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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, 1996

                                       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)


<TABLE>
       <S>                                                    <C>
                   Delaware                                         59-3176454
        (State or other jurisdiction of                            (IRS Employer
       of incorporation or organization)                      Identification Number)
</TABLE>

            265 East 100 South, Suite 220, Salt Lake City, UT  84111
  (Address of principal executive offices)                         (Zip Code)

                                 (801) 322-1554
              (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.     X    Yes          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, 1997, the aggregate market value of the voting stock
held by non-affiliates of the registrant is approximately $35,378,000 based 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, 1997
was 11,844,602

                      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 1997 Annual Meeting of
Stockholders.

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                          UROQUEST MEDICAL CORPORATION

                                    PART I

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Item 1.  BUSINESS

  UroQuest Medical Corporation ("the Company") completed an initial public
offering of its Common Stock on October 30, 1996 (the "IPO").  Prior to the
IPO, the Company changed its name from "UroQuest Corporation" to "UroQuest
Medical Corporation" and reincorporated from the State of Florida to the State
of Delaware.  In connection with the IPO, the Company completed the acquisition
of BMT, Inc., an Indiana corporation, and its wholly owned subsidiary, Bivona,
Inc., an Indiana corporation (collectively, "BMT"), pursuant to which BMT
became a wholly owned subsidiary of the Company as described below.

  The Company's other wholly owned subsidiary is UroCath Corporation, a Florida
corporation ("UroCath").  Unless the context of this Report requires otherwise,
(i) references to the "Company" refer to UroQuest Medical Corporation and each
of its wholly owned subsidiaries, including the business and operations of BMT
from October 30, 1996 (the date of the BMT acquisition), and (ii) references to
"UroQuest" refer to UroQuest Medical Corporation and UroCath, excluding the
business and operations of BMT.

  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 Catheter, 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 Catheter 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 On-Command Catheter have
demonstrated the utility of the device in managing male urinary outflow
disorders. The results of the clinical trials showed an overall symptomatic
urinary tract infection ("UTI") rate of less than 3% for all device insertions
during the trials. This rate is significantly lower than the rate of infection
generally associated with the use of Foley catheters. Of the patients included
in the trials, approximately 90% found the Male On-Command Catheter maintained
continence, was comfortable to wear and easy to use.

  Clinical trials of the Male On-Command Catheter have been conducted at eight
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 Catheter. Consequently, the
Company is conducting a controlled, randomized clinical study under an approved
IDE application at three investigational sites in the United States. The
Company expects to complete the study and submit a premarket approval ("PMA")
application for the Male On-Command Catheter in the second half of 1997.  An
IDE application for the Female On-Command Catheter was approved in March 1996
and the Company has obtained Institutional Review Board ("IRB") approval at two
investigational sites and is conducting a non-randomized pilot evaluation prior
to initiating a controlled, randomized study.

  The Company expects to initiate clinical evaluation of the Male On-Command
Catheter in Europe pursuant to an arrangement with B. Braun Biotrol, S.A.
("Braun"), a European-based multinational medical device company. Braun plans
to conduct the evaluation and to prepare the necessary regulatory filings in 16
European countries. The clinical evaluation of the Male On-Command Catheter in
Europe is

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expected to begin during the second quarter of 1997 at an
investigational site in France, followed by trials in Germany and Spain.

  In October 1996, the Company acquired 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. 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 Catheter. The product
development and production expertise of BMT is also being utilized by the
Company to develop additional On-Command Catheter products and other new
devices related to the management and diagnosis of urological disorders.

UROLOGY PRODUCTS

  The On-Command Catheter 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 Catheter 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 Catheter 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 Catheter 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 Catheter include:

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

   - Non-Surgical Application. The On-Command Catheter 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 Catheter is simple and
         efficient for the patient. The device is also easy for the physician
         to understand, size and insert because it shares several common design
         features with other commonly used indwelling catheters, such as the
         Foley catheter. There is no initial capital or inventory investment
         required and only minimal training is

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         necessary for a physician to become proficient in the use of the
         device.

   - Convenience and Enhanced Lifestyle. The proprietary intraurethral design
        of the On-Command Catheter 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.

   - Lower Incidence of Complications. The On-Command Catheter, 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 likely to stay dry, reducing
        the risks of rashes, skin irritations, urethral strictures and other
        complications.

   - Reduced Infection Rate. Male patients with either incontinence or
        retention have been shown in the Company's clinical trials to have
        lower symptomatic UTI rates while using the Male On-Command Catheter,
        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 Catheter 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 Catheter will be lower due to a reduced incidence of
        complications and side effects, as well as patient transfers into
        institutionalized settings.

  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
Catheter. 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 Catheter.
Finally, patients with other physical limitations such as excessive obesity or
retracted penis may not be able to use the On-Command Catheter.

   Male On-Command Catheter

The Male On-Command Catheter 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 simple 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,
allowing the device to 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 are easily 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 ensures a comfortable and customized fit in a
variety of anatomies.

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<PAGE>   5
   Female On-Command Catheter

  The Female On-Command Catheter also employs a catheter with a detachable
inflator section and a magnetically activated valve. The device is shorter than
the Male On-Command Catheter 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 Catheter are expected
to be higher than the Male On-Command Catheter which resides entirely inside
the urethra. The procedures for insertion, voiding and removal are similar to
those for the male device.

CLINICAL TRIALS

  Clinical trials of the Male On-Command Catheter were conducted by Surgitek,
Inc. ("Surgitek"), a prior licensee of the Company's technology, from 1989 to
1992. The trials evaluated a minimum of   three successive device insertions
for a period of 30 to 37 days each in male patients with either incontinence or
retention. A total of 49 patients were enrolled receiving an aggregate of 201
Male On-Command Catheter insertions.  The longest trial period on any patient
was 32 months, with the patient receiving a total of 30 device insertions.

  The clinical trials demonstrated the utility of the Male On-Command Catheter
in managing urinary outflow problems. The results of the clinical trials showed
an overall symptomatic UTI rate of less than 3% for all device insertions
during the trials. This rate is significantly lower than the rate of infection
generally associated with the use of Foley catheters. The Company believes that
the results are due, in part, to the entirely indwelling design of the Male
On-Command Catheter which is not subject to bacterial influx from external
tubing and collection systems typically associated with a Foley catheter. In
addition, the proprietary anchoring system caused no adverse effects to the
urethra or bladder.

  In the clinical trials, the Male On-Command Catheter initially experienced a
high degree of mechanical failure; however, the device's performance improved
substantially as the design changes, manufacturing procedures, testing
protocols and insertion techniques were modified and enhanced. Complications
other than symptomatic UTI primarily included migration, mis-sizing and bladder
spasms. Notwithstanding the foregoing, approximately 90% of the patients
included in the trials found the Male On-Command Catheter maintained continence
and was comfortable to wear and easy to use.

  The Company submitted a 510(k) notification application to the FDA in July
1994 based on the clinical data collected by Surgitek. The Company was notified
by the FDA that the clinical trials were deficient in certain respects,
particularly with respect to the design of the trials, which had an
insufficient number of patients and was not structured as a controlled,
randomized study, as required under current FDA regulations. In response to the
FDA, the Company designed a controlled, randomized study of the Male On-Command
Catheter 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 confirm prior clinical results and
demonstrate the safety and efficacy of the Male On-Command Catheter when
compared to a Foley catheter in managing urinary outflow dysfunction. To date,
three participating centers are conducting the clinical trials. The study
protocol includes the evaluation of a single device insertion for a period of


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up to 30 days. The duration of the study is 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 second
half of 1997. There can be no assurance that the study will be completed in
this time frame.

  The Company recently obtained clarification from the FDA that the Male and
Female On-Command Catheters will now be regulated through a PMA process.  The
FDA also re-examined the IDE protocol being used in the Company's ongoing
controlled, randomized study and indicated that the study design should be
sufficient to support a PMA filing.  See "Government Regulation."

  The IDE for the Female On-Command Catheter was approved in March 1996 by the
FDA and the Company has obtained IRB approval at two investigational sites. As
part of the approved IDE, the Company is conducting a non-randomized pilot
evaluation to test protocols and procedures prior to initiating the controlled,
randomized study. The clinical study will use a Foley catheter as the control
device and will evaluate single device insertions over a 7 to 30 day period.
The study will require seven weeks per patient to complete and will include 180
patients, 90 of whom will receive the Female On-Command Catheter and 90 of whom
will receive the Foley catheter. 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 expects to initiate clinical evaluation of the Male On-Command
Catheter in Europe pursuant to an arrangement with Braun Braun has agreed to
conduct the evaluation and prepare the necessary regulatory filings in 16
European countries. The Company expects the clinical evaluation in Europe to
begin in the second quarter of 1997 and will evaluate the Male On-Command
Catheter at an investigational site in France, followed by trials in Germany and
Spain. There can be no assurance that the clinical evaluation will be completed
in this time frame. The protocol will be similar to the IDE approved protocol
used in the United States. However, the Company will not be required to include
a control group. The Company anticipates evaluating up to three sequential
device insertions for each patient.

MARKETING AND SALES OF THE ON-COMMAND CATHETER

  The Company intends to market the On-Command Catheter directly in the United
States to physicians and their patients while using marketing collaborations
for institutions (nursing home and hospital care) and international markets.
The Company's marketing strategy is designed to create awareness and promote
the On-Command Catheter 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 primary care
physicians whose patients are seeking relief from urinary outflow problems.

  The On-Command Catheter represents a new management modality for urinary
outflow dysfunction, and there can be no assurance that the On-Command
Catheter 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 competing products, lifestyle implications,
available reimbursement and other considerations. Failure of the On-Command
Catheter 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 marketing strategy through clinical
sales specialists who will educate and train physicians and patients. These
specialists will

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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.

