maturity (at date of purchase) of three months or less to be the equivalent of
 cash for the purpose of balance sheet and statement of cash flows presentation.
 Cash and cash equivalents consist primarily of money market funds which are
 carried at cost which approximates market value.

 Concentration of Credit Risk

          Financial instruments that potentially subject the Company to
 significant concentrations of credit risk consist principally of cash and cash
 equivalents and accounts receivable.

         The Company's sales are generated primarily in the United States,
 Western Europe and Japan. The Company generally does not require collateral or
 other security in extending credit to customers. Management believes
 concentration of credit risk with respect to accounts receivable is
 substantially mitigated by the Company's credit evaluation process, relatively
 short collection terms, and the geographical dispersion of sales. The Company
 did not incur any material bad debt write-offs in 1997, 1996 or 1995.

 Inventories

          Inventories are stated at the lower of cost (first-in, first-out
 method) or market.

 Property, Plant and Equipment

          Property, plant and equipment is recorded at cost. Depreciation is
 calculated using straight-line method over the estimated useful lives of the
 assets, which range from 3 to 15 years.

                                      F-14
<PAGE>   44

                          UroQuest Medical Corporation

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1997

Intangible Assets

         Intangible assets consist of the excess of cost over the fair value of
the net assets acquired, patents and trademarks and other intangibles.
Intangible assets are amortized using the straight-line method over periods of
five to twenty years. Management evaluates the recoverability of these net
assets on a periodic basis based on the projected cash flows from estimated
future operations.

         Intangible assets at December 31 consist of the following:


<TABLE>
<CAPTION>

                                                      1997                1996
                                                  ------------        ------------
<S>                                               <C>                 <C>
Excess of cost over the fair value of
net assets acquired .........................     $ 11,622,369        $ 12,280,869
Patents and trademarks ......................          650,160             650,160
Other intangibles ...........................           67,865              67,865
                                                  ------------        ------------

Less accumulated amortization ...............       (1,261,017)           (476,883)
                                                  ------------        ------------
                                                  $ 11,079,377        $ 12,522,011
                                                  ============        ============
</TABLE>

Income Taxes

         The Company accounts for income taxes using the asset and liability
method under Statement of Financial Accounting Standards No. 109. Under the
asset and liability method, deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases, operating loss, and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.

Revenue Recognition

         Revenue is recognized by the Company upon shipment.

Net Loss Per Share

         At December 31, 1997, the Company adopted the provisions of Financial
Accounting Standard No. 128 Earnings per Share ("SFAS 128") and the requirements
of the Securities and Exchange Commission Staff Accounting Bulletin No. 98 ("SAB
98"). SFAS 128 replaced the calculation of primary and fully diluted earnings
per share with basic and diluted earnings per share. Unlike primary earnings per
share, basic earnings (loss) per share excludes any dilutive effects of options,
warrants and convertible securities. Earnings (loss) per share amounts for all
periods have been presented in accordance with SFAS 128 and SAB 98 requirements.

         Basic net loss per share has been calculated based on the weighted
average number of shares of common stock outstanding and, in 1996 and 1995, also
gives effect, on a pro forma basis, to the conversion of the preferred stock
upon the completion of the Company's initial public offering (using the as-if
converted method) from original date of issuance.

         If the Company had been in a net income position in the years
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, and the conversion of outstanding
preferred stock, using the as-if converted method.


                                      F-15
<PAGE>   45
                          UroQuest Medical Corporation

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1997

 Estimates

          The preparation of financial statements in accordance with generally
 accepted accounting principles requires management to make estimates and
 assumptions that affect the reported amounts in the financial statements and
 accompanying notes. Actual results could differ from those estimates.

 Stock-Based Compensation

          The Company has elected to follow Accounting Principles Board
 Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related
 Interpretations in accounting for its employee stock options because the
 alternative fair value accounting provided for under FASB Statement No. 123,
 "Accounting for Stock-Based Compensation," requires use of option valuation
 models that were not developed for use in valuing employee stock options. The
 Company generally grants stock options for a fixed number of shares to
 employees with an exercise price equal to the fair value of the shares at the
 date of grant. Under APB 25, for employee stock options with an exercise price
 equal to the market price of the underlying stock on the date of grant, no
 compensation expense is recorded. The Company recognizes compensation expense
 for those stock options granted to employees with an exercise price less than
 fair value.