  The Company believes that many patients using currently available products to
manage incontinence and retention are dissatisfied with such products. Patient
awareness of the benefits of the On-Command Catheter will be created through
the use of selected print advertising, incontinence advocacy group sponsorship,
prostate cancer newsletters and other targeted promotions. The objective will
be to inform patients that a new management option is available and provide
them with a toll free phone number to call for more information. Callers will
be provided with the names of physicians in the patient's area who have been
trained by the clinical sales specialist, have adopted the On-Command Catheter
for their patients and are prepared to evaluate the clinical suitability of the
patient. The Company's strategy is to identify reference physicians in selected
geographic areas to provide a referral network for patients seeking management
alternatives. Timing of the awareness media campaign will be carefully
orchestrated to coincide with the physician training. The Company's direct
sales activities will also be augmented through attendance and participation in
trade shows and organizational meetings specifically related to urology and
urinary dysfunction and through the publication of scientific papers discussing
the results of expanded clinical development work.

  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 over
one million 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 Catheter.
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.

  The Company is targeting women with moderate to severe stress incontinence
who require some form of continuous management and are dissatisfied with
wearing diapers and pads. The Company estimates that this represents a target
market of one and one-half million women in the United States. The Company
intends to introduce the Female On-Command Catheter initially through the
physicians who have had prior experience with the Male On-Command Catheter and
are treating female patients with similar profiles.

  The Company expects eventually to add managed care specialists to address the
unique requirements of capitated health care systems including hospitals, HMOs
and nursing homes. The products will be sold on the basis of pharmacoeconomic
results and the overall cost effectiveness versus other management and
treatment modalities. The Company plans to analyze and use the most appropriate
distribution method to reach these institutional markets.

  To date, the Company has not sold any On-Command Catheter products and does
not currently employ any marketing or sales employees for such device. 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 Catheter. 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.

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   International

  International marketing efforts are initially being directed at Europe and
Japan. International sales are expected to be made through independent foreign
distribution arrangements. The Company has entered into an arrangement with
Braun to conduct clinical trials in Europe for the On-Command Catheter. Braun
has over 200 sales representatives in the major European countries who would be
responsible for selling and marketing the Company's catheter products. This
arrangement may lead to an exclusive licensing and distribution agreement in
Europe following the clinical trials. Preliminary discussions are currently
underway with other potential distributors in Japan and other Pacific Rim
countries.  There can be no assurance that the Company will be successful in
establishing or maintaining 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.

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. The Company 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.

  The Company uses a small 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 anesthesiologists. A group of specialty medical dealers is used in
international markets. Approximately 20% 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 about 20 different companies, most of which are Fortune 500 medical
device companies. For the year ended December 31, 1996, OEM sales accounted for
approximately 40% of the Company's net sales. Sales to Abbott Laboratories
accounted for approximately 20% of total net sales. Although the Company
intends to continue developing its OEM business, there can be no assurance that
it will be successful in its efforts or that its OEM customers will react
favorably to the acquisition of BMT by the Company. The loss of Abbott
Laboratories or other 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 the Company's engineering staff. The Company is positioned as a value
added manufacturer providing complete product development, regulatory affairs,
manufacturing and packaging service. The Company 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 Catheter for use in its clinical trials. The manufacturing
facilities are currently operated in compliance with existing FDA-mandated Good
Manufacturing Practices ("GMPs") and have passed inspection repeatedly by the
FDA, as well as the United Kingdom's Department of Health.

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   The business of BMT has been specialized in the manufacture of medical
devices using predominantly silicone technology for 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.

  The Company purchases certain of the components used to manufacture the
On-Command Catheter 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 Catheter, could
have a material adverse effect on the Company's business, financial condition
and results of operations.

  The Company'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. The Company 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 Catheter.

  The Company 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, the Company'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, the Company 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 the Company currently has
excess manufacturing capacity.

  The manufacture of the On-Command Catheter 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 Catheter are similar to those currently used by the
Company to manufacture other silicone catheter-type devices. The On-Command
Catheter 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.

  The Company may encounter difficulties, delays and significant expenses in
scaling up production of the On-Command Catheter, 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
Catheter 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
Catheter 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.

  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

                                       8
<PAGE>   10
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 On-Command configurations to address additional
clinical indications, as well as developing 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 8
engineers and 14 skilled technicians.

   On-Command Convertible Catheter

  The On-Command Convertible Catheter 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 to monitor urine output and
chemistry and evaluate kidney function. With the inflator portion attached, the
On-Command Convertible Catheter would function like a Foley catheter allowing
for continuous bladder drainage.  When continuous monitoring is no longer
necessary and continence has not yet returned, the inflator portion of the
On-Command Convertible Catheter can be disconnected and the device then
functions 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.

   On-Command Control Catheter

  The On-Command Control Catheter is being developed for use with
semi-ambulatory or bed-ridden patients in long-term or home care environments.
The On-Command Control Catheter incorporates a mechanical valve mechanism that
can be easily opened or closed 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.

   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. Because urine is a
body fluid that can potentially transmit dangerous diseases, OSHA has mandated
the use of precautionary measures when handling such fluids. The use of gloves,
gowns, face protection and special

                                       9

<PAGE>   11
ventilation and disposal for these supplies, as well as the specimen, raises the
cost of urinalysis performed in a physician's office.


  The Snap-Shot is designed to ensure compliance with OSHA safety regulations
for the safe handling of body fluids during testing procedures. The Company is
not aware of any other manual urinalysis device which is either currently on the
market or under development which complies with these regulations. 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 that 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
Systems, Inc., C.R. Bard, Inc., Mentor Corporation, Johnson & Johnson Co. and
Collagen Corporation.

  The Company is aware that UroMed Corp., UroHealth, Inc., Rochester Medical
Corporation, Influence, Inc. and others are developing a number of alternative
products for the management of female stress incontinence. The Company is not
aware of any new products or technologies currently being tested that compete
directly with the On-Command Catheter in the male urinary outflow dysfunction
market.

  The Company 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. The Company 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.

                                       10

<PAGE>   12
  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 ten United States patents, eight of which relate to the
On-Command Catheter, numerous foreign patents, five United States patent
applications and various foreign patent applications pending. One United States
patent and two patent applications 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 Catheter, expire
in 2000 and 2001 and the remainder of all other patents, including six related
to the On-Command Catheter, expire in the years from 2007 through 2014. In
addition, BMT holds fifteen Unites 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 2014. 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
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

                                       11

<PAGE>   13
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.
On-Command(R) is a registered trademark of UroQuest. In addition, UroQuest has
filed intent to use applications for other marks which have been approved by
the PTO.  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.

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. 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 Catheter will generally
be eligible for coverage by third-party reimbursement programs. There can be no
assurance, however, that such reimbursement will be available. The Company is
unable to determine whether the On-Command Catheter reimbursement amount, if
any, will be sufficient to cover the cost of the product. The Company currently
estimates the price of the Male On-Command Catheter 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 Catheter has not yet been set. The pricing for the
Female On-Command Catheter has not yet been determined by the Company. Medicare
allowable costs for other urinary outflow dysfunction management devices are
approximately $60 for Foley catheters and approximately $85 for male external
catheters per month. Allowable reimbursement costs for sterile IC are
approximately $600 per month. The Company's long-term strategy is to obtain
separate reimbursement codes and perform outcome studies evaluating the cost
effectiveness of the On-Command Catheter compared to other device, absorbent
and treatment modalities.

  If third-party reimbursement is unavailable, consumers will have to pay for
the On-Command Catheter 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

                                       12
<PAGE>   14
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 Catheter will be dependent upon decisions by
the Health Care Financing Administration 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
Catheter, for products of the Company's competitors or for surgical procedures
may affect the pricing of the On-Command Catheter or the relative cost to the
patient. Regardless of the type of reimbursement system, the Company believes
that physician advocacy of the On-Command Catheter will be required to obtain
reimbursement. There can be no assurance that reimbursement for the On-Command
Catheter 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 Catheter.  The foregoing discussion regarding
third-party reimbursement for the On-Command Catheter is generally applicable to
BMT's proprietary line of airway management products.  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 Catheter, 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.

  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 MDR requirements that a firm report 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.

  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

                                       13
<PAGE>   15

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 costs to comply with 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.

  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 510(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. The FDA has no specific time limit by which it must
respond to a 510(k) notification. It generally takes four to 12 months from the
date of submission to obtain 510(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 510(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, which must prove that a device is safe and effective, 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 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

                                       14
<PAGE>   16
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 FDA has approved IDEs for both the Male On-Command Catheter and the
Female On-Command Catheter and the Company is currently conducting clinical
studies in the U.S. There can be no assurance that the FDA will determine that
the data derived from these studies will support the safety and efficacy of the
devices or warrant the continuation of clinical studies.  The FDA has recently
indicated that the Male and Female On-Command Catheters are now considered
"transurethral occlusive devices" and as such will be regulated through the PMA
process.

  The Company currently expects to submit a PMA application for the Male
On-Command Catheter in the second half of 1997. There can be no assurance that a
PMA application will be submitted in this time frame, nor can there be any
assurance that approval will be obtained. Any failure to obtain, or delay in
obtaining, such approvals would have a material adverse effect on the Company's
business, financial condition and results of operations.

  There can be no assurance that the Company will be able to obtain necessary
regulatory clearances or approvals for its products on a timely basis or at
all, and delays in receipt of or failure to receive such clearances or
approvals, the loss of previously received clearances or approvals, limitations
on intended use imposed as a condition of 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.

  Sales of medical devices outside of the United States are subject to
regulatory requirements that vary widely from country to country. The time
necessary to obtain approval for sale in other countries may be longer or
shorter than that required for FDA approval, and requirements may differ from
FDA requirements. The Company expects to initiate clinical evaluation of the
Male On-Command Catheter in Europe pursuant to an arrangement with Braun. Braun
will be responsible for management of the evaluation and obtaining regulatory
approval for the On-Command Catheter, and such approval will therefore be
outside the Company's control. Moreover, the success of such evaluation in
Europe will be dependent, in large part, on Braun's capabilities and
performance. Some countries in which the Company intends to sell devices
through distributors (for example, Germany, France and Spain) either do not
currently regulate medical devices such as the On-Command Catheter 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 Catheter. Some countries have historically permitted
human studies earlier in the product development cycle than the United States.
Other countries, such as Japan, have standards similar to those of the FDA.
This disparity in the regulation of medical devices may result in more rapid
product approvals in certain countries than in the United States, while
approvals in countries such as Japan may require longer than in the United
States. The export of medical devices is also subject to regulation in certain
instances.

  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

                                       15
<PAGE>   17
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.

  BMT recently 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).

PRODUCT LIABILITY AND INSURANCE

  The business of the Company entails significant product liability and recall
risks. A recent United States Supreme Court decision held that product
liability may exist despite FDA 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.

EMPLOYEES

  As of December 31, 1996, the Company employed a total of 265 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 six 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.

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

                                       16
<PAGE>   18
Condition" and "Results of Operations."

  Lack of Regulatory Approval and Limited Clinical Data

  The Company's principal product, the On-Command Catheter, is an
investigational device that has not been approved by the FDA or foreign
regulatory authorities and will not be available for commercial distribution in
the United States or internationally unless and until such approval is obtained.
The Male On-Command Catheter is currently in clinical testing in the United
States with respect to single use insertions of up to 30 days. Clinical data
obtained to date is limited. The Company is conducting a controlled, randomized
clinical study of the Male On-Command Catheter. 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. Clinical testing of the Female
On-Command Catheter has only recently been initiated. If either the Male or
Female On-Command Catheter does not prove to be safe and effective in clinical
testing to the satisfaction of the FDA or foreign regulatory authorities, the
Company will not be able to market or commercialize the On-Command Catheter in
the United States or abroad. Furthermore, approval for single use insertions of
the On-Command Catheter, 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 Catheter will prove to
be safe and effective in the United States or international clinical testing, or
that FDA or foreign regulatory approval will be obtained on a timely basis, if
at all. In addition, the clinical testing may identify technical, manufacturing,
design or other obstacles that can delay completion of such testing, as was
experienced in early clinical trials of the Male On-Command Catheter. If the
On-Command Catheter 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 Catheter

  The Company expects to derive a substantial majority of its future revenues
from sales of the On-Command Catheter. 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 Catheter 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 Catheter, 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 Catheter 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 Catheter 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 Catheter represents a new management modality for urinary
outflow dysfunction, and there can be no assurance that the On-Command
Catheter 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 Catheter by physicians will be
essential for market acceptance of the On-Command Catheter, and there can be no
assurance that any such recommendations will be obtained. Broad use of the
On-Command Catheter 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 Catheter will be an important factor in

                                       17
<PAGE>   19
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 Catheter 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 Catheter," 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 Company has been primarily engaged in research and development of the
On-Command Catheter. The Company has experienced substantial operating losses
since inception and, as of December 31, 1996, had an accumulated deficit of
approximately $5,666,000. The Company expects its operating losses to continue
for at least the next two years as it 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."

  Risks Associated with BMT Acquisition

  The recent 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 a 20
year period 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 BMT's
earnings and negatively impact the contribution otherwise expected to be
provided by BMT to the Company's consolidated results of operations. 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 40% of BMT's net
sales during 1996 were derived from its manufacture of OEM medical device
products. BMT maintains no long-term OEM customer contracts and, during 1996,
BMT derived approximately 20% of its net sales from one such customer. Although
BMT intends to continue developing its OEM business, there can be no assurance
that BMT will be successful in its efforts or that its OEM customers will react
favorably to the acquisition. 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 Catheter.

  Government Regulation

  The Company's products, including the On-Command Catheter, 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 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.

                                       18
<PAGE>   20
  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 a 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 trials of the device. The time period required
to assemble and compile this data can be extensive and can extend the
regulatory process for a considerable length of time. The PMA process can take
several years or longer from initial filing and requires the submission of
extensive clinical data and supporting information.

  The FDA has approved IDEs for both the Male On-Command Catheter and the
Female On-Command Catheter. The Company has obtained IRB approval and is
conducting non-randomized pilot evaluations of both devices prior to initiating
controlled, randomized studies. There can be no assurance that the FDA will
determine that the data derived from these studies will support the safety and
efficacy of the devices or warrant the continuation of clinical studies.

  The Company currently expects to submit a PMA application for the Male
On-Command Catheter in the second half of 1997.  There can be no assurance that
a PMA application will be submitted in this time frame, nor can there be any
assurance that approval will be obtained. Any failure to obtain, or delay in
obtaining, such approval would have a material adverse effect on the Company's
business, financial condition and results of operations.

  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 of 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. The Company expects to initiate clinical evaluation of the
Male On-Command Catheter in Europe pursuant to an arrangement with Braun. Braun
will be responsible for management of the evaluation and obtaining regulatory
approval for the On- Command Catheter, and such approval will therefore be
outside the Company's control. Moreover, the success of such evaluation in
Europe will be dependent, in large part, on Braun's capabilities and
performance. 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 Catheter 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 Catheter.

  There can be no assurance that the Company will be able to obtain PMA
approval to market the On-Command Catheter 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.

                                       19
<PAGE>   21
  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 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. See "Clinical Trials, and Government Regulation."

  Lack of Marketing and Sales Experience

  To date, the Company has not sold any On-Command Catheter products. Although
the Company intends to market the On-Command Catheter in the United States
through a direct sales force, if and when necessary regulatory approvals are
obtained, the Company currently does not employ any marketing or sales
employees for the On-Command Catheter. In addition, the Company intends to
market the On-Command Catheter 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 Catheter. See "Marketing and Sales of the On-Command Catheter."

  Manufacturing Risks

  Through BMT, the Company has only manufactured the On-Command Catheter in
limited quantities for clinical testing purposes. Although BMT has extensive
experience in manufacturing custom silicone products, including urological
catheters, the Company does not have experience in manufacturing the On-Command
Catheter in commercial quantities. The Company may encounter difficulties,
delays and significant expenses in scaling up production of the On-Command
Catheter, 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 Catheter at a commercially reasonable
price. There can be no assurance that difficulties or unfavorable costs will
not be encountered in mass-production of the On-Command Catheter 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 employees, consultants and other parties. The
Company's proprietary information agreements with employees and consultants

                                       20
<PAGE>   22
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. 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 Catheter will generally be eligible
for coverage by third-party reimbursement programs. There can be no assurance,
however, that such reimbursement will be available. The Company is unable to
determine whether the On-Command Catheter reimbursement amount, if any, 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 Catheter 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
Catheter will be dependent upon decisions by the Health Care Financing
Administration 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
Catheter, for products of the Company's competitors or for surgical procedures
may affect the pricing of the On-Command Catheter or the relative cost to the
patient. Regardless of the type of reimbursement system, the Company believes
that physician advocacy of the On-Command Catheter 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 Catheter. Failure to obtain such reimbursement may
have a material adverse effect on the Company's business, financial condition
and results of operations. See

                                       21
<PAGE>   23
"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 Catheter 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 that the net proceeds from its IPO, together with existing
borrowings and cash anticipated to be generated from non-urological operations,
will provide adequate funding for its capital requirements in the foreseeable
future, 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 know-how owned by the Company or to
determine the enforceability, scope and validity of the proprietary rights of
others.

  Any litigation or interference proceedings would result in substantial
expense to the Company and significant diversion of attention by the Company's
technical and management personnel. An adverse determination in litigation or
interference proceedings to which the Company may become a party could subject
the Company to significant liabilities to third parties or require the Company
to seek licenses from third parties. Although patent and intellectual property
disputes in the medical device area have often been settled through licensing
or similar arrangements, costs associated with such arrangements may be
substantial and could include 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.

                                       22
<PAGE>   24
  International Sales Risks

  The Company plans to sell the On-Command Catheter 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 Catheter 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 Catheter."

  Product Liability Risk; Product Recall Risk

  The manufacture and sale of medical devices entails significant product
liability and recall risks. A recent United States Supreme Court decision held
that product liability may exist despite FDA approval and future court decisions
may also affect the Company's risk of product liability. Although the Company
intends to obtain product liability insurance covering the On-Command Catheter
prior to commercialization, it does not currently have such insurance which may
be expensive and may not be available on acceptable terms, if at all. 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 Catheter 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
Catheter, could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Manufacturing."

  Uncertainty of BMT Operations

  Although the business operations of BMT have continued since 1971, there can
be no assurance that

                                       23
<PAGE>   25
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 six 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

  Through BMT, the Company 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 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 to another location.  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. See "Manufacturing."

  Management's Broad Discretion in the Use of Unallocated Portion of Proceeds

  A significant portion of the net proceeds to the Company from its IPO are not
allocated to any specific purpose. Accordingly, the Company's management
retains broad discretion as to the allocation of a substantial portion of the
net proceeds. Stockholders will not have any advance notice or opportunity to
approve the Company's uses of these unallocated proceeds.

  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 56% 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 Common Stock. In addition, the market price of the Common

                                       24
<PAGE>   26
Stock is likely to be highly volatile. Factors such as fluctuations in the
Company's operating results, announcements of technological innovations or new
products by the Company or its competitors, FDA and international regulatory
actions, actions with respect to reimbursement matters, developments with
respect to patents or proprietary rights, public concern as to the safety of
products developed by the Company or others, changes in health care policy in
the United States and internationally, changes in stock market analyst
recommendations regarding the Company, other medical device companies or the
medical device industry generally and general market conditions may have a
significant effect on the market price of the Common Stock. In addition, it is
likely that during future quarterly periods, the Company's results of
operations may fluctuate significantly or may fail to meet the expectations of
stock market analysts and investors and, in such event, the Company's stock
price could be materially adversely affected. In the past, securities class
action litigation has often 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.