 Effect of New Accounting Standards

          In June 1997, the Financial Accounting Standards Board issued
 Statement No. 130, "Reporting Comprehensive Income" ("SFAS 130"), and Statement
 No. 131, "Disclosures about Segments of an Enterprise and Related Information"
 ("SFAS 131") (collectively the "Statements"). The Company is required to adopt
 these Statements in fiscal 1998. SFAS 130 establishes new standards for
 reporting and displaying comprehensive income and its components. SFAS 131
 requires disclosure of certain information regarding operating segments,
 products and services, geographic areas of operation and major customers.
 Adoption of these Statements is expected to have no material impact on the
 Company's financial position, results of operations or cash flows.

 2.       INVENTORIES

 Inventories at December 31 consist of the following:

<TABLE>
<CAPTION>
                                     1997             1996
                                  ----------       ----------
<S>                              <C>              <C>
 Finished goods ...........       $  589,169       $  748,268
 Work-in-progress .........        1,046,127        1,100,104
 Raw materials and supplies          813,776          774,440
                                  ----------       ----------
                                  $2,449,072       $2,622,812
                                  ==========       ==========
</TABLE>

 3.       PROPERTY, PLANT AND EQUIPMENT

 Property, plant and equipment at December 31 consists of the following:

<TABLE>
<CAPTION>
                                              1997               1996
                                          -----------        -----------
<S>                                      <C>                <C>
 Land and building.................       $ 2,385,282        $ 2,414,914

 Machinery and equipment...........         3,232,846          2,955,253

 Office furniture and equipment ...           942,911            649,301
                                          -----------        -----------
 Total.............................         6,561,039          6,019,468

 Less accumulated depreciation.....        (2,147,908)        (1,476,518)
                                          -----------        -----------
 Property, plant and equipment, net       $ 4,413,131        $ 4,542,950
                                          ===========        ===========
</TABLE>


 Depreciation expense in 1997, 1996, and 1995 was $710,682, $186,473 and $8,750,
 respectively.


                                      F-16
<PAGE>   46
                          UroQuest Medical Corporation

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1997

 4.      NOTES PAYABLE AND LONG-TERM DEBT

 Notes payable and long-term debt at December 31 consist of the following:

<TABLE>
<CAPTION>
                                                                                        1997           1996
                                                                                        ----           ----
<S>                                                                                <C>              <C>
Notes payable under bank line of credit agreement; payable on
   demand and collateralized by certain trade receivables,
   inventory and equipment. Interest at the bank's prime rate is
   payable monthly .........................................................       $       --       $  150,000
                                                                                   ==========       ==========
Long-term debt:
   Bank term note payable monthly, with interest at the bank's prime rate
      (8.5% at December 31, 1997) based upon a seven year amortization. The
      note matures in October 1999 and is collateralized by certain trade
      receivables, inventory and equipment .................................          696,214        1,073,664

   Mortgage note payable with monthly principal and interest payable at the
      average weekly yield on United States Treasury Securities (5.5% at
      December 31, 1997) plus 2.25%. The note matures in October 2007 and is
      collateralized by the plant, land and building .......................        1,087,321        1,156,137
                                                                                   ----------       ----------
                                                                                    1,783,535        2,229,801
        Less current maturities ............................................          490,360          442,364
                                                                                   ----------       ----------
                                                                                   $1,293,175       $1,787,437
                                                                                   ==========       ==========
</TABLE>

          The loan agreements contain certain restrictive covenants and provide
 for the maintenance of certain financial requirements. The Company has
 satisfied all covenants and requirements at December 31, 1997.