  Shares Eligible for Future Sale; Registration Rights; Potential Adverse Effect
  on Market Price

  Sales of Common Stock (including shares issued upon the exercise of
outstanding options or warrants) in the public market could materially
adversely affect the market price of the Common Stock. Such sales also might
make it more difficult for the Company to sell equity securities or
equity-related securities in the future at a time and price that the Company
deems appropriate. The Company currently has approximately 11,845,000 shares of
Common Stock outstanding, assuming no exercise of options after March 27, 1997,
of which the 3,350,000 shares offered hereby will be freely tradable without
restriction under the Securities Act of 1933, as amended (the "Securities Act")
unless held by "affiliates" of the Company, as that term is defined in Rule 144
under the Securities Act. The remaining 8,495,000 shares of Common Stock held
by existing stockholders will be "restricted securities" within the meaning of
Rule 144 promulgated under the Securities Act, and were issued and sold by the
Company in reliance on exemptions from the registration requirements of the
Securities Act. These shares may be sold in the public market only if
registered or pursuant to an exemption from registration, such as Rule 144,
144(k) or Rule 701 under the Securities Act.  All executive officers, directors
and certain stockholders of the Company, holding in aggregate approximately
8,342,000 shares of Common Stock, are subject to lock-up agreements which
provide that they will not offer, sell, contract to sell, grant any option to
purchase or otherwise dispose of, or agree to dispose of, directly or
indirectly, any shares of Common Stock, options or warrants to acquire shares
of Common Stock or securities exchangeable for or convertible into Common Stock
owned by them prior to April 22, 1997, without the prior written consent of
Dillon, Read & Co. Inc. ("Dillon Read"). Dillon Read may, in its sole
discretion and at any time without notice, release all or any portion of the
shares subject to such lock-up agreements before April 22, 1997. After April
22, 1997, certain shares of Common Stock held by existing stockholders will be
eligible for immediate public resale without restriction pursuant to Rule
144(k) or Rule 701, and certain shares held by existing stockholders will be
eligible for sale subject to the volume limitation and other restrictions of
Rule 144. The remaining shares held by existing stockholders will become
eligible for public resale pursuant to Rule 144 upon the expiration of their
two-year holding periods. As of December, 1996, approximately 1,128,000 shares
were subject to outstanding options. All of these shares are subject to the
lock-up agreements described above.

                                       25

<PAGE>   27

As of December 31, 1996 approximately 572,000 shares subject to such options
were vested. After April 22, 1997, holders of approximately 5,914,000 shares of
Common Stock (including shares issuable upon exercise of certain options) or
their transferees will be entitled to certain registration rights with respect
to such shares. If such holders, by exercising such rights, cause a large number
of shares to be registered and sold in the public market, such sales could have
a material adverse effect on the market price 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.

Item 2.  PROPERTIES

  The Company's principal administrative offices are located in Salt Lake City,
Utah and its  manufacturing and distribution facility is located in Gary,
Indiana. The Company believes that its facilities are adequate for its current
operations.

  The Company currently leases approximately 2,300 square feet in Salt Lake
City, Utah pursuant to a lease expiring in September 2000. The current annual
rate on the lease is $37,017, with annual increases based on the percentage
increase in the prior year's average consumer price index, beginning in October
1998. Current space is dedicated to administration and regulatory activities.

  The Company owns its manufacturing plant which is a 45,000 square foot
facility located on a 20 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 legal proceedings other than
routine litigation in the ordinary course of business. 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

  Prior to the Company's IPO on October 24, 1996, a Special Meeting of
Stockholders of the Company was held on October 18, 1996, to consider and vote
upon proposals to:  (i) reincorporate the Company from Florida to Delaware,
(ii) ratify each director's prior election and elect directors, and (iii)
approve the UroQuest Medical Corporation 1996 Employee Stock Purchase Plan.

  The first proposal was approved by a vote of 4,415,395 for, 0 against, and 0
withheld.  The prior election and appointment of Richard C.  Davis, Eric B.
Hale, Jack W. Lasersohn, Gary E. Nei, Maynard Ramsey, III, and Elizabeth H.
Weatherman were ratified and such directors were re-elected as members of the
Board of Directors.  All such directors received 4,415,395 votes. The third
proposal was approved by a vote of 4,415,395 for, 0 against, and 0 withheld.

                                       26
<PAGE>   28
                                    PART II

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

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

  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-21 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-20 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" pages F-2 through F-6 hereof.


Item 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

  The consolidated financial statements of the Company and its subsidiaries are
set forth on pages F-7 and F-18 hereof.

  The statements and information set forth under the caption "Quarterly Results
of Operations" are set forth on page F-21 hereof.

Item 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE

  None

                                   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, 1997 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, 1997 is incorporated herein by reference.

                                       27
<PAGE>   29
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, 1997 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, 1997 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

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

             3.  3  Specimen Stock Certificate

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

             10. 2* 1994 Stock Option Plan (1)

             10. 3* 1996 Employee Stock Purchase Plan and form of Subscription
                    and Contribution Election Form (1)

             10. 4  Letter of Intent dated February 20, 1996 between B. Braun
                    Biotrol, S.A. and UroQuest Medical Corporation (1)

             10. 5  Lease Agreement of office space dated July 6, 1995 between
                    265 East Associates and the Registrant (1)

             10. 6  Lease dated December 16, 1995 between JVM Realty Corpora-
                    tion and Bivona, Inc. (1)

                                       28
<PAGE>   30
             10. 7* Employment Agreement (as amended) dated November 1, 1994
                    for Eric B. Hale (1)

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

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

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

             10.11* Employment Agreement effective June 27, 1996 for Tom E.
                    Brandt (1)

             10.12* Letter dated August 15, 1996 from the Registrant to J.J.
                    Donohue (1)

             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")(1)

             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 (1)

             21. 1  Subsidiaries of Registrant (1)

             27. 1  Financial Data Schedule for the year ended December 31, 1996

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

               *   Management contract or compensatory plan arrangement



(b)      Reports on Form 8-K:

         The Company did not file any reports on Form 8-K during the fourth
         quarter of 1996.  On October 30, 1996,  the Company acquired BMT as
         discussed under Part I, Item 1. of this Report.  All financial
         statements and other information required by Form 8-K with respect to
         the acquisition were previously filed in connection with the Company's
         Registration Statement on Form S-1 (Reg. No. 333-07277).


(c)      See Item 14(a) 3 above

(d)      See Item 14(a) 2 above

                                       29
<PAGE>   31
                                   SIGNATURES


  Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized in Salt Lake City,
State of Utah, on the 27th day of March 1997.


                                  UROQUEST MEDICAL CORPORATION


                                      By:  Eric B. Hale
                                           ------------------------------
                                           Eric B. Hale
                                           President and Chief Executive Officer


  Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and as of the date indicated.

<TABLE>
<CAPTION>
SIGNATURE                                        TITLE                                       DATE
<S>                                    <C>                                                <C>

Eric B. Hale                           President, Chief Executive Officer                 March 27, 1997
-----------------------------------    and Director (Principal Executive Officer)
Eric B. Hale


Gregory S. Ayers                       Vice President, Chief Financial Officer and        March 27, 1997
------------------------------------   Treasurer (Principal Financial and
Gregory S. Ayers                       Accounting Officer)

Tom E. Brandt                          Director and Chief Operating Officer               March 27, 1997
------------------------------------
Tom E. Brandt

Richard C. Davis, Jr.                  Director, Chairman of the Board and                March 27, 1997
------------------------------------   Chief Science Officer
Richard C. Davis, Jr., M.D.


Jack W. Lasersohn                      Director                                           March 27, 1997
------------------------------------
Jack W. Lasersohn


Gary E. Nei                            Director                                           March 27, 1997
------------------------------------
Gary E. Nei


Maynard Ramsey, III                    Director                                           March 27, 1997
------------------------------------
Maynard Ramsey, III, M.D., Ph.D.


Elizabeth H. Weatherman                Director                                           March 27, 1997
------------------------------------
Elizabeth H. Weatherman
</TABLE>

                                       30
<PAGE>   32





                          UroQuest Medical Corporation

                       CONSOLIDATED FINANCIAL INFORMATION


<TABLE>
<CAPTION>
                                                                                              Page
<S>                                                                                           <C>
Management's Discussion and Analysis of Financial Condition and Results of Operations . .     F- 2
Consolidated Statements of Operations . . . . . . . . . . . . . . . . . . . . . . . . . .     F- 7
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     F- 8
Consolidated Statements of Stockholders' Equity . . . . . . . . . . . . . . . . . . . . .     F- 9
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . .     F-10
Notes to Consolidated Financial Statements  . . . . . . . . . . . . . . . . . . . . . . .     F-11
Independent Auditors' Report  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     F-19
Five-Year Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . .     F-20
Quarterly Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     F-21
Market for the Company's Common Stock and Related Matters . . . . . . . . . . . . . . . .     F-21
</TABLE>

                                      F-1
<PAGE>   33
                          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 Financial Statements and
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 that involve risks and uncertainties. The
Company's actual results 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

  The Male On-Command Catheter was originally designed and developed by Richard
C. Davis, M. D., the principal founder and Chief Science Officer of the
Company. In December 1986, the technology underlying the Male On-Command
Catheter was licensed to Surgitek, a urological and plastic surgery products
subsidiary of Bristol-Myers Squibb Company. Surgitek spent approximately five
years and substantial sums advancing the technology, engineering prototype
catheters, conducting clinical trials and preparing regulatory filings for the
Male On-Command Catheter. In 1992, Surgitek was acquired by Cabot Medical
Corporation, and as a result of nonperformance under the license agreement, the
technology relating to the Male On-Command Catheter reverted back to Dr. Davis
and was transferred to UroCath, a wholly owned subsidiary of UroQuest, in
February 1993.

  In November 1994, UroQuest hired a new Chief Executive Officer to facilitate
the regulatory approval process, including necessary clinical trials,
commercialize the On-Command Catheter and to seek additional funding to support
UroQuest's operations. In December 1994, UroQuest secured all remaining
intellectual property rights related to the Female On-Command Catheter.
UroQuest also intensified its efforts in design and engineering refinements,
manufacturing tooling, production testing and regulatory filings in connection
with conducting clinical trials in the United States of the Male On-Command
Catheter and initiating clinical trials for the Female On-Command Catheter. In
June 1995, UroQuest raised $2.2 million pursuant to the issuance of Preferred
Stock to Warburg and Vertical, allowing UroQuest to continue its efforts to
develop and commercialize the On-Command Catheter. The Company completed an IPO
in October 1996 with net proceeds to the Company of approximately $17.8
million.

  The Company expects to derive a substantial majority of its future revenues
from sales of the On-Command Catheter. 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 Catheter in the United
States and abroad. The life cycle of the On- Command Catheter is difficult to
estimate, particularly in light of current and future technological
developments, competition and other factors.

  The Company has a limited history of operations and has experienced
substantial operating losses since inception. Notwithstanding the acquisition
of BMT, the Company expects its operating losses to continue for at least the
next two years as it 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.





                                      F-2
<PAGE>   34
   Acquisition of BMT

  On October 30, 1996, concurrent with the closing of the IPO, the Company
acquired 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

  In the acquisition, shareholders of BMT received, in the aggregate, a
combination of $10 million cash and 2,500,000 newly issued shares of Common
Stock. The acquisition was accounted for under the purchase method of
accounting and resulted in goodwill of approximately $12.3 million.
Amortization of such goodwill and other depreciation charges related to the
acquisition, totaling approximately $823,000 annually, will negatively impact
the Company's consolidated results of operations.  The financial statements and
operations of the Company include the operations of BMT from October 30, 1996
(the date of  the BMT acquisition).

  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 Catheter. The product development
and engineering expertise of BMT is also being utilized by the Company to
develop additional On-Command Catheter 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 Catheter. 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.

   BMT Background

  The business of BMT was commenced in 1971 to develop tracheal and
endotracheal tubes for airway management and has expanded to include various
other medical device products. BMT has utilized its product development
expertise and production capabilities to manufacture silicone medical device
products on an OEM basis, including components, assemblies and finished devices
for use in gastroenterology, urology, cardiopulmonary, parenteral and
diagnostic applications.

  In December 1987, the business of BMT was acquired by Synthelabo, a
pharmaceutical division of L'Oreal S.A. In October 1992, the business was
acquired from Synthelabo by the existing executive officers and certain other
employees of BMT in a management buyout for approximately $7 million. These
officers and employees have continued to operate the business of BMT since the
buyout.

  Over the past three years, BMT has implemented various management strategies
to increase sales and profitability. These strategies have included elimination
of low margin products, expansion of BMT's line of proprietary products,
investment in research and development, and improvements in manufacturing
facilities and capabilities. BMT operates under GMPs and has obtained ISO-9001
certification and CE mark status.





                                      F-3
<PAGE>   35
RESULTS OF OPERATIONS

  Net sales and cost of sales.  The Company had no material sales in 1994 or
1995.  Sales of $2,299,895 in 1996 related to BMT sales in November and
December of proprietary airway management products and other medical devices
products to OEM customers. Cost of sales of $1,308,730 related to the those
sales.

Research and development. Research and development expenses include clinical
testing and regulatory expenses. For the year ended December 31, 1996, research
and development expenses increased to $2,173,312 from $1,106,631 for the year
ended December 31, 1995. This increase was due primarily to hiring of clinical
personnel, conducting clinical trials in 1996 and implementing improvements in
product design and the manufacturing process.  Included in the 1996 expense was
a $783,000 write-off of in-process research and development costs related to
the acquisition of BMT. Also included in 1996 were two month's research and
development expenses related to BMT totaling $213,122. Research and development
expenses increased to $1,106,631 in 1995 from $431,295 in 1994 resulting
primarily from the transfer of certain personnel to research and development
functions in 1995 from general and administrative functions in 1994 and
manufacturing costs incurred to produce devices used in clinical trials. The
increase in research and development expenses in 1995, as compared to 1994, is
also attributable to costs associated with commencing clinical trials of the
Male On-Command Catheter, including legal and other fees related to regulatory
matters, the increased number of research and development employees and
amortization of approximately $79,000 related to patents purchased by UroQuest
in December 1994. Research and development expenses are expected to continue to
increase for the foreseeable future.

  General and administrative. General and administrative expenses increased to
$1,091,857 for the year ended December 31, 1996 from $397,523 for the year
ended December 31, 1995. This increase was attributable primarily to public
company administration expenses. Also included in 1996 were two month's general
and administrative expenses related to BMT totaling $413,319. General and
administrative expenses decreased to $397,523 in 1995 from $483,399 in 1994 due
primarily to the transfer of certain personnel to research and development
functions in 1995 from general and administrative functions in 1994. General
and administrative expenses are expected to continue to increase as the Company
hires additional personnel to support anticipated expansion of the Company's
business.

  Sales and marketing. Sales and marketing expenses increased to $297,587 for
the year ended December 31, 1996 from $46,262 for the year ended December 31,
1995. This increase was primarily attributable primarily to the inclusion of
two month's sales and marketing expenses related to BMT totaling $256,991.
Sales and marketing expenses increased to $46,262 in 1995 from $30,257 in 1994
due principally to costs associated with UroQuest retaining a sales and
marketing consultant.

  Other income (expense), net. Other income (expense), net increased to 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.  Interest expense
increased to $82,364 in 1996 from $54,809 in 1995.  Included in 1996 were two
month's interest expense related to BMT totaling $33,201. Other income
(expense), net increased to income of $36,669 in 1995 from an expense of
$260,663 in 1994. This change resulted primarily from a bad debt reserve in
1994 which was not incurred in 1995. In exchange for the sale of assets
unrelated to the urology business in 1994 to corporations owned by certain
stockholders of the Company, UroQuest received promissory notes totaling
$235,008 from such corporations. The notes were reserved in full as it was
probable that the Company would not collect the full amount of the notes. In
June 1996, approximately $200,000 principal amount of the notes due from Trek
Medical Corporation (a company formed in June 1994 by certain stockholders of
the Company) was converted into common stock of Trek Medical Corporation. The
balance of $35,008 remains outstanding as a promissory note from SilvaFoam
Corporation and U.S. Infusion Care, Inc. The total $35,008 of notes receivable
is reserved in full. The net change to 1995 from 1994 also resulted from an
increase of approximately $56,000 in interest income partially offset by an


                                      F-4
<PAGE>   36
increase of approximately $25,000 in interest expense.

  Provision for income taxes.  The Company has not generated any taxable income
to date and, therefore, has not paid any federal income taxes since its
inception. The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109 ("FAS 109"). Realization of deferred tax assets is
dependent on future earnings, if any, the timing and amount of which are
uncertain. Accordingly, valuation allowances, in amounts equal to the net
deferred tax assets as of December 31, 1996, 1995 and 1994, have been
established in each period to reflect these uncertainties.  At December 31,
1996, UroQuest and BMT had net operating losses, for tax purposes, of
approximately $3,300,000 and $1,093,000, respectively, that can be carried
forward to reduce federal income taxes. However, utilization of net operating
losses and any tax credit carryforwards will be subject to annual limitations
due to the ownership change limitations of the Internal Revenue Code of 1986,
as amended, and similar state provisions.

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. Since
inception, the Company has raised approximately $26.8 million in net proceeds
of equity financing.

  In December 1994, UroQuest issued $390,000 of 12% secured promissory notes
due December 31, 1996. The notes were repaid in November 1996. In connection
with such placement, 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.

  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.  During the 1996 year, the
Company issued 10% demand promissory notes totaling $500,000. The notes were
repaid by year end.

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

  As of December 31, 1996 and December 31, 1995, the Company had cash and cash
equivalents of $12,694,047 and $1,113,594, respectively. The increase since
December 31, 1995 was due primarily to the net cash provided by the public sale
of common stock and the exercise of $5 million of stock warrants. As of
December 31, 1996, 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 Catheter 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. Consequently, although the Company believes that the net proceeds
from its IPO, together with existing borrowings and cash anticipated to be
generated from BMT's operations, will provide adequate funding for its capital
requirements in the foreseeable future, 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

                                      F-5
<PAGE>   37
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 for at least the next two
years as it continues to expend substantial resources in funding clinical
trials in support of regulatory and reimbursement approvals, expansion of
marketing and sales activities, and research and development. In addition, the
Company's results of operations may fluctuate significantly during future
quarterly periods. The Company plans to implement an aggressive marketing and
growth strategy, and 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-6

<PAGE>   38
                          UROQUEST MEDICAL CORPORATION

                     CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                               Years ended December 31,
                                         ---------------------------------------
                                            1996           1995         1994
                                         -----------    ----------   -----------
<S>                                      <C>           <C>           <C>
Net sales.............................   $ 2,229,895    $        -   $     2,801

Cost of sales.........................     1,308,730             -         2,381
                                         -----------   -----------   -----------
Gross profit..........................       991,165             -           420
                                         -----------   -----------   -----------

Operating expenses:
 Research and development.............     2,173,312     1,106,631       431,295
 General and administrative...........     1,091,857       397,523       483,399
 Sales and marketing..................       297,587        46,262        30,257
 Amortization of goodwill.............        90,982             -             -
                                         -----------   -----------   -----------
  Total operating expenses............     3,653,738     1,550,416       944,951
                                         -----------   -----------   -----------
Operating loss........................    (2,662,573)   (1,550,416)     (944,531)

Operating income (expense):
 Interest expense.....................       (82,364)      (54,809)      (29,939)
 Interest income......................       124,227        60,688         4,284
 Other, net (note 8)..................             -        30,790      (235,008)
                                         -----------   -----------   -----------
                                              41,863        36,669      (260,663)

Provision for income taxes (note 6)...             -             -             -
                                         -----------   -----------   -----------
  Net loss............................   $(2,620,710)  $(1,513,747)  $(1,205,194)
                                         ===========   ===========   ===========

Net loss per common share.............   $     (0.45)  $     (0.36)  $     (0.36)
                                         ===========   ===========   ===========

Weighted average number of common
shares outstanding....................     5,768,198     4,156,968     3,382,974
                                         ===========   ===========   ===========
</TABLE>

See accompanying notes to consolidated financial statements.