         Long-term debt matures as follows:

<TABLE>
<S>                                                   <C>
                    Year ending December 31,

                    1998 ..................           $     490,360
                    1999 ..................                 367,511
                    2000 ..................                  90,691
                    2001 ..................                  97,974
                    2002 ..................                 105,843
                    2003 and thereafter ...                 631,156
                                                       ------------
                                                       $  1,783,535
                                                       ============
</TABLE>




                                      F-17
<PAGE>   47
                          UroQuest Medical Corporation

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1997

5.       STOCKHOLDERS' EQUITY

Initial Public Offering

          In October 1996, the Company closed an initial public offering
 of 3,350,000 shares of common stock which generated net proceeds of
 $17,803,352, a portion of which was used to fund the acquisition of BMT. In
 conjunction with the Company's IPO, all outstanding shares of convertible
 preferred stock were converted to 1,252,672 shares of common stock and all
 outstanding shares of non-voting common stock were converted to 285,715 shares
 of common stock.

Stock Warrants

          Concurrent with the Company's IPO, warrants to purchase 1,428,571
 shares of common stock were exercised for $5 million. Subsequent to the IPO,
 warrants to purchase 25,923 shares of common stock for $90,730 were exercised.
 There were no warrants outstanding at December 31, 1997.

Preferred Stock

         The Company has 16,000,000 undesignated preferred shares authorized,
 but none outstanding. Terms of the preferred stock will be established by the
 Board of Directors at the time of issuance.

Stock Plan

          Under the Company's 1994 Stock Plan (the "Plan"), which was adopted
 by the Board of Directors (the "Board") in March 1994 and was amended,
 restated and approved by shareholders in September 1997, the Company may
 grant options and rights to its employees, directors and consultants for up
 to approximately 3,400,000 shares of common stock.

          Options granted may be either incentive stock options or non-qualified
 stock options. The exercise price of each option is at least equal to the
 market price of the Company's stock on the date of grant and an option's
 maximum term is ten years. Options must be granted by March 31, 2004. Options
 are generally granted at the inception of employment or engagement and
 generally vest over a four year period.



                                      F-18
<PAGE>   48
                          UroQuest Medical Corporation

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1997

          A summary of the activity of the Plan follows:

<TABLE>
<CAPTION>
                                                                          Years Ended
                                         ----------------------------------------------------------------------------------
                                                 1997                        1996                         1995
                                         -------------------------    ------------------------     ------------------------
                                                         Weighted-                   Weighted-                    Weighted-
                                                         Average                     Average                      Average
                                          Shares         Exercise      Shares        Exercise        Shares       Exercise
                                           (000)          Price        (000)          Price          (000)         Price
                                           -----          -----        -----          -----          -----        ---------
<S>                                      <C>          <C>             <C>          <C>             <C>          <C>
Outstanding at the beginning of year        1,128        $  0.950        1,116        $  0.670        1,233        $  0.630
         Granted ...................        1,649           4.120           77           4.670           47           0.700
         Exercised .................         (107)          0.420          (54)          0.700          (86)          0.004
         Canceled ..................          (32)          4.510          (11)          0.700          (78)          0.700
                                          -------                      -------                      -------
Outstanding at end of year .........        2,638           2.910        1,128           0.950        1,116           0.670
                                          =======                      =======                      =======

Options exercisable
         at year end ...............          813                          572                          450

Weighted-average fair
         value of options granted
         during the year ...........      $  2.83                      $  3.38                      $  0.48
</TABLE>


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

<TABLE>
<CAPTION>
                                       Options Outstanding                         Options Exercisable
                             ---------------------------------------------      ----------------------------
                                             Weighted
                                             Average           Weighted                          Weighted
                             Number         Remaining           Average         Number           Average
       Exercise Price        (000)       Contractual Life   Exercise Price       (000)        Exercise Price
       --------------        -----       ----------------   --------------       -----        --------------
<S>                          <C>         <C>                <C>                <C>             <C>
    $0.700  - $1.750           944             6.6 years        $0.706            662             $0.709
    $4.000  - $5.625         1,694             9.5               4.136            151              4.247
                             -----                                                ---
                             2,638             8.4               2.909            813              1.366
                             =====                                                ===
</TABLE>


          Had compensation cost for the Company's stock-based compensation plan
 been determined consistent with SFAS 123, the Company's net loss and loss per
 share would have been increased to the pro forma amounts indicated below:

<TABLE>
<CAPTION>
                                                   1997            1996               1995
                                                   ----            ----               ----
<S>                          <C>               <C>              <C>               <C>
     Net loss:               As Reported ....  $ (3,875,944)    $ (2,620,710)     $ (1,513,747)
                             Pro forma ......  $ (4,197,795)    $ (2,664,111)     $ (1,515,661)

     Basic and diluted net   As Reported ....  $      (0.33)    $      (0.45)     $      (0.36)
       loss per share:       Pro forma ......  $      (0.35)    $      (0.46)     $      (0.36)
</TABLE>




                                      F-19
<PAGE>   49
                          UroQuest Medical Corporation

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1997

          The effects of calculating compensation cost under SFAS 123 for the
 years ending December 31, 1997 and 1996, may not be representative of the
 effects that this calculation may have on reported net losses or income for
 future years.

          The fair value of each option grant is estimated on the date of grant
 using the Black-Scholes option-pricing model with the following
 weighted-average assumptions used for grants in 1997, 1996 and 1995,
 respectively: dividend yield of 0% for all years; expected volatility of 82%,
 113% and 107%; risk-free interest rates of 5.5%, 6.6% and 6.1%; and expected
 lives of 5, 3.9 and 3.8 years.

          The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different than those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.

Employee Stock Purchase Plan

          In October 1996, the Company adopted the 1996 Employee Stock Purchase
 Plan ("Purchase Plan"), and reserved 250,000 common shares for issuance under
 the Purchase Plan. Under the terms of the Purchase Plan, employees may purchase
 common shares at 85% of the shares' fair market value. Eligible employees may
 elect to participate through payroll deductions at the maximum level
 established by the Board of Directors, but not to exceed 15% of the
 participants base pay, as defined. No shares have been issued from the Purchase
 Plan as of December 31, 1997.

6.       EMPLOYEE BENEFIT PLAN

         The Company has established a defined contribution employee benefit
plan (the "Benefit Plan") pursuant to Section 401(k) of the Internal Revenue
Code. Employees who have completed one year of service, and have attained the
age of twenty-one, are eligible to participate in the Benefit Plan. Participants
may elect to make salary deferral contributions of up to 15% of their
compensation. The Company makes matching contributions of up to 4% of each
participant's compensation. The Company made matching contributions of
approximately $156,860 and $16,000 for the years ended December 31, 1997 and
1996, respectively.

7.       INCOME TAXES

         The Company recorded a $130,000 provision for state income taxes in
1997 as a result of taxable income earned by its subsidiary in a state where
the Company is required to file tax returns on a separate company basis. There
was no federal income tax expense in 1997, 1996, and 1995 due to net operating
losses.

         The reconciliation of the provision (benefit) for income taxes computed
at the U.S. federal statutory tax rate to the effective tax rate is as follows:

<TABLE>
<CAPTION>
                                                       1997
                                                    -----------
<S>                                                 <C>
Tax provision (benefit) at U.S.
     statutory rate .........................       $(1,273,621)
Valuation allowance for deferred tax assets .         1,273,621
State income tax ............................           130,000
                                                    -----------
                                                    $   130,000
                                                    ===========
</TABLE>

                                      F-20
<PAGE>   50

                          UroQuest Medical Corporation

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1997

         The difference between the expected tax benefit and actual tax benefit
for 1996 and 1995 is primarily attributable to the effect of net operating
losses being offset by an increase in the Company's deferred tax asset
valuation allowance.

         Deferred income taxes reflect the net tax effect of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. The significant
components of the Company's deferred tax assets and liabilities at December 31
are as follows:

<TABLE>
<CAPTION>
                                                        1997               1996
                                                    -----------        -----------
<S>                                                 <C>                <C>
Deferred tax assets:
    Acquired net operating loss carryforwards       $   454,677        $   372,000
    Research and development credits ........            80,000             80,000
    Inventory capitalization and allowances .            23,372             27,000
    Start up and organization costs .........           332,252            570,703
    Net operating loss carryforwards ........         1,901,284          1,024,578
    Allowance for doubtful accounts .........           132,320            112,657
    Other ...................................           551,343             72,000
                                                    -----------        -----------
         Total ..............................         3,475,248          2,258,938
    Less valuation allowance ................        (2,611,268)        (1,900,438)
                                                    -----------        -----------
    Total gross deferred tax assets .........           863,980            358,500