                                      F-7
<PAGE>   39
                          UROQUEST MEDICAL CORPORATION

                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                    December 31,
                                                                            -----------------------------
                                                                                1996             1995
                                                                            -----------       -----------
<S>                                                                         <C>               <C>
                            ASSETS
Current assets:
 Cash.....................................................................  $12,694,047       $ 1,113,594
 Accounts receivable, net of allowance for doubtful accounts
  of $60,000 (note 4).....................................................    2,161,849                 -
 Inventories (notes 2 and 4)..............................................    2,622,812             9,590
 Prepaid expenses and other current assets................................      226,040            14,311
 Income tax receivable....................................................      145,808                 -
 Deferred income taxes (note 6)...........................................      124,000                 -
                                                                            -----------       -----------
     Total current assets.................................................   17,974,556         1,137,495
                                                                            -----------       -----------

Property, plant and equipment, net (notes 3 and 4)........................    4,542,950           142,321
Intangibles, at cost, less accumulated amortization of $476,883 in 1996
  and $181,949 in 1995....................................................   12,522,011           441,211
                                                                            -----------       -----------
     Total assets.........................................................  $35,039,517       $ 1,721,027
                                                                            ===========       ===========

                 LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
 Notes payable under line of credit (note 4)..............................  $   150,000       $         -
 Current portion of long-term debt (note 4)...............................      442,364                 -
 Accounts payable.........................................................      721,984           200,416
 Accrued compensation.....................................................      146,460            76,983
 Accrued selling and distribution expenses................................      137,500                 -
 Other accrued expenses...................................................      384,958             6,502
 Secured promissory notes (note 4)........................................            -           390,000
                                                                            -----------       -----------
     Total current liabilities............................................    1,983,266           673,901
                                                                            -----------       -----------
Long-term liabilities:
 Deferred income taxes (note 6)...........................................      782,500                 -
 Long-term debt (note 4)..................................................    1,787,437                 -
                                                                            -----------       -----------
     Total long-term liabilities..........................................    2,569,937                 -
                                                                            -----------       -----------

 Commitments (note 9)

Stockholders' equity (note 5):
 Convertible preferred stock, $.001 par value:
  Series D: Converted to 628,573 shares of common stock upon
    close of initial public offering......................................            -               629
  Series A: Converted to 90,486 shares of common stock upon
    close of initial public offering......................................            -                90
  Series B: Converted to 273,020 shares of common stock upon
    close of initial public offering......................................            -               273
  Series C: Converted to 260,593 shares of common stock upon
    close of initial public offering......................................            -               261
 Voting common stock, $.001 par value; 31,000,000
    shares authorized, 11,844,602 and 2,947,516 shares issued and
    outstanding as of December 31, 1996 and 1995, respectively............       11,845             2,948
 Non-voting common stock, $001 par value; Converted to 285,715
    shares of common stock upon close of initial public offering..........            -               286
 Additional paid-in capital...............................................   36,203,483         4,088,237
 Deferred compensation....................................................      (62,706)                -
 Accumulated deficit......................................................   (5,666,308)       (3,045,598)
                                                                            -----------       -----------
     Total stockholders' equity...........................................   30,486,314         1,047,126
                                                                            -----------       -----------
Total liabilities and stockholders' equity................................  $35,039,517       $ 1,721,027
                                                                            ===========       ===========
</TABLE>

See accompanying notes to consolidated financial statements.

                                      F-8
<PAGE>   40
                          UROQUEST MEDICAL CORPORATION

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>                                                                       Non-
                                                Series Preferred Stock  Voting  Voting Additional Deferred             Total
                                                ----------------------- Common  Common Paid-in    Compen-  Accumulated Stockholders'
                                                  D       A    B    C   Stock   Stock  Capital    sation   Deficit     Equity
                                                -----------------------------------------------------------------------------------
<S>                                             <C>    <C>  <C>   <C>  <C>      <C>    <C>        <C>     <C>         <C>
Balance, December 31, 1993..................... $   -   90     -     -   1,571  143    390,413       -    (326,657)     65,560
Issuance of 1,428,571 shares of Common Stock
 for acquisition of subsidiary.................     -    -     -     -   1,286  143      3,571       -           -       5,000
Issuance of 143,000 shares of Common Stock
 for cash......................................     -    -     -     -       -    -        100       -           -         100
Issuance of 273,shares of Series B Preferred
 Stock for cash, net of issuance costs of $3,542    -    -   273     -       -    -    684,141       -           -     684,414
Issuance of 4,511 shares of Common Stock
 for consulting services........................    -    -     -     -       5    -     11,362       -           -      11,367
Issuance of 189,450 shares of Series C Preferred
 Stock for cash, net of issuance costs
 of $25,626.....................................    -    -     -   190       -    -    637,184       -           -     637,374
Issuance of 61,143 shares of Series C Preferred
 Stock, in exchange for notes payable...........    -    -     -    61       -    -    213,939       -           -     214,000
Net loss........................................    -    -     -     -       -    -          -       -  (1,205,194) (1,205,194)
                                                 -----------------------------------------------------------------------------
Balance, December 31, 1994......................    -   90   273   251   2,862  286  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.....................................  629    -     -     -       -    -  2,112,323       -           -   2,112,952
Issuance of 10,000 shares of Series C Preferred
 Stock, in exchange for notes payable...........    -    -     -    10       -          34,990       -           -      35,000
Issuance of 85,715 shares of Common Stock
 for cash, upon exercise of stock options.......    -    -     -     -      86    -        214       -           -         300
Net loss........................................    -    -     -     -       -    -          -       -  (1,513,747) (1,513,747)
                                                 -----------------------------------------------------------------------------
Balance, December 31, 1995......................  629   90   273   261   2,948  286  4,088,237       -  (3,045,598)  1,047,126
                                                 -----------------------------------------------------------------------------
Issuance of 54,220 shares of Common Stock
 for cash, upon exercise of stock options.......    -    -     -     -      54    -     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 (note 5).........................    -    -     -     -   3,350    - 17,800,002       -           -  17,803,352
Issuance of 2,499,990 shares of Common Stock for
 acquisition of Subsidiary (note 7).............    -    -     -     -   2,500    -  9,105,440       -           -   9,107,940
Issuance of 1,454,494 shares of Common Stock
 for cash, upon exercise of stock warrants......    -    -     -     -   1,454    -  5,089,276       -           -   5,090,730
Conversion of Non-Voting Common Stock to
 Common Stock...................................    -    -     -     -     286 (286)         -       -           -           -
Conversion of Preferred Stock to Common Stock... (629) (90) (273) (261)  1,253    -          -       -           -           -
Net loss........................................    -    -     -     -       -    -          -       -  (2,620,710) (2,620,710)
                                                 -----------------------------------------------------------------------------
Balance, December 31, 1996...................... $  -    -     -     -  11,845    - 36,203,483 (62,706) (5,666,308) 30,486,314
                                                 =============================================================================
</TABLE>
See accompanying notes to consolidated financial statements.

                                      F-9
<PAGE>   41
                          UROQUEST MEDICAL CORPORATION

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                        Years ended December 31,
                                                            --------------------------------------------------
                                                                  1996             1995               1994
                                                             ------------      ------------       ----------
<S>                                                         <C>                <C>                <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
 Net loss..................................................  $ (2,620,710)     $ (1,513,747)      $(1,205,194)
 Adjustments to reconcile net loss to net
  cash used in operating activities:
 Depreciation and amortization.............................       430,689           139,022            58,244
 Write-off of in-process research and development costs....       783,000                 -                 -
 Issuance of Common Stock in
  exchange for consulting services.........................             -                 -            11,367
 Provisions for loss on receivables........................        38,541               614           235,008
 Provisions for inventory reserve..........................        45,000                 -                 -
 Changes in operating assets and liabilities:
   Accounts Receivable.....................................       155,432                 -                 -
   Inventories.............................................        98,597             (9,590)               -
   Prepaid expenses and other current assets...............        (4,604)           (12,221)               -
   Accounts payable........................................        57,240            116,291           26,008
   Amounts payable to related parties......................             -            (31,404)         (66,500)
   Accrued expenses........................................       250,283             28,550           54,935
   Deferred income taxes...................................       (14,000)                 -                -
   Income taxes............................................      (254,541)                 -                -
                                                             ------------         ----------      -----------
     Net cash used in operating activities.................    (1,035,073)        (1,282,485)        (886,132)

CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchases of property and equipment......................      (132,143)           (83,468)        (159,819)
  Purchases of patents and trademarks......................             -                  -         (400,000)
  Business acquisition, net of cash acquired (note 7)......    (9,900,262)                 -                -
  Deposits and other.......................................        25,756                  -                -
  Cash advances - affiliates...............................             -               (614)         (92,290)
                                                             ------------         ----------      -----------
    Net cash used in investing activities..................   (10,006,649)           (84,082)        (652,109)

CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from issuance of Stock..........................    22,932,036          2,113,252        1,321,888
  Proceeds from issuance of Notes..........................       650,000                  -          674,000
  Repayment of Notes.......................................      (959,861)          (197,188)         (80,972)
                                                             ------------         ----------      -----------
    Net cash provided by financing activities..............    22,622,175          1,916,064        1,914,916
                                                             ------------         ----------      -----------

Net increase in cash.......................................    11,580,453            549,497          376,675
Cash at beginning of period................................     1,113,594            564,097          187,422
                                                             ------------         ----------      -----------
Cash at end of period......................................  $ 12,694,047         $1,113,594      $   564,097
                                                             ============         ==========      ===========

Supplemental disclosures of cash flow information:
  Cash paid for interest...................................  $     80,851         $   63,849      $    20,899
  Cash paid for income taxes...............................       254,541                  -                -
Supplemental disclosure of noncash investing and financing activities:
 Common stock issued for common stock of subsidiary........     9,107,940                  -            5,000
 Conversion of notes payable to preferred stock............             -             35,000          214,000
 Issuance of note payable, net of discount,
    for patents and trademarks.............................             -                  -          243,160
 Notes received in exchange for patents and trademarks.....             -                  -           30,000
 Note received in exchange for fixed assets................             -                  -          112,718
 Increase in additional paid-in capital as a result of
    recording deferred compensation........................        81,360                  -                -
</TABLE>

See accompanying notes to consolidated financial statements.

                                      F-10
<PAGE>   42
                          UroQuest Medical Corporation

1.       DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business

         The Company was incorporated in the state of Florida on April 8, 1992,
and commenced operations for the purpose of designing, developing, and
marketing disposable urological catheters and other medical devices. Prior to
October 30, 1996 the Company was considered a development stage company under
the guidelines of Statement of Financial Accounting Standards No. 7. On October
30, 1996 the Company closed on its initial public offering ("IPO") of common
stock which generated net proceeds of approximately $17.8 million and acquired
all of the common stock of BMT, Inc. ("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.

Principles of Consolidation

         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 during the year are included in
the accompanying consolidated statements of operations since acquisition. All
significant intercompany transactions have been eliminated in consolidation.

Inventories

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

Property, Plant and Equipment

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

Intangible Assets

         Intangible assets consist primarily of values assigned to the excess
of cost over the assigned value of the net assets acquired ($12,280,869),
patents and trademarks ($650,160) and other intangibles ($67,865).  Intangible
assets are amortized using the straight-line method over periods of five to
twenty years. The increase in intangible assets during 1996 is attributable to
the acquisition of BMT.  Management evaluates the recoverability of these net
assets on a periodic basis based on the projected cash flows from estimated
future sales.

Income Taxes

         The Company accounts for income taxes using the asset and liability
method.  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 the actual
shipment of goods.

Research and Development Cost - Research and development costs are expensed as
incurred.

                                      F-11
<PAGE>   43
                          UroQuest Medical Corporation

Net Loss Per Share

         Net loss per share amounts are based on the weighted average number of
common shares and common share equivalents (if dilutive) resulting from options
and warrants outstanding during the periods, after giving retroactive effect to
the common stock reverse stock split and the conversion of preferred shares
into common shares at their respective issuance dates as discussed in note 5.

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 of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period.  Actual results could differ from those estimates.

Stock-Based Compensation

         Effective January 1, 1996, the Company adopted the footnote disclosure
provisions of Statement of Financial Accounting Standards (SFAS) No. 123,
Accounting for Stock-Based Compensation.  SFAS No. 123 encourages entities to
adopt a fair-value based method of accounting for stock options of similar
equity instruments.  However, it also allows an entity to continue measuring
compensation cost for stock-based compensation using the intrinsic-value method
of accounting prescribed by Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees (ABP 25).  The Company has elected to
continue to apply the provisions of APB 25 and provide pro forma footnote
disclosures required by SFAS No. 123.

2.       INVENTORIES

         Inventories at December 31 consist of the following:

<TABLE>
<CAPTION>
                                                 1996         1995
                                                 ----         ----
         <S>                               <C>             <C>
          Finished goods..................  $   748,268     $     -
          Work-in-process.................    1,100,104           -
          Raw materials and supplies......      774,440       9,590
                                            -----------      ------
                                            $ 2,622,812     $ 9,590
                                            ===========     =======
</TABLE>

3.       PROPERTY, PLANT AND EQUIPMENT

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

<TABLE>
<CAPTION>

                                                   1996              1995
                                                   ----              ----
       <S>                                     <C>             <C>
        Land and building...................   $ 2,414,914     $          -
        Machinery and equipment............      2,955,253          109,370
        Office furniture and equipment.......      649,301           57,374
                                                ----------        ---------
          Total..............................    6,019,468          166,744
        Less accumulated depreciation........   (1,476,518)         (24,423)
                                                -----------       ---------
        Property, plant and equipment, net...  $ 4,542,950        $ 142,321
                                               ===========        =========
</TABLE>

                                      F-12
<PAGE>   44
4.       NOTES PAYABLE, SECURED PROMISSORY NOTES AND LONG-TERM DEBT

Notes payable, secured promissory notes, and long-term debt at December 31
consists of the following:

<TABLE>
<CAPTION>
                                                                                            1996              1995
                                                                                            ----              ----
<S>                                                                                      <C>                      <C>
Notes payable under bank line of credit agreement:
  Maximum borrowings are the lesser of $1,200,000 or
   75% of eligible accounts receivable, plus 50% of
   eligible inventory as defined. Interest at the bank's
   prime rate is payable monthly.  The prime rate was
   8.25% at December 31, 1996.  The line of credit
   agreement is payable on demand and is collateralized
   by certain trade receivables, inventory and equipment,
   in aggregate totaling approximately $9.7 million   . . . . . . . . . . . . . . .       $ 150,000     $             -
                                                                                          =========      ==============


Secured promissory notes:
  12% secured promissory notes due December 31, 1996 with
   interest payable quarterly, secured by an interest
   in certain patents.  The notes were fully repaid in
   November 1996..  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .             -             390,000
                                                                                        ===========             =======


Long-term debt:
  Bank term note payable to bank monthly, with interest at
   the bank's prime rate (8.25% at December 31, 1996) plus
   .5% based upon a seven year amortization. The note
   matures in October of 1999 and is collateralized by
   certain trade receivables, inventory and equipment, in
   aggregate totaling approximately $9.7 million   . . . . . . . . . . . . . . . . .      1,073,664                  -


  Mortgage note payable with monthly principal and interest
   payable at the bank's prime rate (8.25% at December 31, 1996)
   plus .5%.  The note matures in October of 2007 and is
   collateralized by the plant land and building. . . . . . . . . . . . . . . . . . .     1,156,137                  -
                                                                                          ---------      -------------
                                                                                          2,229,801                  -
         Less current maturities. . . . . . . . . . . . . . . . . . . . . . . . . . .       442,364                  -
                                                                                       ------------     --------------
                                                                                        $ 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, 1996.

         Long-term debt matures as follows:

<TABLE>
<CAPTION>
                 Year ending December 31,
                 -------------------------
                 <S>                                                      <C>
                 1997 . . . . . . . . . . . . . . . . . . . . . . . . .    $  442,364
                 1998 . . . . . . . . . . . . . . . . . . . . . . . . .       483,677
                 1999 . . . . . . . . . . . . . . . . . . . . . . . . .       370,190
                 2000 . . . . . . . . . . . . . . . . . . . . . . . . .        88,098
                 2001 . . . . . . . . . . . . . . . . . . . . . . . . .        96,123
                 2002 and thereafter  . . . . . . . . . . . . . . . . .       749,349
                                                                        -------------
                                                                          $ 2,229,801
                                                                          ===========
</TABLE>

                                      F-13
<PAGE>   45
                          UroQuest Medical Corporation

5.       STOCKHOLDERS' EQUITY

Initial Public Offering

         In October 1996, the Company closed an IPO 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.  Management intends to use the
remainder for clinical trials, marketing and sales, research and development,
and working capital requirements. 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. Prior to the closing of the
IPO, the Company had 10,281,268 authorized shares, and 1,252,672 issued and
outstanding shares of convertible preferred stock.

Reverse Stock Split

         The Company effected a 1 for 3.5 reverse stock split of all stock
effective October 18, 1996.  The effect of the reverse stock split has been
reflected for all periods presented in the accompanying financial statements.

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.

Fixed Stock Option Plan

         Under the Company's 1994 Stock Option Plan ("Plan"), the Company may
grant options to its employees, directors and consultants for up to
approximately 1.4 million 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 five year period.

         A summary of the activity of the Plan follows:

<TABLE>
<CAPTION>
                                                                    Years Ended
                                     --------------------------------------------------------------------------------
                                              1996                        1995                        1994
                                     -------------------------      ----------------------     ----------------------
                                                     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 beginning of year. .     1,116          $ 0.67        1,233         $ 0.630            -       $     -
  Granted . . . . . . . . . . . . .        77            4.67           47           0.700        1,233          0.63
  Exercised . . . . . . . . . . . .       (54)           0.70          (86)          0.004            -             -
  Canceled  . . . . . . . . . . . .       (11)           0.70          (78)          0.700            -             -
                                          ---                       ------                        -----
Outstanding at end of year  . . . .     1,128            0.95        1,116           0.670        1,233          0.63
                                        =====                        =====                        =====

Options exercisable
   at year-end  . . . . . . . . .         572                          450                          324
Weighted-average fair
   value of options granted
   during the year  . . . . .          $ 3.38                       $ 0.48
</TABLE>

                                      F-14
<PAGE>   46
                          UroQuest Medical Corporation

The following table summarizes information about fixed stock options
outstanding at December 31, 1996:

<TABLE>
<CAPTION>
                             Options Outstanding
                             -------------------
                         Number                                  Options
                      Outstanding       Weighted-Avg.          Exercisable
                      at 12/31/96         Remaining            at 12/31/96
  Exercise Price         (000)         Contractual Life           (000)
  --------------         -----         ----------------           -----
    <S>                <C>                <C>                     <C>
    $  .004                 43             7.8 years                18
       .700              1,007             7.6                      46
      1.750                  6             9.3                       4
      4.900                 72             9.7                       4
                         -----                                     ---
                         1,128             7.7                     572
                         =====                                     ===
</TABLE>

         The weighted-average exercise price of options outstanding and options
exercisable at December 31, 1996 and 1995 was $0.95 and $0.71, respectively.

         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>
                                                              1996                1995
                                                              ----                ----
    <S>                     <C>                          <C>                  <C>
    Net loss:               As Reported . . . . . . . .  $ (2,620,710)        $ (1,513,747)
                            Pro forma . . . . . . . . .  $ (2,664,111)        $ (1,515,661)

    Primary loss            As Reported . . . . . . . . . . . $ (0.45)             $ (0.36)
      per share:            Pro forma . . . . . . . . . . . . $ (0.46)             $ (0.36)
</TABLE>

         The effects of calculating compensation cost under SFAS No. 123 for
the years ending December 31, 1996 and 1995, 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 1996 and 1995, respectively:
dividend yield of 0% for both years; expected volatility of 113% and 107%;
risk-free interest rates of 6.6% and 6.1%, and expected lives of 3.9 and 3.8
years.

         The Company has recorded as deferred compensation expense the excess
of the fair value of the common stock at the date of grant over the exercise
price.  The compensation expense will be amortized ratably over the vesting
period of the options and will aggregate a maximum of $81,360.  Amortization
expense for the year ended December 31, 1996 was $18,654.

1996 Employee Stock Purchase Plan

         In October 1996, the Company adopted the 1996 Employee Stock Purchase
Plan (the "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 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, 1996.

                                      F-15
<PAGE>   47
Employee Benefit Plan

         The Company has established a defined contribution employee benefit
plan ("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 $16,000
for the year ended December 31, 1996.

Increase in Authorized Shares

         In October 1996, the shareholders approved an amendment to the
Articles of Incorporation to provide authorized capital stock of 31,000,000
common shares and 16,000,000 undesignated preferred shares effective upon the
closing of the IPO.


6.       INCOME TAXES

         There was no Federal income tax expense in 1996, 1995, and 1994 due to
net operating losses.  The difference between the expected tax benefit and
actual tax benefit is primarily attributable to the effect of these net
operating losses being offset by an increase in the Company's valuation
allowance.