Deferred tax liabilities:
     Depreciation ...........................          (863,980)        (1,017,000)
                                                    -----------        -----------

     Net deferred tax liabilities ...........       $        --        $  (658,500)
                                                    ===========        ===========
</TABLE>

         Realization of deferred tax assets is dependent upon future earnings,
if any, the timing and amount of which are uncertain. Accordingly, a valuation
allowance in an amount equal to the net deferred tax assets has been
established to reflect these uncertainties. In 1997, the Company reduced the
valuation allowance to the extent of the deferred tax liabilities generated
primarily through the acquisition of BMT with a corresponding reduction in
goodwill. The valuation allowance for deferred tax assets increased by $710,830,
$764,431 and $564,627 during 1997, 1996 and 1995, respectively.

         As of December 31, 1997, the Company had federal net operating loss
carryforwards of approximately $5,900,000. The net operating loss carryforwards
will expire beginning in 2007, if not utilized. Utilization of the net operating
loss carryforwards may be subject to a substantial annual limitation due to the
ownership change limitations provided by the Internal Revenue Code of 1986, as
amended. The annual limitation may result in the expiration of net operating
loss carryforwards before utilization.

  8.     BUSINESS ACQUISITION

         On October 30, 1996, simultaneous with the closing of the Company's
IPO, the Company acquired all of the issued and outstanding common stock of BMT.
The shareholders of BMT received, in the aggregate, a combination of $10,000,060
cash and 2,499,990 newly issued shares of common stock valued at $9,107,940. The
acquisition was accounted for as a purchase. Accordingly, the purchase price was
allocated, based on an estimated fair value, to the net tangible assets and
identifiable in-process research and development projects that had not reached
technological feasibility. The excess of the purchase price over the fair value
of the acquired net tangible and identifiable assets was recorded as goodwill
and is being amortized over 20 years on a straight line basis. The amount
allocated to in-process research and development projects was written-off to
expense in November 1996. The allocation of the purchase price is summarized as
follows:


                                      F-21
<PAGE>   51
                          UroQuest Medical Corporation

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1997


<TABLE>
<S>                                                        <C>
Assets acquired........................................... $  7,912,219
Liabilities assumed.......................................   (3,979,331)
Expensed in-process research and development..............      783,000
Net fair market value of property, plant
   and equipment acquired in excess of book value.........    2,111,243

Goodwill..................................................   12,280,869
                                                           ------------

   Total.................................................. $ 19,108,000
                                                           ============
</TABLE>

         BMT's results of operations are included in the accompanying
  consolidated statements of operations since November 1, 1996.

         The unaudited pro forma supplemental information on the results of
operations, exclusive of the non-recurring charge (the charge associated with
in-process research and development projects has not been reflected in the
following pro forma summary as it is non-recurring), for the years ended
December 31, 1996 and 1995 include the acquisition as if it had occurred at the
beginning of the respective years.

<TABLE>
<CAPTION>
                                1996             1995
                                ----             ----
<S>                         <C>              <C>
Revenues................... $ 14,634,838     $ 14,257,413
Net loss...................     (483,601)         (84,428)
Basic and diluted net loss
   per share...............        (0.04)           (0.01)
</TABLE>

         The unaudited pro forma financial information is not necessarily
 indicative of either the results of operations that would have occurred had the
 acquisition been effected at the beginning of the respective preceding years or
 of future results of operations of the combined companies.

9.       SEVERANCE COSTS

         The Company included in 1997 operating expenses a non-recurring
severance charge of $1,600,000 related to accrued severance payments, stock
option compensation expenses and expenses incurred primarily due to certain
changes in management personnel in May 1997. Approximately $713,000 of the
severance costs were non-cash charges related to stock option compensation.

 10.     LEASE OBLIGATIONS AND COMMITMENTS

        The Company leases office and warehouse space and certain equipment
 under operating leases that expire through 2000. Minimum future obligations
 under noncancelable operating leases as of December 31, 1997 are as follows:

<TABLE>
<CAPTION>
                         Year                        Amount
                         ----                        ------
<S>                                                <C>
                       1998                         $  192,288
                       1999                             15,778
                       2000                              3,152
                                                    ----------
                       Total                        $  211,218
                                                    ==========
</TABLE>

         Total rent expense for operating leases in 1997, 1996, and 1995 was
approximately $148,000, $54,500, and $36,200, respectively.

                                      F-22
<PAGE>   52
                          UroQuest Medical Corporation

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1997


 11.     MAJOR CUSTOMERS AND EXPORT SALES

         Net sales to one customer amounted to 24% and 21% of total net sales
 for the years ended December 31, 1997 and 1996, respectively. Outstanding
 receivables from this customer at December 31, 1997 and 1996 approximated 22%
 and 21% of total gross accounts receivable, respectively.

          Export sales by major geographic area are as follows:

<TABLE>
<CAPTION>
                        1997           1996
                        ----           ----
<S>                  <C>              <C>
Western Europe.....  $1,357,806       $  286,470
Japan .............     163,031           54,264
Other .............     629,477           11,458
                     ----------       ----------
                     $2,150,314       $  352,192
                     ==========       ==========
</TABLE>



                                      F-23
<PAGE>   53
                          UROQUEST MEDICAL CORPORATION


            MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED MATTERS
                                   (UNAUDITED)

The Company's stock is traded on the Nasdaq National Market under the Symbol:
UROQ.

The Company's stock commenced trading on October 24, 1996 following the
Company's IPO.

The following table shows the market range for the Company's Common Stock:

<TABLE>
<CAPTION>
                                                      High             Low
<S>                                                 <C>           <C>
Fourth Quarter, 1997 ........................       $     6.500   $    2.375
Third Quarter, 1997 .........................             6.500        3.313
Second Quarter, 1997  .......................             7.000        5.000
First Quarter, 1997 .........................             7.125        5.375
Fourth Quarter, 1996 (since October 24, 1996)            10.250        5.250
</TABLE>

At December 31, 1997, there were approximately 146 record holders of the
   Company's Common Stock.

The closing price of the Registrant's Common Stock as reported by The Nasdaq
   National Market on March 20, 1998 was $5.375.

The Company has never declared or paid dividends on its stock and does not
   anticipate paying dividends in the foreseeable future.


                                      F-24
<PAGE>   54
                          UROQUEST MEDICAL CORPORATION

                                 USE OF PROCEEDS
                                   (UNAUDITED)


      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 1, 1997 through December 31,
1997. All amounts in the table below represent actual payments, unless otherwise
stated.


<TABLE>
<CAPTION>
Use of Net Proceeds                     Directors/Officers(1)   Others(2)         Total
-------------------                     ---------------------   ---------         -----
<S>                                           <C>              <C>              <C>
Construction of plant, building, and
      facilities                              $       --       $       --       $       --
Purchases and installation of machinery
      and equipment                                   --           28,791           28,791
Purchases of real estate                              --               --               --
Acquisition of other business                         --               --               --
Repayment of indebtedness                             --               --               --
Working capital/general corporate
      purposes                                   116,697          510,265          626,962
Other purposes:
    - Clinical trials and research and
      development                                     --          232,119          232,119
    - Sales and marketing activities              38,132          170,467          208,599
    - Severance payments                          82,028            3,986           86,014
                                              ----------       ----------       ----------
                                                 236,857          945,628        1,182,485
Temporary investment:
    - Cash and cash equivalents                       --        2,780,277        2,780,277
                                              ----------       ----------       ----------
                                              $  236,857       $3,725,905       $3,962,762
                                              ==========       ==========       ==========
</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 others.


      There is no material change in the use of net proceeds as described in the
prospectus, except that the Company has used approximately $2.4 million for
working capital and general corporate purposes.


                                      F-25
<PAGE>   55
                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT NUMBER                 EXHIBIT DESCRIPTION

<S>                      <C>
   10.2*                 1994 Stock Plan

   23.1a                 Consent of Ernst & Young LLP, Independent Auditors

   23.1b                 Consent of KPMG Peat Marwick LLP

   27.1                  Financial Data Schedule for the year ended December 31, 1997
</TABLE>

_______________

   *  Management contract or compensatory plan arrangement