         The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities are presented below:


<TABLE>
<CAPTION>
                                                         December 31,
                                               -------------------------------
                                                    1996              1995
                                                 ----------          ---------
<S>                                             <C>                <C>
Deferred tax assets:
   Acquired net operating
      loss carryforwards  . . . . . . . . . . .  $  372,000         $        -
   Research and development credits   . . . . .      80,000                  -
   Inventory capitalization and allowances  . .      27,000                  -
   Start up and organization costs  . . . . . .     570,703            434,065
   Net operating loss carryforwards   . . . . .   1,024,578            614,285
   Allowance for doubtful accounts  . . . . . .     112,657             87,657
   Other  . . . . . . . . . . . . . . . . . . .      72,000                  -
                                                 ----------         ----------
        Total   . . . . . . . . . . . . . . . .   2,258,938          1,136,007
   Less valuation allowance   . . . . . . . . .  (1,900,438)        (1,136,007)
                                                  ---------          ---------
   Total gross deferred tax assets  . . . . . .     358,500                  -

Deferred tax liability:
   Depreciation   . . . . . . . . . . . . . . .  (1,017,000)                 -
                                                 ----------         ----------
   Net deferred tax liability   . . . . . . . .  $ (658,500)        $        -
                                                 ==========         ==========
</TABLE>

The net current and long-term deferred tax asset and liability are reflected in
the financial statements as:

<TABLE>
           <S>                                             <C>
           Current deferred tax asset . . . . . . . . . .   $ 124,000
           Long-term deferred tax liability . . . . . . .    (782,500)
                                                            ----------
                                                            $(658,500)
                                                            ==========
</TABLE>

         The valuation allowance for deferred tax assets as of January 1, 1996
and 1995 was $1,136,007 and $571,380, respectively. The net change in the total
valuation allowance for the years ended December 31, 1996 and


                                      F-16
<PAGE>   48
                          UroQuest Medical Corporation

1995 was an increase of $764,431 and $564,627, respectively.  In assessing the
recoverability of deferred tax assets, management considers whether it is more
likely than not that all or a portion of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which those temporary
differences become deductible.  Management considers the scheduled reversal of
deferred tax liabilities, projected future taxable income, and tax planning
strategies in making this assessment.  Based upon the level of historical
taxable income and projections for future taxable income over the periods which
the deferred tax assets are deductible, management believes it is more likely
than not the Company will realize the benefits of these deductible differences,
net of valuation allowances at December 31, 1996. Subsequently recognized tax
benefits relating to the valuation allowance for deferred tax assets will be
recognized as an income tax benefit to be reported in the statement of
operations.

         At December 31, 1996 the Company had total tax net operating losses of
approximately $4,400,000 that can be carried forward to reduce federal income
taxes.  If not utilized, the tax loss carryforwards expire beginning in 2007.

         Under the rules of the Tax Reform Act of 1986, the Company has
undergone a greater than 50% change of ownership.  Consequently, a certain
amount of the Company's net operating loss carryforwards available to offset
future taxable income in any one year may be limited.  The maximum amount of
carryforwards available in a given year is limited to the product of the
Company's value on the date of ownership change and the federal long-term
tax-exempt rate, plus any limited carryforwards not utilized in prior years.

7.       BUSINESS ACQUISITION

    On October 30, 1996, simultaneous with the Company's closing of its IPO,
all of the issued and outstanding common stock of BMT was acquired. 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 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:

<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 a 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 they 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)
    Loss per share                        (0.04)             (0.01)
</TABLE>

                                      F-17

<PAGE>   49
                          UroQuest Medical Corporation

    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.

8.       RELATED PARTY TRANSACTIONS

         In 1994, non-affiliated corporations were formed by certain
stockholders of the Company.  Cash and other non-core business assets totaling
$235,008 were transferred to those corporations in exchange for 8% promissory
notes.  The notes are payable on demand and a valuation allowance for the full
amount has been established to account for possible non-collection of the
notes. In June 1996, approximately $200,000 principal amount of the notes was
converted into common stock of a corporation owned by certain stockholders of
the Company. After this conversion, the Company held less than 10% of the
outstanding stock of the corporation.  The balance of $35,008 remains
outstanding as a promissory note from SilvaFoam Corporation and U.S. Infusion
Care, Inc.

9.       LEASE OBLIGATIONS AND COMMITMENTS

         The Company leases office and warehouse space and certain equipment
under operating leases that expire over a period of two to four years.  Minimum
future obligations under noncancelable operating leases as of December 31, 1996
are as follows:

<TABLE>
<CAPTION>
                Year                                   Amount
              --------                            --------------
                <S>                                 <C>
                1997   . . . . . . . . . . . . . .  $ 103,402
                1998   . . . . . . . . . . . . . .    101,273
                1999   . . . . . . . . . . . . . .     37,017
                2000   . . . . . . . . . . . . . .     24,678
                                                     --------
                Total  . . . . . . . . . . . . . .  $ 266,370
                                                    =========
</TABLE>

         Total rent expense for operating leases in 1996, 1995, and 1994 was
approximately $54,500, $36,200, and $23,300, respectively.

10.      MAJOR CUSTOMERS AND EXPORT SALES

         Net sales to one customer amounted to 21% of total net sales for the
year ended December 31, 1996.  Outstanding receivables from this customer at
December 31, 1996 approximated 21% of total gross accounts receivable.
                 Export sales by major geographic area are as follows:

<TABLE>
                     <S>                               <C>
                     Western Europe  . . . . . . . .   $ 286,470
                     Japan . . . . . . . . . . . . .      54,264
                     Other . . . . . . . . . . . . .      11,458
                                                        --------
                                                       $ 352,192
                                                       =========
</TABLE>

                                      F-18


<PAGE>   50
                          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 1995, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the years in the three 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 1995 and the
results of their operations and their cash flows for each of the years in the
three year period ended December 31, 1996, in conformity with generally
accepted accounting principles.



                             KPMG Peat Marwick LLP



Salt Lake City, Utah
February 10, 1997

                                      F-19
<PAGE>   51
                          UROQUEST MEDICAL CORPORATION

                       FIVE-YEAR SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
                                                                                                                     Period from
                                                                          Year Ended                                  Inception
                                                    ------------------------------------------------------------  (April 8, 1992) to
                                                       1996             1995              1994          1993         Dec. 31, 1992
                                                       ----             ----              ----          ----         -------------
<S>                                                 <C>              <C>              <C>            <C>             <C>
OPERATING DATA (1):
Net sales.........................................  $ 2,299,895      $         -      $     2,801    $       979      $        -
Cost of sales.....................................    1,308,730                -            2,381            832               -
Gross profit......................................      991,165                -              420            147               -
Research and development expenses.................    2,173,312        1,106,631          431,295        120,531               -
General and administrative expenses...............    1,091,857          397,523          483,399        156,647          11,234
Sales and marketing expenses......................      297,587           46,262           30,257         38,392               -
Amortization of goodwill..........................       90,982                -                -              -               -
Operating loss....................................   (2,662,573)      (1,550,416)        (944,531)      (315,423)        (11,234)
Other income (expense), net.......................       41,863           36,669         (260,663)             -               -
Net loss..........................................   (2,620,710)      (1,513,747)      (1,205,194)      (315,423)        (11,234)
Net loss per common share (2).....................        (0.45)           (0.36)           (0.36)         (0.21)          (0.01)
Shares used in computing net loss per share (2)...    5,768,198        4,156,968        3,382,974      1,502,596       1,428,571
</TABLE>


<TABLE>
<CAPTION>
                                                                                      December 31,
                                                    ----------------------------------------------------------------------------
                                                       1996             1995              1994          1993             1992
                                                       ----             ----              ----          ----             ----
<S>                                                 <C>              <C>              <C>            <C>             <C>
BALANCE SHEET DATA (1):
  Cash............................................   12,694,047        1,113,594          564,097        187,422               -
  Working capital.................................   15,991,290          463,594          325,723         33,491         (38,300)
  Total assets....................................   35,039,517        1,721,027        1,205,273        221,581          32,566
  Long-term debt, excluding current portion.......    1,787,437                -          552,188              -               -
  Accumulated deficit.............................   (5,666,308)      (3,045,598)      (1,531,851)      (326,657)        (11,234)
  Stockholders' equity (3)........................   30,486,314        1,047,126          412,621         65,560          (6,234)
</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) Restated to reflect the impact of preferred shares' conversion to common
    shares in connection with the Company's initial public offering.

(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 the
    offering, warrants totaling 1,428,572 shares were exercised at $3.50 per
    share. Combined, the Company realized net proceeds of $22,803,350.

                                      F-20
<PAGE>   52
                          UROQUEST MEDICAL CORPORATION

                        QUARTERLY RESULTS OF OPERATIONS

                                  (UNAUDITED)

<TABLE>
<CAPTION>
                                              Three Months Ended
                                -------------------------------------------------
                                March 31,   June 30,    September 30,  December 31,
                                ---------   ---------   -------------  ------------
<S>                             <C>         <C>         <C>            <C>
YEAR ENDED DECEMBER 31, 1996
Net sales...................... $       -   $       -   $       -      $2 ,299,895
Gross profit...................         -           -           -          991,895
Operating loss.................  (446,232)   (363,754)   (352,908)      (1,499,679)
Net loss.......................  (446,793)   (370,041)   (364,873)      (1,439,003)
Net loss per common share(1)...     (0.10)      (0.08)      (0.08)           (0.15)

YEAR ENDED DECEMBER 31, 1995
Net sales......................         -           -           -            -
Gross profit...................         -           -           -            -
Operating loss.................  (274,771)   (368,532)   (371,579)    (535,534)
Net loss.......................  (282,681)   (343,659)   (364,531)    (522,876)
Net loss per common share(1)...     (0.08)      (0.09)      (0.08)       (0.12)
</TABLE>

(1) Restated to reflect the impact of preferred shares' conversion
to common shares in connection with the Company's initial public offering.

           MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED MATTERS

                                  (UNAUDITED)

The Company's common 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:

                                                      High      Low
                                                      ----      ---

Fourth Quarter (since October 24, 1996)............ $10.25     $5.25

At December 31, 1996, there were approximately 149 record
 holders of the Company's Common Stock.

The closing price of the Registrant's Common Stock as reported
 by the Wall Street Journal on March 21, 1997 was $6.875.

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

                                      F-21